Download Economic Development and Nation

Invited Speakers’ Abstracts
Theme 3
Economic Development and Nation-Building: the Case of
China
Shinichi Ichimura (Co-leader)
Professor Emeritus, Kyoto University, Japan
0. Four Stages of Development and Development Barriers
Sixty years after the World War II and nearly 20 years after the end of Cold War, a number of
countries still remain in the group of the so-called “Least Developed Count- ries,” on the one hand. On
the other hand, however, some countries or areas have achieved remarkable development and become
the middle income countries or even as well-off as the advanced economies. Why cannot those
stagnant economies get out of the group? Don’t they wish to develop themselves? If they really do,
what are the barriers or the difficulties for them to achieve development? There must be the hard- core
difficulties to break through in those countries? Or why did those successful economies overcome the
same barriers?
In order to understand the problems and explain what should be done to get out of the stage of
the Least Developed, it is useful to differentiate four stages of development. The United Nations
reports and the World Bank Development reports classify the various economies into the four groups.
They may be summarized as follows:
1) the Least Developed,
below $500- per capita GDP
2) the Underdeveloped (lower middle income),
between $500 and $2,000.
3) the Developing (upper middle income),
between $2,000 and $10,000-
4) the Developed. Countries,
above $10,000-.
To move up from one stage to another, it is difficult as there are some barriers. I name them as:
I. Barriers to Take-Off
toward $ 500-,
II. Barriers to Industrialization
toward $ 2000-,
III. Barrier to Modernization
toward $ 10,000-
In East Asia, most countries are moving up the ladder of economic development step by step by
achieving rapid economic growth. Among successful ASEAN countries, however, Indonesia and the
Philippines seem to have failed in going beyond the barrier of $2,000- or even $1,000- so far, whereas
China seems to have successfully taken off and may be going beyond $2,000- barrier within a few
more years to a decade, depending on the timing of Yuan revaluation. The so-called NIEs (South
Korea, Taiwan, Hong Kong and Singapore) seem to have successfully gone beyond the $10.000barriers. Similarly, we can think of the barriers to go beyond $300.
In fact some famous economists have already discussed about such barriers as the conditions for
development to take-off. Perhaps, well known are W. W. Rostow’s emphasis on the Saving Ratio
beyond 4~5%; Joseph A. Schumpeter’s emphasis on the role of “Entrepreneurship” or “Innovation”;
Ragner Nurkse’s emphasis of Capital Formation; Simon Kuznets emphasis of Technological Progress or
Technology Transfer etc. There are also a few varieties of so-called “Big-Push Theory”, including one
emphasizing the role of technology like steam-engines, or the political revolution resulting in the
complete institutional change. All these ideas partially point out some true factors in the historical
records of different countries. To my knowledge, Simon Kuznets presented a fairly well-balanced view
on the conditions for Modernization in his Modern Economic Growth, and Max Weber gave a
penetrating views on the broad sociological factors of modernization in his Wirtshaft und Gesellshaft.
Based on learnings from those books and my own observations of Japanese and East Asian
development (See S. Ichimura, Political Economy of Japanese and Asian Development, SpringerVerlage, 1998), I would like to summarize the conditions to overcome these three barriers.
I. Barriers to Take-off
Conditions 1 : Switch from Politics to Economics
In any country one can identify a historic point of time when rapid economic growth began. It is
the time that the government or the political leader made an important decision to put aside the
political confrontation among political groups or factions and concentrate in the economic
development of the nation. In China it was Den Xia Pin’s great order of “Reform and Open. “around
1978. In Vietnam it was the adoption of Doi Moi (Reform).In Indonesia, it was the Suharto reign’s
decision after 1965 coup de’tate. In South Korea it was Presidents Park’s decision to develop the
economy by all means with law and order even under military dictatorial government. The economy
cannot be developed, while civil war or domestic fightings among political forces are going on. The
civil war conditions in Sri Lanka or earlier in Malaysia are such examples. This implies the second
condition. (See Table 1.3.)
