China’s ‘Erhardian Bargain’

Asia Europe Politics World

Author: Tristan Kenderdine, Future Risk

The English call it wacky economics, it is at odds with France’s economic philosophy of dirigisme and it has been accused of pushing the European Union into a monetary policy stalemate. Yet German ordoliberalism may have much in common with contemporary economic policy in China.

A worker uses a mobile phone in front of a poster outside a construction site in Beijing's central business area, China 4 February, 2018, (Photo: Reuters/Jason Lee).

A worker uses a mobile phone in front of a poster outside a construction site in Beijing's central business area, China 4 February, 2018, (Photo: Reuters/Jason Lee).

The German Historical School of economic theory played a huge part in China’s choice of development trajectory and institutions during industrialisation. The economic logic of China’s reform era model was part Friedrich List, part Alexander Hamilton and part Ludwig Erhard. In Germany, this economic logic would evolve to become ordoliberalism.

East Asian economic development has consisted of a series of exercises attempting to emulate the German experience. These attempts include the ‘East Asian miracle’, South Korea’s ‘Miracle on the Han River’, ‘Taiwan’s Miracle’ and ‘China’s economic miracle’. These aphorisms — almost always inadvertently — refer to the original Wirtschaftswunder, the ‘Miracle on the Rhine’ of post-war German reconstruction. But both globalisation and development economics consistently ignore the contribution of the underlying ordoliberal theory to economic development policy.

The model for industrial development in East Asia requires a national economic system in the first instance. State-capitalist industrialisation drives in East Asia were all dependent on a ‘Lewis model’ of converting an unlimited supply of rural labour into labour for urban manufacturing. Under this labour-for-development model, there is generally a window of around 30 years within which states establish the initial institutions of industrialisation before moving into regional and global trading regimes. Indeed, during each of the 30-year industrialisation windows in Germany, Japan, South Korea and Taiwan, an entire generation was forced to make a sacrifice for the nation.

This national sacrifice required a willing supply of labour to be used for a greater utilitarian good. This is one of the key ingredients of the East Asian industrialisation model: a population of labour that undertook generational sacrifice for future national and generational prosperity. Compared with the early European and American industrialisers that used forced labour to achieve this, the East Asian model is better described as ‘coerced labour’.

This sacrifice is often taken as an acceptable trade-off between governments and their populations. In South Korea, for example, the working generation from 1956 to 1979 suffered immense hardships through rapid industrialisation so that the country could modernise. In East Asian economic history, the political legitimacy mechanism underlying this economic growth period could be described as an ‘Erhardian Bargain’ with rural labour.

The political legitimacy of an Erhardian Bargain is dependent on government achieving industrialisation within one generation. When industrialisation drives fail — like they have in Thailand and Kazakhstan — public discontent that the sacrifice did not result in sufficient capital accumulation necessitates a renegotiation of the bargain.

In China, labour sacrifice has been immense and coastal development astonishingly successful. But the hinterland remains poor, rural development has stalled and many parts of rural China lag behind aggregate development. For example, the seven least-developed provinces in China have per capita incomes under US$7000 a year — that is over 238 million people who are far off the OECD income range.

The legitimacy of China’s Erhardian Bargain is now being put to the test as the economic restart post-COVID-19 hits labour in China hard. Many mid-income salary workers are on half-pay or no pay, many rural migrants have returned to the countryside from urban factory work and new graduates and high-skilled workers are facing an impossible leap in 2020 to reach national science and technology industrial policy goals.

The promise of economic development after a 40-year modernisation project is the backbone of Chinese Communist Party legitimacy. But China’s central leadership may find it difficult to ask rural migrant workers to take another hit for national development, especially after rural families have already sacrificed their children into the urban industrialisation project in the hope of long-term gains that for many have not yet materialised.

The 2020s is the decade that China is due to deliver on its Erhardian Bargain: to eradicate rural poverty by 2020, to achieve a moderately prosperous society by doubling 2010 GDP by 2021 and to establish the economic growth framework to become a developed ‘modern socialist state’ by 2035. But a continuous supply of rural labour is needed to support China’s further economic growth and development. It is not as simple as turning the machines back on if structural elements of labour were to drop out.

The central leadership in Beijing already has a huge task to transform the Chinese economy into one driven by consumption, imports, outbound FDI investment and high-technology. This would have been an economic pirouette of the highest dexterity even in reasonably good economic years. To achieve it this year — given low-to-no growth, a developing labour crisis and a possible debt crisis on the horizon — appears to be a step too far.

Even before COVID-19, the contemporary debate in China’s macroeconomic policymaking circles was already between stimulus and austerity. The project to integrate China into the global economy has stalled and may need a new theoretical framework to both redefine China’s domestic economic policy and international macroeconomic guidelines. In the post-COVID-19 economic restart, there may not be another ‘miracle’. The policy uses of both Listian national economics and the ‘Erhadian Bargain’ of a generation of rapid growth have now expired. Perhaps a contemporary Chinese version of ordoliberalism could provide the policy tools to maintain economic growth.

Tristan Kenderdine is Research Director at Future Risk, based in Almaty.