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Defying Convention: An Explanation of China’s Explosive Economic Growth

INTRODUCTION
Since the Deng Xiaoping reforms of 1978, China has soared into a rarified atmosphere of explosive economic growth, skyrocketing past the wisdom of conventional economics in its wake. What explains China’s remarkable economic growth despite its centralized authoritarian regime and limited economic freedom? Why has China developed in such a meteoric manner while other countries that lack similar economic freedom remain mired in swamps of transition? Effective and pragmatic central leadership helped create a developmental state set to drive economic growth by implementing gradual reforms through experimentation rather than neo-liberal economic shock therapies that plagued similar developing nations such as the Soviet Union in the 1980s. Many scholars have also produced different explanations and two chief contending schools of thought have materialized. In this essay, the two competing schools of thought are designed as Decentralization: Federalism, Chinese Style and Foreign Investment Driven Growth, which focus on the effects of decentralization and foreign investment on China’s economic growth, respectively. In direct contrast, I will argue for the instrumental role of centralized leadership as the principal catalyst behind China’s explosive economic prosperity. China’s extraordinary economic boom was catalyzed by a gradual reform process under the leadership of a strong and pragmatic central party.

I will begin the essay by making essential qualifications to my argument for the critical role of centralized leadership to China’s economic growth. Subsequently, I will focus on discussing the logic and shortcomings of two competing schools of thought designated as Decentralization: Federalism, Chinese Style, and Foreign Investment. Following the refutation of the two chief contending schools of thought, the essay will launch into the argument for critical role of central leadership in the implementation of gradual market-oriented reforms and their paramount effects on China’s explosive economic growth. Lastly, the strong counter-argument related to economic freedom and rule of law in terms of growth and development will be challenged and refuted.

Before I embark upon developing my argument for the role of centralized leadership behind’s China’s remarkable economic growth, I must make some qualifying statements that will dispel immediate counter-arguments that do not pertain to my thesis. First of all, I am not advocating for an authoritarian regime in terms of sustained economic growth. Instead, I make the case that effective and centralized authoritarian leadership was the root cause and catalyzed China’s economic development from 1978 to the early 2000s. It may very well be the case that a democratic government would be more conducive to further sustained growth in the future, but that lies outside the scope of this paper. This paper aims to explain why China’s economic development was so extraordinary and successful. Secondly, there is a distinct and significant difference between a centrally-planned economy and my argument for a centralized government with gradual market reform policies. A centrally-planned economy disregards all market principles and economic freedom, while my thesis instead focuses on the role of effective centralized leadership in implementing gradual market-oriented reforms.

In the following section, I will discuss, analyze, and refute two major schools of thought that compete against my proposed thesis. By doing so, I plan to expose the weaknesses of the scholarly arguments in favor of the impact of decentralization and foreign investment on stimulating China’s economic growth. In fact, as my discussion and analysis will clearly show, many of their arguments actually support my proposed thesis of centralized leadership as the principal catalyst behind the remarkable economic growth.

DECENTRALIZATION: FEDERALISM, CHINESE STYLE
The cardinal competing school of thought against my thesis arguing for the effectiveness of centralized leadership is, in fact, the polar opposite. Many economists and political scientists assert that China’s decentralized structures of public finance and government was the principal driver behind its economic miracle. Decentralization, according to the World Bank, refers to the “transfer of authority and responsibility for public functions from the central government to intermediate and local governments.” Generally speaking, decentralization refers to the devolution of decision-making powers. Montinola, Qian, and Weingast coined the term, Federalism, Chinese Style, to describe the decentralization inherent in the reforms of China as his central argument revolved around the hypothesis that decentralization fostered economic prosperity by limiting the central government’s control over the economy and their ability to act arbitrarily.

The fundamental economic arguments in favor of decentralization catalyzing economic growth rely on two key assumptions: 1) decentralization increases economic efficiency as local governments are more capable of providing better services due to proximity and informational advantages; and 2) competition across local governments. Harnessing these principles, many scholars such as Weingast developed the decentralized federalism school of thought to explain China’s remarkable economic growth. In summary, the proponents of the decentralized school of thought puts forth three main arguments. First, some believe political decentralization inspired local reform experiments by allowing new ideas to percolate up from the grass roots. Second, some assert decentralization created political restraints on central authorities, thus curtailing predation. Third, proponents argue that fiscal decentralization provided local officials with powerful incentives to stimulate economic growth.