Condition 2: National Unification be maintained.
The least developed countries are often multi-ethnic countries. Although the well-being of the
people are the most vital interests of common people, the political leaders face the difficulty in
achieving the national consensus on non-economic issues. The people should not lose the national
integration on social, religious or political goals of some leaders. Leaders must have the courage to
postpone the final decision on the delicate or ideological matters until a certain level of economic
development is realized. What is needed is the courage and wisdom of such sense of historic patience.
The great Chinese leader Deng had that wisdom, but many Soviet leaders before Gorbachof did not.
As a consequence national unification was lost. It is the sense of balance between the required
economic development and the necessary consensus on essential national integration.
Condition 3: Open Doors to the World
In the contemporary world the amount of information needed for modernizing a national
economy is enormous. Unless the country opens the doors to the outside world and tries to obtain the
various scientific, social, cultural and other information through TV, internet, news- papers and
journals, visits to foreign countries and so on, the flow of precious information from abroad would be
so limited that no matter what the government does to compensate the loss of information due to
Invited Speakers’ Abstracts
restrictions, the game will be lost sooner or later. The example of the Soviet Union already
demonstrated this fact. True, in some cases, it may result in the brain drain. But one should not be
afraid of it. The net effect of brain drain will be plus eventually.
Condition 4: Emancipate human want to become better-off
Everybody wants to be better off. The worst aspect of Socialism is to control the human want of
freedom to choose. Price control and rationing must be limited to the absolute minimum under any
circumstance. In this sense, the agricultural policies for consumers’ necessities like rice in Myanmar are
precisely the point in question. Freedom of economic behavior, however, must be restrained by moral
self-control and legal regulations based on sound common sense.
Condition 5: Give incentives to vigorous entrepreneurs
The most crucial to take off is to increase production. Production is undertaken by enterprises.
However limited they may be in the least developed countries, to give the opportunities to the
entrepreneurs who are willing to take initiatives and risk to produce more is essential to increase
production of the goods and services of all kinds.
Condition 6: Avoid Extreme Income Inequality
In the least developed countries we often observe the extreme inequality of income. The Gini ratio
is often over 50 %. This leads to “social instability” and deprives the opportunities to foster the sound
middle income class. The middle income class is the base to supply the talents in all the fields. The
clues to materialize this objective are to properly collect all the taxes and never to give unfair subsidies
to politically linked families.
Condition 7: Keep the government and bureaucratic policy decisions publicly transparent
Many important policies are often made improperly with no examination by experts or specialists. I
have served the Indonesian government as the leader of Japanese economists’ team about 20 years
until 1988 and even later as an adviser to JICA with ODA policies . I kept telling the Indonesia
authorities that Indonesia had been borrowing too much so that they should try to keep the debt
service ratio below 30% as soon as possible. But they never took my advises, because the experts of
IMF and the World Bank kept telling the government then that Indonesia was an ideal borrower. If my
views and their views were openly notified to the public or journalism, the government would have
been criticized at some point before the 1997 financial crisis. Lack of transparency is often a source of
corruption, too.
These are the necessary conditions for “Take-Off.” Then, how should the government proceed in
taking off. The government must select one or two key industries and develop them by all
means. It is impossible in the least developed to develop many industries all around at the same time.
In many cases such industries as Agriculture and Textile Industries are those to be chosen, but in some
cases tourism or other service industries may be chosen.
II. Barriers to Industrialization
China as a whole is in the beginning step of Stage (2). Since, however, China is a big economy, the
coastal provinces and major municipalities are in the beginning step of Stage (3) but the rest of the
economy, especially the agrarian regions, are in Stage (2) or even in Stage (1). The various regions in
China are domestically following the “flying geese pattern” of growth. Therefore, they are facing the
barriers to Take-off and Industrialization at the same time. By taking a middle size economy of
population around 20 to 100 millions, the barriers to Industrialization may be summarized as follows.
