(This essay was published in Hong Kong Economic Journal on 25 June 2013)
Why does modernization lead to political change – even violent and revolutionary change at times? Modernization is the economic transformation of a society from subsistence agriculture to an industrial market based system. Two critical changes take place in this process.
First is technological change. Farming technology had few breakthroughs for thousands of years. In every pre-modern society the standard of living in self-sufficient agricultural economies was stagnant. Economies grew only because populations expanded and not because of increases in the level of per capita income. Industrialization and the growth of the market economy began to alter this situation.
This transformation first took place in Western Europe about 200 years ago. Historical data on per capita GDP compiled by Professor Angus Maddison reproduced in Figure 1 gives a visual description of this incredible transformation. Economic growth is a very radical and young idea in the history of human civilization. Until the 1800s people did not imagine that the future could be better than the present. The so-called “golden age” of all civilizations was almost always in the ancient past. Today people are worried if tomorrow is not going to be better than today. Modernization requires change. It necessarily challenges the traditional way of life that assumes away progress. This can be a very scary thought for those who are today’s winners.
The second critical change is a modern economy. This is in effect the market economy, a system designed to accommodate and encourage change. In a market economy someone else produces almost everything a person consumes. In self-sufficient agricultural economies almost all economic production and consumption took place in the village. Events outside the village seldom had any economic impact. The lives of the landlords and peasants did not seem to change very much from generation to generation.
Economic Transition Leads to Political Change
The primary characteristic of pre-modern life was that it was traditional, customary, and overwhelmingly local. Even the languages people spoke were local dialects. Modern societies are dynamic, creative and cosmopolitan; people are often multilingual and share some common language. Modern economies are organized through markets in ways that are fundamentally different from the traditional economy. Markets encourage specialization and the division of labor, an observation that goes back to Adam Smith.
In agrarian times the world was not economically inter-connected. People seldom connected with those outside their village, except for a small number of elites. Rural villages were like self-sufficient unconnected islands in a vast ocean. Other than infrequent market fairs, most commercial activities were exclusively involved in the long distance trade of luxury goods consumed by the nobility and the rich. The bulk of the population, who were peasants, did not participate in such trade. The “global economy” of the agrarian age touched less than a fraction of one percent of the world’s population; and those who were touched were the elites.
When agricultural production became commercialized, self-sufficiency and subsistence came to an end. The lives and fates of landlords and peasants became connected to events in remote places through markets, and they found themselves at the mercy of forces and events they could not see and did not comprehend. The social and political institutions that had been adequate in a stable self-sufficient agrarian economy were no longer fit for purpose in an inter-connected growing market economy.
Barrington Moore showed why such economic transformation could trigger political crises of huge proportions as winners and losers traded places. England, France and the United States experienced violent revolutions that swept away the remnants of the past to install the emerging bourgeoisie in power and establish liberal democracies. In Russia and China the political outcomes were communist dictatorships, and in Germany and Japan they were fascist dictatorships. India became a democracy through peaceful means, but it did so without changing its self-sufficient agrarian economy. Markets continue to be underdeveloped because the old agrarian structure has lingered on. The peaceful emergence of India’s democracy did not threaten the old power structure. Democracy survived by presiding on top of the existing social structure without transforming it and made very little difference to the economic lives of the peasants.
Moore argued the social conditions in China made the communist revolution logical and the subsequent dictatorship a necessary outcome for the country to modernize. Traditional society and the Chinese gentry had to be swept away. The questions Moore did not pursue were (1) whether communism and the Chinese Communist Party would succeed in modernizing China, and (2) what would happen to the political dictatorship. These are the intriguing questions China faced after 1949 and still do today. The answers have relevance for everyone in our inter-connected modern global economy.
Economic Overtaking and Resource Misallocation
The challenge for the Chinese Communist Party after it captured power in 1949 was to industrialize without a bourgeois class. The instrument for this task was the organized party and its running of the government bureaucracy. For over two thousand years China had been administered through a central bureaucracy; the Chinese had invented it. What was new was the transformed role of the bureaucrat. The traditional Chinese bureaucrat had been a scholar official who did not take part in economic production but performed only public administrative and judicial duties, and sometimes led military operations. Under communism the bureaucrat became, in addition, an economic manager.