Although Weingast and many scholars make a compelling argument regarding the role of decentralization on China’s economic growth, their argument is flawed because of the two key factors that I will examine in detail: 1) the effects of decentralization on economic growth have been overstated as evidenced by the growing body of empirical studies suggesting otherwise; 2) the extent of decentralization in China has been over-exaggerated. I will provide evidence and explanations for each in the following sections.
Refuting the effect of Decentralization on Economic Growth

Scholars often argue that decentralization enhances economic efficiency which in turn positively affects the dynamic setting of economic growth. Theoretically, fiscal decentralization and autonomy is correlated with higher output per unit of labor and higher steady state growth rates. In reality, however, empirical evidence often contradicts the decentralization theory with Zhang and Zhou (1998) , Davoodi and Zhou (1998), Thiessen (2003), and Xie (1999) all discovering negative impacts of decentralization upon economic growth. A 2010 study by Roberto Ezcurra and Andrés Rodríguez-Pose of the London School of Economics analyzed the relationship between decentralization and economic growth in 21 Organization for Economic Co-operation and Development countries (OECD). The result of the analysis highlight that “the connection between fiscal decentralization and economic performance is negative” and that “the potential economic benefits of fiscal decentralization in terms of economic performance are more than counterweighed by the potential economic pitfalls of transferring ever greater resources to subnational tiers of government.” Similarly, a cross-country study of 46 nations (including China) by Zhou and Davoodi of the World Bank concluded that the relationship between decentralization and economic growth was negative for developing countries and inconclusive for developed nations. Following up on the previous study with a specific focus on China, Zhang and Zhou of the World Bank found in their empirical results that “a higher degree of fiscal decentralization” was associated with “lower provincial economic growth over the past fifteen years.” Why is there a negative relationship between decentralization and economic growth despite seemingly conventional economic wisdom that suggest otherwise?

First of all, the efficiency gain attributed to decentralization could certainly be challenged. In reality, the purported information advantage of the local government may be insignificant because the central government can assign representatives to local offices to gain sufficient knowledge and make informed resource allocation decisions. The central government, especially in the early stages of economic development, is in a much better position to undertake public investment in national priorities such as highways, telecommunications, energy, and railways. This assertion can be substantiated with evidence from the Zhang and Zhou study that found a positive and significant association between central government spending and economic growth in direct contrast to negative association between provincial government spending and growth. Lastly, it is far from proven that local governments have a clear comparative advantage with respect to national governments in terms of allocative efficiency due to information advantages. As a result, the validity of the theory that decentralization improves allocative efficiency is overstated and lacks substantiating evidence.

The overwhelming evidence and subsequent explanations presented above clearly illustrates that the principal driver behind China’ economic growth cannot be based upon such a fragile theory of decentralization that is often debated and contradicted by a plethora of empirical studies. In the following section, I will address the issues of decentralization with a specific focus on the case of China in order to refute and respond to the arguments in favor of decentralization and its product, market-preserving federalism, proposed by Weingast in his original 1995 article, The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development.

Argument for the Over-exaggeration of the Decentralization in China
A critical issue with the argument in favor of decentralization stimulating economic success of China lies in the reality that China’s efforts of decentralization have been greatly over-exaggerated. Provinces have latitude only to the degree that local government officials pursue goals prescribed by the central government. Although in the 1980s, local officials gained greater authority in decision-making, especially on economic affairs, central authorities always had veto power and the ability to repossess the delegated authority. For example, in 1984, the party central committee devolved the right to make and review appointments of sub-provincial officials to the provincial party committees. However, after revaluation, these appointments were again brought under central control in 1990. Clearly, there was not a “loss of central government influence and control over local officials” , as suggested by Weingast in his 1995 article as a critical condition of market preserving federalism, because the central authorities always possessed veto power and ultimate discretion in final decisions. Sebastian Heilmann argued that giving provinces and local governments some administrative autonomy did not “eliminate the weight of hierarchy and ad hoc central interference in China’s political economy.” Similarly, Heilmann’s views were echoed by Andrew Nathan, professor of political science at Columbia University, who maintained that China’s regime remained “a centralized, unitary system in which power at lower levels derives from grants by the center.”

