Michael Pettis, “A Brief History of the Chinese Growth Model,” Michael Pettis’ China Financial Markets, February 21, 2013.It should be read with the comments of Matias Vernengo here.
In short, Pettis points out the similarity of the Chinese growth model to that of America in the 18th and 19th centuries: the protectionist and interventionist model of Alexander Hamilton, Friedrich List, Henry Clay, Henry and Matthew Cary, and John Calhoun, what was at that time called the “American System.” It emphasised:
(1) infant industry protectionism and tariffs;I would depart from Pettis on point (3), in the sense that the US banking system in the 19th century was much more unstable and crisis-prone than other systems, and its more laissez faire nature imposed significant costs such as a bias towards debt deflationary dynamics in the 1870s and 1890s.
(2) internal development or what we now call public infrastructure, often through government investment, and
(3) a modern financial system.
A very significant point is that 19th century Meiji regime in Japan used the services of the E. Pechine Smith and a stream of others – all the second generation proponents of the “American System” – as advisers in their industrial policy that sent Meiji Japan on the road to industrialisation.
The astute Japanese followed the successful model of state-led growth pioneered by the US (and to some extent late-19th-century Germany and other nations). That model was refined and developed after 1945 by Japan, South Korea, and Taiwan in the import-substitution industrialization (ISI) model, and now in a new form it has been continued by China.
Nor is China proof of the success of the orthodox policies of globalisation, because China simply did not, and does not, follow those orthodox policies. How can a country with capital controls, state-owned banks, a pegged, undervalued currency (as a mercantilist policy to boost exports), a large state-owned industrial sector, subsidies to key domestic industries, huge non-tariff barriers, and an activist industrial policy be an example of the success of globalisation? Nobody doubts that liberalised foreign direct investment and international trade have been major factors in the success of China, but one cannot look at these policies in isolation. One only needs to look at the use of industrial policy in China as noted, for example, by Clyde Prestowitz many years ago in some insightful work.
In general, a crucial difference between East Asian nations and the US is that East Asia turned towards export-led growth (outward-oriented ISI) as a fundamental driver of development. The downside is that this often leads to not enough domestic consumption and social services.
As far as I can see the United States pursued more balanced development, because by the late 19th and early 20th centuries it had turned away from the export-led growth model to much greater reliance on internal markets and domestic demand.
More Reading
Matias Vernengo, “Is China Buying the World?,” Naked Keynesianism, October 20, 2012.
Matias Vernengo, “On 'Free' and Managed Trade, Naked Keynesianism,” October 8, 2011.
Clyde Prestowitz, “China as No. 1,” American Prospect, February 21, 2005.