How could such a person be recruited and what credentials should he possess? It was apparent that the ideal bureaucrat-manager could not be selected through a civil service examination as had been done in the traditional order. Furthermore, what would he be examined on to make such an examination an appropriate screening tool? Instead, most bureaucrat-managers in post-1949 China have been trained engineers. This remains the profile of most top leaders in China today in contrast to the legal backgrounds of leaders in capitalist economies.
A deeper question is of course whether a government bureaucrat should also be a business manager. In a market economy these two roles do not overlap, but they cannot be separated in a planned economy. Anyone who has been to China and heard government officials speak is amazed at their ability to quote industrial production and trade statistics in all key economic sectors under their ward. Hong Kong government officials cannot do that, and Hong Kong businessmen can only tell you what their company does. Should we be comforted or worried by this?
China in 1949 adopted the Stalinist model of industrialization emphasizing investment in heavy industries and the collectivization of agriculture with the explicit aim to accelerate economic growth through the forced mobilization of savings. China was of course primarily an agrarian economy with very low levels of productivity and capital accumulation so the bulk of the savings had to come from agriculture.
Since labor was abundant in China but capital was scarce this was a very inefficient and costly strategy. In 1949, about 80% of the population worked in agriculture. The Stalinist model meant that scarce and expensive capital had to be forcibly mobilized from peasants to invest in capital-intensive heavy industries where the rates of return are low. Labor-intensive light industries that would create more employment had to be suppressed and denied scarce capital.
The communes were the main instrument for this mobilization. They served two roles. First, they kept peasants in the rural sector and prevented them from migrating into the cities in search of job opportunities in the process of industrialization. Second, equal participation without private ownership required the state to continuously redistribute production shares as a means of organizing agricultural work that tied the peasants directly to the state. This provided a mechanism for the state to keep a large agricultural base and to extract its entire surplus for urban centered industrialization. The state now performed the dual role of the landlord and the official in pre-modern times. Rural cadres were the bureaucrat managers of the rural collectives.
The Stalinist model purposefully contradicted the laws of comparative advantage. Prices were controlled across the board and markets were suppressed. Vast bureaucracies at both the central and provincial levels were created as the institutional instruments to manage widespread shortages and impose full scale rationing. Coercion was a central feature of the system.
Indeed the command system was the ideal institution for delivering Stalinist economic goals. Total coercion under a bureaucratic command system made perfect sense for the Stalinist aim of overtaking the West and therefore it had to defy the laws of comparative advantage. The market system based on individual choice could not deliver Stalinist goals.
Adverse Effects of Excessive Control
State ownership was a compelling and logical institution for achieving coercive developmental goals. Agricultural collectivization provided the institutional mechanism to extract the maximum possible surplus from labor that was to be forcibly employed in agriculture and forced to remain in the rural sector.
The bureaucracy that emerged in China was a necessary consequence of the full-scale attempt to manage pervasive shortages in the market. Given China’s size, there were several layers of bureaucracy comprising both centralized monopolistic ministries and decentralized regional-provincial-local bureaucracies that behaved as geographically based monopolies. The centralization of bureaucratic management was far less extensive in China than in the Soviet Union for reasons reflecting China’s size, its lesser degree of industrialization, and Mao’s own preference for decentralization.
Mao abhorred the vast bureaucratic empire that emerged because he felt powerless against the institutionalization and routinization process that dominated the economy and society. The Cultural Revolution he unleashed is seen by some as Mao’s attempt to rebel against a bureaucracy that he felt was sapping China of its revolutionary fervor and spontaneity, but he did not have an alternative to replace it with beyond sheer charismatic cult. By challenging the bureaucracy in this way, Mao succeeded in weakening it, as well as damaging the economy and discrediting the political authority of the state. This prepared the ground for Deng to later resurrect a partial market solution.
The disadvantages of the command system are now well known. It provided very little incentive to motivate effort in the rural collectives and the state owned enterprises. State coordination of different types of economic sectors was also too rigid compared to the market, suffocated innovation, and retarded productivity gains. Another problem was the misallocation of resources in favor of the wrong set of industries – heavy capital-intensive industries were inefficient in capital scarce and labor abundant China.
Economic Miracle of Partial Deregulation
The system also created powerful bureaucrat managers, who became defenders of their own interests and bureaus. And artificial planned prices created economic rents that the bureaucrats were committed to protect from competition. This encouraged rent-seeking opportunities that were not merely restricted to those at the center, but existed locally as well in the provinces and counties.