Condition 1: Government Industrial Policies in selecting and supporting some leading
industries and policies for income redistribution.
Condition 2: Transfer of appropriate technologies from the advanced economies and the
domestic supply of middle level engineers.
Condition 3: Liberalization of trade and foreign direct investment (FDI) with limited flow
of financial capital.
Condition 4: Guarantee of free and fair Competition in the market and maintenance of
business rules and morals.
Condition 5: Enactment of legal system appropriate for modern transactions and
establishment of impartial jurisdiction.
Condition 6: Establishment of business practices and community, and non-corrupted
cooperation of bureaucrats, businessmen and academic communities.
Condition 7: Equal opportunities to fundamental education and engineering trainings
and employment of their graduates.
The most important aspects of government policies at this stage is to maintain the social and
political stability, so that the business communities can develop the industries primarily with their
initiatives. The following formula will hold at this and the following stages. This is a synthesis of some
assertions of Samuel Huntington and other political scientists’ on political disorder of changing
societies in developing countries.
Socio-Political Linkage Equations in Development
1. Peoples’ Dissatisfaction
= (Material Want) / (Consumption Level)
2. Social Grievance
= (People’s Dissatisfaction) / (Income Equality)
3. Political Discontent
= (Social Grievance) / (Shift of Social Classes)
4. Political Instability
= (Political Discontent) / (Political Participation)
5. Political Crisis
= (Political Instability) / (Strength of Political Creeds)
III Barriers To Modernization
As the stage of economic development approaches to the level of $10,000-, the countries must
prepare themselves to the social, political and cultural as well as economic conditions as the modern,
advanced countries, as the countries and countrymen must associate themselves with the members of
the other advanced counties and their members so that they must behave more or less according to
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the global rules. The main conditions to consider are the following.
Condition 1: Freedom of speech, information exchange and publication as well as
business contract.
Condition 2: Liberalization of Private Property and Capital Ownership as well as opening
of Stock Exchange.
Condition 3: Liberalization of banking system and foreign exchange.
Condition 4: Perfect liberalization of academic and scientific research and international
communication.
Condition 5: Absorption of requests from special interest groups and democratization of
policy-making.
Condition 6: Gradual political democratization toward admission of factions in a single
party, multiple party system, and election of political leaders.
Condition 7: Enlargement of autonomy of minorities’ self-governing districts or
admittance of their independence.
IV The Future of China as a Nation-State
In the case of China, there are some additional factors to diagnose its future. One is the aspects of
transitional economies, and another is the fundamental character of China as a nation. Those aspects
may be listed as follows.
As a transitional economy:
1) Reform and transformation of State-Owned enterprises,
2) Dissolution of heavy deficits of SOE and central and local governments,
3) Reform of social security system.
The Central Committee of Communist Party and the government have taken a number of steps to
reform and privatize the enterprise system in China and admitting foreign enterprises in various forms.
Now more than one quarter of GDP is estimated to be produced by Non-SOE companies.
(See Figure 1, Figure 2, Figure 3, Figure 4, Figure 5, Table 3.)
As for the future of China as a nation-state, the following problems must be carefully observed.
1) The ideal of Communist revolution is lost. The new ideal of Chinese nationalism is not yet
established. What is the spiritual base of new Chinese nationalism? The traditional Chinese
political philosophy may be to regard the wishes of people as the Heaven’s voice (Mencius).
2) How are the traditional teachings of Confucianism, Taoism and Buddhism going to be
treated? How are the believes of Non-Han minorities going to be treated?
3) China has not faced seriously the international relations with her neighbors like Japan and
ASEAN members, for instance regarding the territorial issues.
4) China has taken ambivalent attitude toward Japan. Clearly the two countries are the key
countries to form the East Asian Economic Cooperation Community. What lessons can be
learned from the roles of France and Germany in the formation of EU.
(2005/08/15)