Review: How China Escaped The Poverty Trap by Yuen Yuen Ang

This is a well-structured intervention into a body of scholarly output that seems woefully unable to understand China’s economic rise. Yuen Yuen Ang insists on understanding development as an interconnected, co-evolutionary process, in which governance and economic growth are mutually interdependent, against the prevailing schools of “good governance → growth” (how does one develop ‘good’ institutions without resources?), “growth → good governance” (where does the growth come from?) or “history → good governance → growth” (deterministic, fatalistic, sometimes chauvinistic).

In one line, Ang’s argument is: Poor and weak countries can escape the poverty trap by first building markets with weak institutions and, more fundamentally, by crafting environments that facilitate improvisation among the relevant players.

“Weak” institutions are those that correspond to Max Weber’s framework for pre-modern institutions as opposed to legal-rational, professional bureaucracies; that is, those that fuse personal and private interests, are regulated partially rather than impartially, implement policies without coordination, and involve fee extractions as opposed to disinterested oversight. As Ang notes, there is a chauvinism in the way this classification is applied:

We miss the obvious because standard binary labels of “weak/strong” and “good/bad” blinds us to the potential of nonmodern, nonformal, non-rule-of-law, and nondemocratic institutions. Our conventional and strongly rooted bias that the norms of the developed West are universally best leads us to regard any deviation from these norms only as weaknesses. Consequently, institutions in developing societies are routinely identified by what they are not rather than by what they are.

She highlights the ways that “weak” institutions are well-suited to the tasks of initial development, including being able to leverage strong communities ties in order to mobilize resources, move quickly and improvise, and adapt to local conditions and needs. Combating a persistent myth that all that is needed for development to explode is for government to protect private property and otherwise get out of the way (as in England’s 1688 Glorious Revolution), Ang looks at how examples of “weak” institutions supported development in 14th-15th century Europe. I particularly liked her insight into the rationality of prebendalism (widespread throughout Europe at this time): central governments unable to pay or administer salaries to a dispersed bureaucracy instead bestow the right to take portions of the taxes in exchange for collecting the taxes.

In treating development as co-evolutionary, Ang leans on the biological metaphor. In evolution, random variation leads to advantages that are selected for, either leading to survival of the fittest, or divergence into specialization to fill a niche. These themes of variation, selection and niche creation are as crucial for studying economic development, but where the origin of species is determined by unambiguous markers of success (survival and reproduction), in sociological systems, what should be considered “success” is determined via public debate and political decision-making (and, though Ang doesn’t say so, the survival of the State).

Ang’s specific advice for developing countries based on her analysis of China’s remarkable development, is (like me, Ang’s a big fan of numbered lists):

1. Delimit boundaries of experimentation and flexibility. China’s central government developed a system of red policies (clear uncrossable lines enforced consistently by the state), black policies (clear positive instructions from the state that must be fulfilled), and grey policies (deliberately ambiguous guidelines). The “grey” area permitted variation and improvisation, and the central government would then transform successful interventions into “black” universal policies. As Deng Xiaoping says, “Cross the river by feeling for the stones.”
2. Activate incremental changes across connected domains simultaneously. Because all aspects of an economy are interconnected, it is not pragmatic to change only a few policies at once. While China’s reform period is marked by incremental change, incremental does not always mean small, and China’s reforms were often bold and typically multi-pronged. 
3. In the beginning, define success narrowly. At the start of Reform and Opening Up, the central state defined success as economic success. With additional resources at its disposal, additional success metrics have been incorporated, such as environmental policy. (Here, I wish Ang had spent considerably more time, including on interplay between social markers like poverty alleviation or education and economic factors, alas!)
4. Give everyone a personal stake in the development process. Even the on-the-ground representatives of the state, like regulatory officers and school teachers, were given personal incentives in the form of income or professional advancement to work towards the collective goals. (I appreciated Ang’s examination of all levels of the bureaucracy, versus party leaders.)
5. Let some get rich first but pair up the poor and the rich. Coastal regions in China had significant trade advantages, and so developed first. As these regions took off, financed largely by foreign direct investment, domestic investment (both state and private) then shifted to the center of the country.
6. Harness weak institutions to build markets. Like parenting a newborn is different from parenting a teen, developing new markets is different from maintaining existing markets. It is not a matter of developing “good enough” institutions, but of using the institutions you have in the best way possible to achieve development

Ang’s examination is very market focused — even more so than I have laid out here. In her exposition, the goal of development is to have strong markets and institutions that support them. My own value system differs somewhat: the goal is to have a thriving, happy, liberated populace and markets are a tool to enable that. Correspondingly, discussion of the human happiness side of China’s meteoric rise was nearly absent from the narrative, and when it was presented, the negative was emphasized: slums, emptied out villages, etc (to her credit, Ang notes that the same patterns emerged during Europe’s early development) rather than poverty alleviation and a continuation of the rise in life expectancy that started with the 1949 revolution. 

There was very little examination at the philosophical factors that led to China’s uniquely being able to solve the poverty trap. In this way, it was the near opposite of When China Rules The World, which I read earlier this year and which explains China’s rise as a result of its Neo-Confucianism more than any material factors. Ang hits the mark a little better, and I think it is not a coincidence that she emphasizes the interconnectedness of systems, the relationship between economic structure and superstructure, and how one stage of development lays the foundations for the stage of development supersedes it. Or, in other words, her analysis is (unintentionally, I think) dialectical and material, the same philosophical foundations of the Communist Party of China. Ang dismisses — or, to the extent they are discussed, regards as one-sidedly tragic — the policies of the Mao era. I think the relationship between pre-Reform and post-Reform China is more continuous than that presented here, and the impact of policies of that era transmitted well beyond the 1970s.

Ang defends her theses by exploring three cities within China that took different paths to development. She used placeholder names (“Forest Hill”) and I would have preferred she use the real names so that I came away from the book with a firm grasp of a real location rather than a firm grasp of somewhere in The Shire. Ang also compares antebellum United States and Nigeria’s Nollywood as examples of development outside China that fulfilled these steps. Showing two positive controls gives the reader confidence in her thesis. As a scientist, I did note the lack of negative controls that would have lent further support to the parsimoniousness of her recommendations: were there locations that implemented five of her six recommendations but saw only tepid growth?

Though I read it critically, I found this to be informative and thought-provoking. The structure of institutions must match the tasks at hand. This is a lesson worth bearing in mind whether the tasks at hand are those of a small local community organization, a venture capital-backed start-up, or the governing body of the world’s most populous country.