Question

China and Japan start to modernize at approximately the same time yet Japan is able to modernize much more quickly and thoroughly than China. What factors account for Japan’s success and conversely, China’s “failures”?

Answer 1

1. Introduction
Maddison (1998, 40-41) has been courageous enough to estimate income levels
and economic growth rates for China, Japan and some other areas during the last
300 years. According to his figures, Chinese and Japanese GDP per capita were
about equal to each other and to the global mean in 1700, although Europe was
already ahead of both of them.

Until the mid-20th century, Chinese GDP per
capita stagnated or even fell, whereas the Japanese GDP per capita rose slowly
in the 18th century and faster thereafter. In the middle of the twentieth century
Japanese GDP per capita was about four times the Chinese value. Thereafter,
Chinese per capita growth significantly improved, but the Japanese did even
better until the late 1970s. How can this divergent experience of intensive
growth be explained?
Before even attempting to answer this question it has to be clarified that
explanatory success is always limited and provisional. Since, it is widely accepted that all theories suffer from anomalies,
i.e., from evidence that calls them into question. Facing this predicament there
are three alternative strategies: one may overlook or deny the existence of
anomalies. Then it becomes impossible to learn from experience and facts. This
is definitely not advisable. Or, one may give up the explanatory and theoretical
enterprise. Although this may be an acceptable position among historians, it is
suicidal for a theoretical social scientist. Or, one may continue the construction
of theories and explanatory sketches in spite of knowledge about their
limitations. Then, anomalies are kept in mind. Then, they serve as question
marks and reminders of the shortcomings of theories or of the never-ending
necessity to improve them. Anomalies also point to the desirability of developing alternative explanations . Space contraints make it obviously impossible to discuss
anomalies or alternative explanations in detail. In the context of my particular
topic it also has to be kept in mind that the facts themselves - say, the safety of
property rights in China or Japan - are debated among historians. What I can try
to do here is no more than to develop one explanatory sketch rooted in classical
poltical economy, Austrian economics, modern institutionalism and which is
compatible with the findings of econometric studies concerning the most recent
historical period. Anomalies, alternative explanations or question marks are
usually relegated to footnotes. Since all theories suffer from anomalies, it
follows that pointing them out or admitting them does not eliminate a theory.
I insist that only a better theory can overcome a theory.
My claim for the theory outlined below is not that it fits all the facts but that no
other one fits the facts better, especially the undisputed facts.
2. An Explanatory Sketch
The Productivity of Freedom and Property
Inspired by Smith (1776/1976), Mises (1920,1927), Hayek (1945,1960,1973-
1976-1979), Weber (1922/1964; 1923/1981)2
, Pipes (1999) and Jones
(1981,1988), I shall attempt to analyze the economic performance of China and
Japan in the last three centuries. Already in the Wealth of Nations Smith
(1776/1976) suggested that people prefer to eat all the time rather than working,
unless they perceive a chance to acquire property. Without private propertyrights shirking becomes the rule and hard work the exception. Obviously this is
not a prescription for intensive growth. Since the Japanese economy did much
better than the Chinese economy through the last three centuries, safer private
property rights in Japan than in China and therefore better incentives to work
and to save in Japan than in China could be part of the explanation.

So, economic freedom and decentralized decision-making
authority based on private property ownership are also conceivable explanatory
factors of the divergent economic performance of China and Japan.

Japan’s Race to the Top

Although 19th century China suffered worse humiliations from Western powers
than Japan did, the Japanese after the Meiji restauration seriously tried to
overcome backwardness whereas China remained mired in backwardness for
about another century. The guiding aspiration of Japanese reformers was ‘rich
nation, strong army’ i.e., the Japanese
government aspired to build the economic foundation for great power status. As
testified by successful wars against the Chinese in 1895 and against the Russians
in 1905, they quickly succeeded. Why did they succeed?
Most econometric research about the determinants of growth refers to the post World War II period.
Nevertheless, its findings might provide some cues to Japan’s early success to
catch-up with the West. By and large, there seems to be widespread agreement
on three issues and some serious disagreement on a fourth one.

