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Sebastian Petric

Degree:

EMBA

Location:

Austria

Industry:

Finance

Year:

Jan 2019 - Sept 2020

By Sebastian Petric

Upcoming study trip to Shanghai and Hangzhou

Early next year, my Oxonian colleagues and I are embarking on a study trip to China. Having been in touch with Prof. Eric Thun, a particular focus will be put on the institutional transformation of China from plan to market. In this blog, I summarise my initial thoughts on our journey and the topics discussed in class.

A substantial part of Chinese growth resulted from improvements in total factor productivity over the last decades; this hints to the importance of institutional features for the country’s developmental trajectory. Indeed, the ‘rules of the game’ in a society have a substantial impact on growth (Douglass North 1990). ‘Why has the growth performance of Russia been so dismal in its first decade of transition […]? Why has the Argentine economy, one of the richest in the world in the early twentieth century, more or less collapsed? Why have the “Asian tigers” experienced a successful economic take-off’ (Roland 2004)? Why was China able to transition to a market economy without greater disruptions?

In this blog, I investigate which institutions supported the growth trajectory of China over the last decades. With respect to this, McNally and Gruin (2017) point to targeted liberalisation and policy experimentation as greatly supporting China’s rise. Each of the aforementioned institutions should be analysed in detail to understand how these supported China’s economic trajectory. To begin with, targeted liberalisation can be regarded as one of the country’s pillars with respect to transitioning from plan to market. Any repercussions of full-blown liberalisation were avoided by China as the country only engaged in targeted opening. China is still liberalising its economy today. Only recently, the country further facilitated investing onshore in China by abolishing investment quotas for foreign institutions.

Another rather unique Chinese institution is policy experimentation; this should not be confused with trial and error. Institutional innovation is greatly facilitated by policy experimentation and hence, new types of economic activities are supported by this. In particular, Special Economic Zones (SEZs) are targeted areas in which experimentation can take place; any successes or failures are initially limited. Only after the confirmation of the performance of the innovation, the policy is expanded across China, if successful, and can support the developmental trajectory of the country.

An example of a combination of targeted opening and experimentation is the currency regime in China. Even though the country stresses that there is only one currency, the yuan, the currency is traded onshore on the mainland and offshore in Hong Kong with different arrangements to determine the exact value of the exchange rate. Capital controls between mainland China and Hong Kong prevent “perfect” arbitrage. Over time, we can expect CNY and CNH to become one currency, but the ideas behind establishing an offshore currency determined by market factors are clear.

After identifying some institutions supporting economic transformation, the question is now whether these institutions can be duplicated in other emerging markets and developing economies? Factors such as culture and history might interfere with the successful implementation of institutional innovations. In addition to these variables, the build-up of institutions simply takes time. Ralf Dahrendorf estimated that it might take several decades for the establishment of functional institutions. Given these impediments, can any duplication of institutions be successful?

Having been on a study trip to Delhi earlier this year, it seems that not all institutions have the same impact in every environment: SEZs in India failed to take-off. There might be various reasons why this did not succeed in India, which should be analysed in more depth but would go beyond the scope of this blog. Nevertheless, importing blueprints does not seem to be an all-encompassing solution. Further insights on this topic will be gained during our study trip to Shanghai and Hangzhou.

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