Scholars from the decentralization school of thought have often emphasized that decentralization incentivized the role of local experiments that grew into nationwide reforms. Cao, Qian and Weingast noted that China has depended on “the laboratory of the local governments’ to pursue reform.” Similarly Xu and Zhuang attributed China’s economic success to “using local experiments and in adopting the ‘bottom-up’ approach.” Proponents often point to the four “special economic zones” (SEZs) established in 1979 as evidence of the success of China’s decentralization, because these zones enjoyed lower tax rates and flexible investment rules in order to encourage foreign investment and high-technology exports (studies have estimated that SEZs accounted for 46% of foreign direct investment (FDI) and 60% of exports ). This begs the question: were these “experiments”, such as the SEZs, really the result of political and fiscal decentralization?

Upon closer examination, China’s “local” experiments were often under the close direction and oversight of central authorities. In fact, according to the professors Hongbin Cai of Peking University and Daniel Treisman of UCLA, “the speed at which effective local polices were identified, evaluated, and extended, usually against the resistance of conservative local cadres, actually owed much to China’s political and administrative centralization.

For example, the Sichuan state-owned-enterprise (SOE) reform experiments were often depicted as a spontaneous initiative of Zhao Ziyang, a provincial party chief. However, in reality, the SOE experiment was one of a centrally coordinated set of pilot projects. Peter Nan-shong Lee, who closely analyzed a number of these experiments, discovered that the experiments in Sichuan were authorized in advance by the State Economic Commission. Central authorities closely monitored and reviewed the progress, cataloged them in five policy documents, and prescribed similar experiments in Shanghai, Tianjin, and Beijing after their success. This example evidently reveals the paramount role of central authorities in implementing and extending the experimental reforms, thus refuting the claims of spontaneous local experiments as a result of decentralization.

Similarly, the role of the establishment of SEZs as a measure of decentralization must also be examined and qualified. The notion that SEZs represented a decentralization of authority must be qualified because the central authorities were instrumental in regulating the system and providing critical oversight. Although the zone’ host provinces were vital in the implementation of policies, central authorities regulated this process, set guidelines, monitored the results, and authorized extensions. Furthermore, central control of the SEZs was also evident in the chosen locations. The SEZs were initially implemented in locations that were underdeveloped and sparsely populated, such as Guangdong and Fujian, in order to reduce economic and political risk. Guangdong “suffered from the lack of a strong industrial base as well as insufficient infrastructural facilities” , while Fujian “had no international airport, and its major ports and railroad system were inadequate for large volumes of freight and passengers.” Only after the idea was experimented with in less critical locations was it expanded to critical cities such as Shanghai, clearly illustrating the predominant role of the central authority in the establishment of the SEZs. Thus the design and geographical spread of effective experiments, such as SEZs, should be more appropriately attributed to authoritarian centralization rather than decentralization.

In summary, despite the compelling justifications made by scholars such as Weingast in favor of the decentralization school of thought, the argument is flawed because of two critical factors: 1) the effects of decentralization on economic growth have been overstated as evidenced by the plethora of evidence that discovered negative relationships between decentralization and economic growth; 2) the extent of decentralization has been over-exaggerated as evidenced by the reality in which central authorities exert tremendous influence over critical policy decisions. Federalism, Chinese Style would be better described as Centralization, Chinese Style.

FOREIGN INVESTMENT DRIVEN GROWTH
The second prevalent competing school of thought argues for the role of foreign investment as the principal driver of China’s remarkable economic boom. Proponents often point to the fact that China has become the world’s second largest recipient of foreign direct investment (FDI) (after the United States) since 1993 as significant evidence of the principal effects of foreign investment on economic growth. They attribute China’s ability to attract foreign technology and capital due to incentive policies as a significant driver behind its remarkable growth. Neoclassical economic theories suggest that FDI is an powerful engine behind economic growth because 1) inward FDI strengthen capital formation and employment augmentation; 2) FDI promotes manufacturing exports; 3) FDI transfers special resources such as management talent and established brand names; and most importantly 4) FDI facilitates technology transfers and spillovers. Thus, FDI seems to have catalyzed China’s economic growth via expanding China’s manufacturing exports, raising capital formation, generating employment, augmenting tax revenue, and facilitating technological spillovers.