The great accomplishment of Deng and his many successors was to allow a partial deregulation of the system that created a dual track in which artificial planned prices co-existed with market-determined prices. Controlled prices were retained for certain classes of products. Micro incentives and market arrangements were permitted to appear again. New enterprises could be established outside the state sector and this led to a huge boom in the formation of market driven labor-intensive enterprises in the form of township and village enterprises, private enterprises, and foreign invested enterprises.
In agriculture, the commune system was largely but not totally dismantled. The household responsibility system was installed, but land was not privatized. Agricultural land leases with long durations were created and the hiring of market was labor permitted. Rural workers were free to migrate to the cities to seek work and many were employed in the new labor-intensive enterprises, but the hukou system of household registration was not reformed and migrant workers were denied state subsidies and benefits available to urban residents. Rural residents gained some rights but not all, and they continue to suffer from official discrimination.
The Chinese economy today is a mixture of bureaucracy and markets governed by a one-party state. This is not unusual if we look at the history of young nations that have successfully industrialized in the past century. Almost all achieved modernization under some form of dictatorship, created mixed economies, and gradually moved towards the formation of a more open and inclusive political system after industrializing. In East Asia this list includes South Korea and Taiwan.
Moore would have called these cases “revolutions from above”. The new states were able to forge an alliance with the emerging commercial and industrial interests on the one hand, and the old agricultural elites on the other. Together they created a mixed industrial economy, commercialized agriculture, and invested heavily in human capital to modernize the workforce. In many respects their economic development parallels some of the experiences of Japan and Germany.
Next Steps to Successful Reform
The Chinese Communist Party succeeded in ending the old rural order that had been a drag on modernization. The first phase was the “destruction” phase. The Stalinist model inaugurated a costly coercive industrialization process that was probably unsustainable beyond one or two decades. The cost of resource misallocation was even higher than in Russia because of China’s economic backwardness and large agricultural economy. Bureaucratic managers were poor substitutes for market entrepreneurs in propelling modernization forward.
The economic miracle created by the partial deregulation initiated by the ruling party made it possible for China to continue the second phase of its modernization. By allowing a market economy to emerge outside the planned regulated economy, the Chinese economy rapidly became the second largest in the world. Over a 30 year period the share of the labor force employed in agriculture declined from 69% to 35%. Within the urban areas the share employed in the state-owned sector declined from 76% to 19%. The share of GDP produced by the state-owned sector today is estimated to be 50%. China is well on its way to becoming a modern market economy and has joined the ranks of the middle-income economies. Will this process continue? It could if deregulation continues and the market economy can continue to expand. Several critical steps need to be taken, however.
First, in agriculture, land use has to be further integrated into the market economy. This entails finding an institutional arrangement to define and recognize the land rights of farmers and providing them with a fair opportunity to take part in the market economy without being disadvantaged and discriminated against. Removing the hukou system would facilitate their full integration into the national economy.
Second, modernization needs to be sustained by a market economy, but markets alone cannot help the disadvantaged to achieve economic success. When this fails on a massive scale, economic productivity growth is stalled. Moreover economic development may be held hostage to political divisiveness when income and wealth gaps widen. Under the worst circumstances unholy alliances are formed that halt the modernization process. This is what happens to economies that get stuck in the middle-income range after an initial period of industrialization. Preventing this outcome requires the government to take effective measures to help society’s many disadvantaged to enhance their human capital through affordable schooling, better food safety and nutrition, and access to health and medical care, and thus participate fully in economic life.
Third, the heavily regulated planned sectors have to be further deregulated. This would impact the political elites. If deregulation is to be sustained then political privileges must also be transformed into economic property rights. This could happen in China with further deregulation. Society would accept this and see it as a worthwhile undertaking in achieving a fair outcome for all. It would be an important act in the long march to modernity.
The path forward may still be challenging, but it cannot be more painful than what the nation endured in the century before Deng opened China. Reading Moore forty years ago was a disturbing personal experience. The unfolding of events in China in the past 30 years has been heartening. Reading Moore again last year has made me feel more optimistic about China’s long, tortuous and difficult march towards economic prosperity and political inclusiveness.
“Barrington Moore on Dictatorship and Democracy” series, Part IV