First, there are
potential advantages of backwardness. Some poor countries have grown muchfaster than others. A number of reasons might contribute to this finding.
Conceivably, it is easier to make productive investments in an economy that is
somewhat lagging behind the pioneers of economic development. The more
backward and agrarian an economy still is, the more labor may be reallocated
from agriculture to industry and later to services. Such a process of reallocation
may fuel productivity gains. Most importantly, poor and backward countries
may borrow technologies from more advanced countries. It is easier and faster
to imitate than to innovate. Of course, openmindedness and willingness to learn
from others is a prerequisite for realizing this particular advantage of
backwardness.
Second, there is the widely shared view that human capital endowment matters.
Convergence of backward economies with richer ones seems to be conditional
on human capital formation. Third, economic openness, export orientation and
economic freedom seem to be helpful. There is less agreement about the role of
investment. Most of the older econometric research was impressed by the
robustnesss of the relationship between investment and growth, whereas more
recent research underlines the endogeneity of investment.
Although investment might still speed growth, investment itself might
simultaneously depend on growth. Moreover, the latter effect might be stronger
than the former effect. Finally, it is not clear whether one should narrowly or
broadly define investment. It is
only equipment investment which boosts growth.
Applying these general arguments about the determinants of growth to Japan,
Japanese performance from the late 19th to the late 20th century is certainly
compatible with the existence of advantages of backwardness . Since the Japanese achieved high degrees of literacy and high secondary
school enrollment ratios quite early, strong human capital formation and
willingness to work long hours seem to have boosted growth and contributed to
conditional convergence. It is more difficult to judge the impact of economic
openness, export orientation and economic freedom on Japanese development.
The Friedmans claim that Japan did rely on markets and market
incentives. In the 19th century, the Western powers had imposed a treaty on
Japan which forbade it to impose customs duties higher than 5 percent. Under
such conditions big price distortions became impossible. The Japanese economy
had to exploit comparative advantages. Efficient resource allocation prevailed
instead of political planning and resulting errors. Such an account of the
Japanese success story is frequently criticized .
Admittedly, Japan always had an industrial policy. The state promoted and even
established some industries. It provided subsidies, formal and informal
protection, for example, by ‘buy Japanese’-campaigns, social pressure,
bureaucratic harassment, and government procurement. On the other hand, one
should not put Japan too far into the statist corner. Protectionism is well known
from American and European economic history; state-owned enterprises were
important in France and Germany; industrial policy by government procurement
and national (or imperial) preference has been the rule rather than the exception
in the West. But Japan benefitted (against its will) from international treaties
putting a cap on its custom duties in the late 19th century. Simultaneously, “the
largest noncoerced privatization of industrial facilities” in the late 19th century
occurred in Japan . Moreover, the Japanese state remained

lean. Japanese general
government expenditure as a share of GDP was below British, French, and
German values from the 1870s through the 1990s. So, the superior Japanese
performance is compatible with a free market interpretation, in particular in
comparison to China.