I completely agree that foreign investment does have a positive effect upon economic growth, however, I disagree with the assertion that it is the principal driver behind China’s economic success. The argument for foreign investment as the principal driver carries a fatal flaw: the positive effects of foreign investment on economic growth comes with a vital caveat – high quality human capital. Human capital is the stock of skills that the labor force possesses in terms of education, training, and health. The effect of foreign investment on the economic development of countries is insignificant and mixed, at best, in the absence of high quality human capital. The key component of FDI in terms of facilitating technology transfer and spillovers is directly dependent upon the level of human capital in a host country, because the application of more advanced technologies necessitate the presence of a sufficient level of human capital in the host economy. Thus, the stock of human capital in the host country limits the absorptive capability of a developing economy. The argument that the effects of FDI on economic growth is directly dependent upon human capital can be substantiated by a well-regarded and often-cited research paper by De Gregorio, Lee, and Borensztein of the International Monetary Fund. After analyzing cross-country data sets, Borensztein discovered that “the effect of FDI on economic growth is dependent on the level of human capital available in the host economy. There is a strong positive interaction between FDI and the level of educational attainment.” They concluded that higher productivity of FDI and its contribution to economic growth holds only when the country has a minimum threshold stock of human capital and a sufficient absorptive capability of advanced technologies. Krugman further supports this point as he argued that the remarkable growth rates and “rapid growth in output could be fully explained by rapid growth in inputs”, more specifically “increases in education levels”, which is a significant indicator of human capital. The fact that the positive effect foreign investment on economic growth depends upon the quality of human quality exposes a significant weakness in the foreign investment school of thought, because the reality suggests that human capital, not foreign investment, is a principal driver of economic growth.

SUMMARY OF REFUTATION OF SCHOOLS OF THOUGHT
While the arguments from both schools of decentralization and foreign investment driven growth are strong, they are inappropriate and insufficient when applied to the analysis of China’s remarkable economic growth. The argument of the decentralization school is flawed because both the effect of decentralization on economic growth and the extent of decentralization in China have been overstated and over-exaggerated. Clear examples and empirical evidence from research contradict many significant assertions advocated by proponents of decentralization, such as the role of local governments in innovative experiments and their ability to allocate resources more efficiently. The fatal weakness of the foreign investment school of thought was exposed by examining the fundamental dependency of foreign investment upon the quality of human capital in terms of stimulating economic growth.

In reality, the principle driver behind China’s remarkable economic growth was the gradual reform process under the leadership of a strong and pragmatic central party. I will utilize a child development analogy to introduce my argument for centralized leadership.
INTRODUCING THE ARGUMENT VIA A CHILD DEVELOPMENT ANALOGY

Consider raising a child from infancy. Would you grant your infant unlimited freedom and let him or her run wild? Absolutely not. The most successful child development requires authoritative parenting where the parents set clear standards for their children, gradually teach them a set of guiding principles, and slowly grant autonomy while giving positive feedback. Authoritative parents are unlike permissive parents who show very little discipline, place few demands on their children. Children raised by permissive parents are generally immature, irresponsible, and impulsive later on. Authoritative parents also differ from authoritarian parents who are restrictive, punishment-heavy, and give very little explanation or feedback. Children raised by authoritarian parents tend to be conformist, suffer from depression, and exhibit less social competence. Psychological studies have unequivocally shown that children raised by authoritative parents are more likely to be successful, generous, and capable of self-determination.

