Will China defy the Washington Consensus?

The Cold War was seen by many as a test of survival for two competing economic models - free market capitalism vs. communism.

While the Soviet Union witnessed astonishing initial growth under the command economy, it ultimately collapsed as Gorbachev's decision to allow a slow process of democratization destabilized Communist control. As the Soviet Union declined, the US validated free market economic policy recommendations (lower barriers to trade, privatization of enterprises, fiscal discipline, tax reform) with their recent victory, and established the Washington Consensus as an agreement between the IMF, World Bank, and US Dept of Treasury on these policy recommendations.

In short, the US said "capitalism won the Cold War, so you should implement capitalism to spur economic development." This set of economic policies was popular during the 1980s in Latin America, often used as a remedy for debt crises.

However, with China experiencing the most rapid economic development ever seen in history, some may question the necessity for economic policies outlined in the Washington Consensus. Let's explore this topic.

Like many other Southeast Asian countries, China developed under the export-oriented industrialization model. By artificially manipulating their currency to make their low-priced goods more competitive on the international market, China has caused a trade deficit with the US and has been the largest exporter in the world since 2009. Operating under a (mostly) communist regime, the government dictates the demand for goods and invests in those sectors heavily.

However, many have begun to question how sustainable this model of economic development truly is. To start, currency manipulation hurts domestic consumers, as Chinese citizens have less purchasing power compared to their US counterparts. Further, rapid industrialization comes with serious environmental costs. Poor air quality in China is a clear indicator that the nation is willing to sacrifice the health of their citizens for rapid industrialization, which, in turn, cuts down on their labor force in the long run. China's repressive measures to limit freedom of speech and expression has also caused human capital to flee the country, thus hindering possible avenues for innovation. China's demographic is also aging, which will lessen their labor force in the long run.

Another big concern is how China's repressive regime disincentivizes entrepreneurs to grow their businesses, as the state deems powerful businessmen a serious threat to their consolidation of power. Take for instance, Jack Ma: Ma is one of the largest entrepreneurs in China, but disappeared for a few years when he spoke out against the government, criticizing its leaders. Ma later reappeared but was forced to film a public apology and pledge his allegiance to the Chinese government as part of his release conditions. From cases like these, Chinese entrepreneurs are well aware of how their rise to power will put a large target on their backs, as the government has no tolerance for dissent, especially from influential individuals.

Economists have recently noted that China's growth is slowing down, and they may even be fudging their numbers as a result. This slowing economic growth explains why Xi Jinping has tightened his grip on dissenters, increased surveillance, and has been increasingly violating the rule of law. Xi is aware of how closely connected China’s economic health is to his retention of power, and is thus enacting more repressive measures to consolidate his grasp over private sectors.

One recent measure that has sparked controversy is Xi’s internet crackdown, which many see as a strategy to reinforce government hold on the private sector. However, a NYT op-ed offers a differing perspective on this issue:

“The internet crackdown is not really about crushing private enterprise: Private companies in many sectors, including tech hardware, are doing just fine. Rather, the crackdown addresses — in a very authoritarian way — the same anxieties about big tech that governments around the world are grappling with: unaccountable power, monopolistic practices, shoddy consumer protection and the tendency of a tech-heavy economy to drive income inequality.”

While this opinion is, to some extent, logical, it remains that the line between government regulation to mitigate monopolies is significantly blurred with authoritarian and oppressive measures to stifle parties that may one day be powerful enough to challenge the government; in fact, these interests are undoubtedly conflated. Regardless, this measure may cause issues with incentives to innovate, leaving many wondering if China can ever become a true leader on the frontlines of technological innovations if it severely dis-incentivizes large entrepreneurs.

While researchers and economists have deemed this model of development to be 'unsustainable,' China has proven to defy economists' predictions time and time again. Analyzing China's politics and economy pushes the big question - is it possible for a nation to spur their economic development without converting to a free market democracy?

Authoritarian regimes around the world are keeping a close watch on China's next moves, beholding the nation as a litmus test for the necessity of the Washington Consensus in spurring sustainable economic growth.