China’s Belated Entry into the Race

In analyzing Chinese performance one may distinguish two separate take-off
thresholds: first, the Communist conquest of power in 1949, because thereafter
per capita incomes in China grew rather than stagnated or fell; second, the end
of Maoism and Deng Xiaoping’s reforms in the late 1970s, because only
thereafter the Chinese economy began to outperform the global economy,i.e.,
only then did the Chinese catch-up really begin. The first Commumnist
achievement rested on ending the civil war, at least as far as the mainland was
concerned. Certainly, the Communists did nothing like imposing law and order. Instead they expropriated rich landowners and redistributed the
land to poor peasants and tenants. Then they diluted all property rights and
interfered with incentives by collectivizing agriculture. In the late 1950s, with
the so-called “great leap forward”, they forced comparatively small collectives
into larger communes, thereby further diluting property rights and attenuating
incentives to work. Simultaneously, ideological indoctrination of peasants was
reinforced. Since time spent in studying Mao Zedong thought was not spent in
the fields, it had an opportunity cost. Another distraction arose from a misguided
attempt to increase rural iron production. Decisions when and where to plant
were no longer made by peasants guided by experience, but by party cadres. In
fact, the “great leap forward” comes as close as possible in the real world to a
giant experiment to test the explanatory sketch . If the “great leap forward” had achieved its goals, then the
explanatory sketch would have been falsified and in deep trouble. But the “greatleap forward” was a disaster and resulted in mass starvation. While estimates of
the number of victims vary from 16.5 to 50 million , 30
million seems to be a middle one.
The “great leap forward” was not the only Maoist desaster. In the late 1960s the
cultural revolution began. This is not the place to analyze its ideology or
purpose, but merely to point to two effects. Again, millions lost their lifes, at the
beginning because of the actions of the red guards against the hated
establishment, later because of the actions of the “people’s liberation army”
which put them down in the end and restored order. In addition, serious
schooling or human capital formation was interrupted for an entire decade.
Nevertheless, one may argue that Chinese efforts and
successes in spreading schooling and literacy to almost all young adults in the
countryside before the cultural revolution greatly contributed to economic
growth after Mao’s death and Deng’s reforms.
The final turning point in Chinese economic development was achieved only
under Deng Xiaoping’s enlightened leadership in the late 1970s. Reforms
began in the countryside. Agriculture was decollectivized by assigning land and
responsibility for production to small working groups of a few families or even
to individual households or persons, i.e., incentives to work hard and to increase
production were restored. Since the overwhelming majority of the Chinese
population in the 1970s and 1980s lived in the countryside and worked the
fields, this mattered. Within a decade or less, rural per capita incomes doubled.
Simultaneously, the discrepancy between higher urban and lower rural incomesnarrowed from about 2.4 in 1978 to about 1.7 in 1985. At the beginning market
reforms not only boosted growth but equalized incomes, too .
Agricultural reforms were complemented with other reforms. Economic
decision-making was decentralized. Much of it was shifted from the central to
provincial and local governments. So-called township and village enterprises
(TVEs) were established. Even truly private enterprises became tolerated. Prices
were permitted to respond to supply and demand. Already in 1993, 95% of all
retail prices were market prices, 90% of agricultural prices, and even about 85%
of investment equipment prices . Entrepreneurs, including
cadre entrepreneurs, became residual claimants to profits and local governments
became residual claimants to taxes . The devolution of
power to regional and local levels reinforced competition. TVEs have to
compete with each other. The reach of ‘their’ local government is not long and
strong enough to protect them. Even if the ownership is still collective, many
TVEs have to compete as if they were private and profit-oriented enterprises.
Since China has not yet established the rule of law, property rights are still
somewhat insecure. In market-preserving federalism , however, the Chinese have implemented
a functional substitute for it. Where lower levels of government treat enterprises
and investors worse than elsewhere in China, where regulation is especially
burdensome, where arbitrary taxation hurts more than elsewhere, where
corruption exceeds Chinese expectations, there investors need not go.

Competition among themselves forces local and regional governments to act as
if they wanted to respect private property rights.
Another major policy reversal of the Chinese government concerns the transition
from a largely closed to a fairly open economy. At the end of the 20th century
China may have exported about 30% of its gross domestic product . This is an extremely high number for such a
huge economy. Another indicator of openness is China’s attractiveness for
foreign capital. In 1998, for example, China received about 43 billion US-$ in
foreign direct investment. By contrast, neither India nor Russia got even one
tenth of this amount . Since its opening up,
China has pursued an export-oriented growth strategy, much as South Korea or
Taiwan did before China. But in contrast to Japan, South Korea and Taiwan,
China relied heavily on foreign direct investment. In the mid-1990s, foreign-
invested enterprises contributed about 15% to gross fixed capital formation,
about 20% to industrial output and about 41% to exports .
Since the mid-1980s income inequality in China is growing again. At the end of
the 20th century top 20% income shares in China and the United States were
about equal, i.e., in between 46 and 47 percent . Because of its strong growth performance, incomes of the poorest 20% in
China nevertheless improved by 3.8% per year .
Although the People’s Republic of China still lags far behind its sister Republic
of China on Taiwan, behind Japan, and behind the West, its incipient catch-uptrajectory has already contributed to some improvement of the global size
distribution of income .

SUMMARY

1/ Authoritarian regimes vs country development

First of all, historians and economists would argue that China is an authoritarian state and that so far in history, no authoritarian state has become a developed country. This is a historical and empirical observation - as no dictatorship has become a developed country (except the benevolent Singapore’s dictatorship).

2/ America did not initiate any Marshall plan for China

The second reason is that China did not get active help in developing itself from America like other countries.

3/ Lack of Competence in the Chinese Communist Party Leadership

Finally, and probably the biggest culprit: China suffered the calamity of the incompetence demonstrated by the leaders of the Chinese Communist Party.

A) China got « colonized » by Japan and lost 3 to 5 mio lives.

B) Then came Mao, with his Great Leap Forward and Cultural Revolution which resulted in 40+ mio deaths - the biggest mass murder in human history.

It was one of the lethal and on a large-scale mass murder in the history of the world.

The Chinese Communist Party strongly denies this historical fact and is using censorship and exclusively state controlled media to push their narrative.

C) Then came the Tiananmen massacre where the Communists Party killed a « few » thousand lives.