This seemingly unrelated child development analogy actually powerfully illustrates and introduces my argument for the role of centralized leadership behind strong economic growth. Developing countries, such as China back in 1978, are the infants in this analogy. A gradual market liberalization reform process by centralized leadership is analogous to the authoritative parenting style that focuses on gradually teaching the children a set of guiding principles and slowly granting autonomy. This differs from central planning, which would be comparable to authoritarian parenting as there is a lack of any market freedom or autonomy. However, as mentioned in the beginning of the essay, there is a fundamental difference between central planning and the gradual reforms by centralized leadership for which I argue for. Lastly, complete and absolute market-liberalization “shock” therapy would be akin to permissive parenting, where developing children are granted complete freedom and are subject to no constraints. Economic development under strong and pragmatic central leadership is the most successful, very much like the success of children under authoritative parents.
THE ARGUMENT FOR CENTRALIZED LEADERSHIP DRIVEN GROWTH VIA GRADUAL REFORMS

Effective and pragmatic leadership by the Chinese government helped create a developmental state set to drive economic growth by implementing gradual reforms through experimentation rather than neo-liberal economic shock therapies. Deng Xiaoping, the engineer and architect of many of the market-oriented reform policies, characterized this policy of gradual reform as “crossing the river while feeling the rocks.” In other words, gradual market reforms were implemented in China via a process of learning via experimentation. The increasingly diversified economic experiments permitted continuous adjustment and selection of appropriate economic intuitions by the central party. Thus, the progress of reform relied significantly on feedback from ongoing experiments in economic efficiency, akin to positive feedback from authoritative parenting. It is also important to note that the decision by central leadership to implement gradual reforms via experimentation instead of neo-liberal “Big Bang” shock therapies by no means indicate that the central party lacked a real strategy. The central party made a pragmatic and critical decision on the gradual reforms strategy, because for a large and diverse economy in the manner of China, it is incredibly difficult and impractical to devise a single one-size-fits-all blueprint for economic reform merely by administering textbook economic principles. This approach of gradual reform by the central party encouraged rational decision making and allowed the Chinese powerful flexibility and creativity in their selection of and innovation in economic institutions.
Examples in Support of Gradual Reforms by Central Leadership

For example, instead of utilizing the “shock therapy” of the immediate privatization of state-owned enterprises (SOEs), as applied in the Soviet Union, the Chinese leadership implemented gradual reform by introducing partial autonomy to a select few SOEs. As the experiment proceeded successfully, the centralized leadership granted greater autonomy to a larger number of SOEs. As a result, the SOEs were successfully transformed and became major international and domestic players, controlling $690 billion in assets abroad and accounting for nearly a third of China’ GDP.

Additionally, the gradual implementation of highly liberalized special economic zones (SEZs) that sparked significant foreign investments is another powerful example of the efficacy of the centralized leadership and their ability to implement gradual market-oriented reforms. After the tremendous success of the initial experiment of the first four SEZs (Shenzhen’s national domestic product grew from 270 million yuan in 1980 to 3.3 billion yuan in 1985; exports rose from 11 million USD to 563 million USD), central leadership decided to rapidly mobilize resources and expanded the SEZ experiments to fourteen major cities along the coasts, which connected China’s economic development with the world market. The acceleration of the SEZ experiment demonstrates the powerful advantages of the flexibility and responsiveness of gradual market-oriented reforms under a strong and pragmatic centralized leadership.

In contrast, the Soviet Union in the 1980s failed spectacularly in its attempts of economic reform utilizing the more radical “shock therapy” of immediate economic liberalization (by 1990, growth of Soviet GDP became negative and national income fell by 13.5-14.5 percent ). As Peter Nolan argues in his book China’s Rise, Russia’s Fall, “the key to the disintegration of the Soviet economy lay with the disastrous decision taken by Gorbachev and his close advisors…to pursue glasnost (openness) and perestroika (reform),” which were policies of spontaneous market liberalization and democratization. These policies led rapidly to the collapse of the centralized communist party, as there was significant resistance to the “shock” economic and political reforms among both the Soviet Party membership and rank and file Party members, which destabilized the government and significant deteriorated their ability to make efficient decisions. The democratization of the government led to further destabilization as it gave rise to independent workers’ movements that led to unprecedented waves of strikes that transformed industrial relations, which in turn interacted in a vicious cycle with the rapid decline in the confidence and effectiveness of the central party. Furthermore, as Blanchard and Shleifer argued, “In Russia, local governments have typically stood in the way [of economic growth and reform]” through taxation and “capture” by initial rent-holders while “In China, local governments have actively contributed to the growth of new firms”, because the Chinese central government was “strong and disciplined enough to induce local governments to favor growth” while the government of Russia was too fragmented to do so. In China, the central government was in a strong position to “either reward or punish local administrations, reducing both the risk of local capture and the scope of competition for rents” while Russia was unable to do so because its “fledgling democracy” was “neither strong enough to impose its views, nor strong enough to set clear rules about the sharing of the proceeds of growth” : a situation analogous to permissive parents who are unable to discipline their child and set clear standards. Thus, the failure of Russia’s economic reforms powerfully emphasizes the vital role of gradual reforms by central government.

