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The prime question is: why did Beijing choose to hold such a major event? The decision was only taken in late September. There were some 200 delegates and another 100 observers. The Chinese official line-up was impressive, including Li Keqiang, Li Junru, Dai Binguo, Zhang Zhijun and a separate meeting with Premier Wen Jiabao (see today’s post). Over 50 Chinese and some 28 European scholars participated. The European delegates were led by former French Prime Minister Jean-Pierre Raffarin, former Hungarian Prime Minister Peter Medgyessi and former British Deputy Prime Minister John Prescott.

The unspoken message from the Chinese government was, in my view: “Europe, we still love you. We’ll love you even more if you get your act together externally – as a counterweight the Americans.” The decision to hold the conference (sponsored by 10 leading think tanks, including the Communist Party School) appears to have been influenced by the Obama visit and the fact that the PRC-EU summit will not be held in Beijing.

This message was confirmed by the excellent and indeed friendly and informal atmosphere. No movement was, however, detected in the Chinese negotiating positions.

Themes discussed were: the strategic significance of the China-EU partnership; China’s development mode; China-EU media cooperation, humanitarian and cultural exchanges; the status quo and prospect of China-EU trade and investment relations; approaches of China and EU to address financial crisis and reform of the international finance system; and cooperation on climate change, energy and environmental protection.

My paper on “The Chinese Development Model” is reproduced below.

HOW TO REGARD THE DEVELOPMENT MODEL OF CHINA

Stanley Crossick
4 November 2009

Forum on China-EU Strategic Partnership:
Turning Challenges into Opportunities

Beijing 19-20 November 2009

Introduction

China’s economic success over the last 30 years is an accepted fact and does not need the citing of statistics. This short paper seeks to answer two questions:

What are the main characteristics of the Chinese development model?
Is the model sustainable?

Main characteristics of the Chinese development model

It is not possible to define the Chinese development model in simple terms. It is really a process rather than a clear policy statement. Its origins lie with Deng Xiaoping, who famously said that one must “seek truth from facts” (and not from dogma) and that “It doesn’t matter if a cat is black or white, so long as it catches mice.”

The model is unique, and has been developed in a country with a long history of civilization, a very difficult modernization experience and with the largest population in the world.

The key features are pragmatism, trial and error and gradual reform. The model is not based on ideology but practical steps, first testing the effectiveness of policies and then, when proven, implementing at a fast rate. However, overall the reforms are in fact gradual without any ‘big bangs’. First came the easy reforms and rural reforms: difficult reforms and urban reforms followed. Experiences in implementing the first reforms helped create the necessary conditions for further reform.

Labels do not help satisfactorily describe the model, which the Chinese say is based on socialism with Chinese characteristics. It can be described as a mixed economy with socialist and capitalist features or, less flatteringly, autocratic capitalism.

The model has a number of key characteristics. The state controls the strategic direction of the economy and therefore its strategic sectors: the state-owned enterprises still dominate industry. The government can thus set and direct its economic priorities.

From the outset, foreign direct investment (FDI) was encouraged as was the higher education abroad of young Chinese, particularly in science and technology. These thousands of students put to good use their acquired knowledge back in China.

China has not hesitated to adopt foreign ideas and practices – entrepreneurship, international trade, the market…, but has never allowed such foreign imports to interfere with government policies.
Successive generations of leaders have been able to ensure continued public support for modernization and, at the same time, macroeconomic stability. Beijing has succeeded in adapting its institutions and managing huge and fast changes.

The Chinese model has delivered several hundred million people out of poverty. Contrary to many Western beliefs, this model, despite its shortcomings, has been more effective than, say, the exported American model based on ideology and democratization, with scant attention to the local circumstances. Without the rule of law, a better educated people and a substantial middle class, premature democratization can have adverse consequences. The Beijing Consensus is to be preferred to the Washington Consensus.

Is the model sustainable?

The Chinese development model now faces three major challenges: first, how to correct its uneven development; second, how to cope with the unsustainability of export-led growth; and third, how to handle the value of the yuan.

The 10th National’s People’s Congress in 2004 recognized that too great an emphasis was placed on GDP growth and a more “people-oriented” approach was needed, in accordance with the “five balanced aspects”, namely balancing urban and rural development, balancing development among regions, balancing economic and social development, balancing development of man and nature, and balancing domestic development and opening wider to the outside world. However, the difference in economic development since then has not been noticeable.

Regarding the second challenge, China relies massively on exports to achieve its growth. The US trade deficit has continued to rise ($268 billion in 2008 – the EU deficit was $169), as does the Chinese currency reserves ($2.273 trillion at the end of September 2009). Thus, China is lending the US money to buy its exports. This situation is not sustainable and indeed is dangerous. There is broad agreement that it is in China’s own interests to promote consumer spending so as to produce domestic demand-led growth. The huge incentive package is being spent mainly by state-owned enterprises and on infrastructure projects. While spending has increased, the Chinese remain big savers, so as to provide for their old age, healthcare and education of the children.

Calls for a revaluation of the yuan are again getting louder. The US, despite its ‘huffing and puffing’, has not declared statutorily currency manipulation. However, the continued pegging of the yuan to the dollar both upsets the Americans, who feel that Beijing is being unfair, and the Europeans because it means that the euro has strengthened against the yuan. Needless to say, the loss of trade competitiveness is the concern of both, as is the contribution it makes to the rising deficits.

Talk of replacing the dollar as the principal reserve currency will continue but there is, as yet, no practical alternative.

Conclusion

I have addressed the subject as requested, but believe that discussions of ‘models’ are somewhat artificial. .Historically a model marked by clear goals and ruthless pragmatism usually succeeds because of the determination of political leadership. Examples are Charles De Gaulle in France after 1958, MITI in Japan during its ‘catch-up’ phase and, of course, Deng Xiaoping 30 years ago. Success generates domestic legitimacy and external challenge. Potential side effects can be, for example, corruption and excessive reliance on exports.

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