Experimentation established a collective learning mechanism that enabled reform to take place gradually and step by step. Successful experimentations, such as the SEZs, were swiftly extended and failed experiments were quickly discarded by central leadership in a manner and rapidity that other forms of government cannot achieve. One does not need to look further than the democratic government of India and its painstakingly inefficient and sluggish decision making process that has no doubt deterred its growth and ability to implement reforms. Effective and pragmatic centralized leadership was absolutely critical to China’s ability to utilize experimentation and implement highly successful gradual market reforms due to its efficient decision-making and stability. As the influential New York Times foreign affairs columnist Thomas Friedman wrote, “One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as in China today, it can also have great advantages. One party can impose the politically difficult but critically important policies needed to move a society forward.” The economic success of developing countries is dependent upon gradual reforms, rather than neo-liberal shock therapies, by a strong, pro-development central political party, in addition to a trust in the free market for economic growth combined with certain state regulations. The replacement of Adam Smith’s invisible hand with a “more muscular state hand on the levers of capitalism” is the best alternative, especially for nations developing economically.

ADDRESSING THE LACK OF RULE OF LAW AND ECONOMIC FREEDOM COUNTERARGUMENT
There is a near consensus in economic literature that shows policies characterized by economic freedom promotes high levels of economic growth. Economic freedom entails the essential concepts of “a small government, protection of private property, a well-functioning legal system, free competition and few regulations.” Milton Friedman asserted that “I believe that free societies have arisen and persisted only because economic freedom is so much more productive economically than other methods of controlling economic activity.” Hanke and Walters studied the relationship between economic freedom and GDP per capita and found it significant and positive. Goldsmith used the EFI (Economic Freedom Index) and showed that developing countries that protect economic rights tend to grow faster, have higher degrees of human well-being, and have a higher national income. Moreover, people often point to the Asian economic powerhouses of Taiwan, Japan, and South Korea as beaming examples of the economic growth propelled by economic freedom under democratic regimes, and utilize them in refutation of the role of an authoritarian, central party in economic development, such as that of China. Taiwan is a multi-party, liberal democracy that is ranked highly in terms of economic freedom and liberty of press as an advanced industrial economy. Similarly, Japan is a multi-party parliamentary representative democratic constitutional monarchy while South Korea is democratic constitutional republic – both of which are high-income advanced economies.

These are all significant arguments against China’s economic growth, as China lacks privatization of state enterprises, de-regulation, and rule of law. The underlying authoritarian political philosophy that eschews democracy, rule of law, and individual rights are in direct contrast to conventional economic wisdom. Yet despite all the apparent contradictions, China experienced a GDP averaging about 10 percent per year since reforms began in 1978, lifting more than 500 million people out of poverty. In contrast, the average GDP growth of all of South Asia was only 3.87% and that of Sub-Saharan Africa was a miniscule 0.23% during a similar timeframe. Clearly, conventional economic wisdoms has its flaws, especially regarding developing economies because 1) the absolute importance of economic freedom and rule of law in economic growth has been overstated, and 2) despite their current democratic status, the Asian “Tiger” Economies were all under the rule of a one-party, centralized regime during the period of initial and explosive economic growth, further emphasizing the importance of a central party.

The role of economic freedom in relation to economic growth and development has been overstated. Empirical studies have found that although greater economic freedom fosters economic growth, the level of economic freedom, however, is not related to growth. In the words of the de Haan and Sturm, “Our findings suggests that more economic freedom will bring countries more quickly to their steady level of economic growth (if they are below that level), but that the level of steady state growth is not affected by the level of economic freedom.” Even the authors themselves were surprised and admitted that, “this finding is not entirely in line with the view of the proponents of liberalization.” Although the conclusion might be shocking at first, it makes perfect sense as reflected by China. China’s gradual reforms starting in 1978 specifically targeted increasing economic freedoms in the agricultural sector and market liberalizations for foreign investors, which catalyzed its path to a steadily strong level of economic growth. Thus, once that stage was reached, the level of economic freedom became insignificant.

Similarly, In his book dedicated to economic growth histories of developing countries Dani Rodrik concluded, “The onset of economic growth does not require deep and extensive institutional reform.” In other words, institutional reforms such as rule of law, rather than rule of man, is unnecessary to initiate economic growth. Furthermore, a study by Allen, Qian, and Qian, concluded that “there exist informal financing channels and governance mechanisms, such as those based on reputation and relationships” to support China’s economic growth. Thus, although China may lack comprehensive formal rule of law mechanisms and channels, there were extensive informal channels that served as “excellent substitutes for standard corporate mechanisms,” offering investors strong protection.

Furthermore, the counter-argument that attributes the economic success of the Asian “Tigers” of Singapore, Taiwan, South Korea, and Japan to their democratic regimes is misguided because all four nations were under centralized, one-party rule during their initial stage of economic development. Beginning in the 1960s, the GDP growth of the four nations averaged 7.5 percent per year for three decades. From 1961 to 1979, South Korea was under the rule of Park Chung-Hee, who established a strong authoritarian rule of a one-party regime. As he said himself, “Democracy cannot be realized without an economic revolution.” Park also formulated specific “Five-Year Plans” for gradual economic reforms that were later emulated by Chinese leadership. Similarly, Taiwan was under the military rule of Generalissimo Chiang Kai-shek when he implemented gradual market reforms in agriculture and trade. The post WWII economic miracle in Japan was spurred by economic policy under the centralized leadership of the Ministry of International Trade and Industry that heavily regulated development. Thus, a World Bank report admitted that the non-democratic and authoritarian political systems during the early years of development were instrumental in the so-called Asian “economic miracle”. These examples of the economic miracles of the East Asian countries further support my argument for the critical role of centralized leadership in initial economic development, analogous to the authoritative parenting style that raises the most successful children.

Lastly, I must briefly refute Paul Krugman’s 1994 article, The Myth of Asia’s Miracle, which generated significant publicity as Krugman boldly asserted that the impressive growth rates of the East Asian economies were a myth and un-sustainable because the rapid growth was achieved “in large part through an astonishing mobilizing of resources” and “rapid growth in inputs.” However, Krugman failed to realize that the astonishing mobilization of resources is only capable because of the centralized regimes that have the power to authorize this type of massive resource mobilization. Furthermore, his argument that there was no sign of increased economic efficiency in terms of total factor productivity is flawed, especially applied to China, as Bosworth and Collins found TPF growth in China that was higher than the developing world as a whole. This was a result of gradual reforms that focused on improving economic efficiency through acquisition of foreign technology and efficient resource allocation. Thus, Krugman’s argument clearly has its limitations, especially when applied to the case of China.

CONCLUSION
This essay aimed to answer the essential question: What explains China’s remarkable economic growth during the reform era? To begin, the two chief contending schools of thought designated as Decentralization: Federalism, Chinese Style and Foreign Investment were refuted and shown to be inappropriate and insufficient when applied to analysis of China’s extraordinary economic growth. The argument of the decentralization school is flawed because both the effect of decentralization on economic growth and the extent of decentralization in China have been overstated and over-exaggerated. The fatal weakness of the foreign investment school of thought was exposed by examining the fundamental dependency of foreign investment upon the quality of human capital in terms of stimulating economic growth. In reality, the principle driver behind China’s remarkable economic growth was the gradual reform process under the leadership of a strong and pragmatic central party. Effective central leadership created a developmental state set to drive economic growth by implementing gradual reforms through experimentation rather than neo-liberal economic shock therapies. The gradual market-oriented reforms under pragmatic central leadership are the sparks that ignited China’s explosive economic boom, in defiance of all conventions.

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