An aerial view of resettlement communities in Wuchuan Gelao and Miao Autonomous County in Zunyi, Guizhou Province, which were built to relocate impoverished people from underdeveloped areas as part of China’s targeted poverty alleviation initiative Photo: TUCHONG

Over the last three decades, economists have reached a consensus that institutions are crucial to the long-term development performance of a country or region. However, institutions are multi-dimensional and complex. In fact, the “ideal” institutional conditions as described by neoclassical economics are usually a far cry from the reality in developing nations. China has made great achievements in economic development over the past 40-odd years, but its specific systems don’t conform to the “standard theory” or “ideal paradigm.” The inconformity is sometimes regarded as an enigma.

The key to unraveling this enigma is to recognize that the ideal economic theory paradigm is based on developed countries’ institutions, which are quite different from what developing nations need. State capacity is one of the vital factors leading to development success, but for many years, this concept has received limited attention in economic theories on developing countries. As a material factor for a country’s development performance, state capacity is the foundation of China’s success over the past decades. Strong state capacity is a key manifestation of China’s institutional strengths, and transforming and modernizing state capacity is a necessary condition for the country’s high-quality economic development.

Significance of state capacity

The development experience of more than 200 years, since the Industrial Revolution, reveals that strong state capacity is critical to economic performance whether in the takeoff or catch-up stage, for both first-mover countries and latecomers. Advanced nations’ growing state capacity provides indispensable long-term support for their economic development. However, developmental economics with a focus primarily on Western countries overanalyze inappropriate state interventions, rather than studying inadequate state capacity. A wide research gap exists between current knowledge production and the real problems facing the developing world.

Beginning in the late 1970s, several political economists formed a new understanding of the powerful role of state capacity in economic development by examining the East Asian model. In their studies of Japan and Singapore, which performed outstandingly in post-WWII development, it became clear that these nations didn’t follow the laissez-faire model advocated by the neoclassical paradigm. Instead, the state played a significant role in economic growth. This was evidenced not only in the construction of infrastructure, like transportation and communication networks, and the provision of basic public services, including education and medical care, but also by the state’s close relations with enterprises. Moreover, they lent extensive policy guidance to bolster corporate development based on the market mechanism, thus these nations were labeled “developmental governments” or “market-augmenting governments.”

When analyzing the development models of Japan and Singapore, scholars introduced the concept of “state capacity,” which generally refers to a state’s capacity to realize stated goals. The difference in economic performance among countries is not linked to whether, or to what extent, they understand development policies. In fact, even in the least-developed countries, such knowledge is widely grasped. Instead, whether the state is capable of implementing basic development policies is more significant. Few countries around the world have succeeded by replicating the East Asian model.

Renowned economist Adam Smith said, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” Nevertheless, meeting these requisites for development demands a certain state capacity.

In recent years, theoretical and empirical research has shown that it is not easy to cultivate and sustain state capacity. It requires citizens from all walks of life to participate in national economic development, alongside continuous massive investment for consolidating state capacity. Many developing countries have long been mired in the poverty trap—not because of excessive state interventions in their economy—but exactly due to their insufficient state capacity. This results in their inability to provide essential support for economic development.

China’s institutional strengths

A decision on some major issues concerning how to uphold and improve the system of socialism with Chinese characteristics and advance the modernization of China’s system and capacity for governance, adopted at the Fourth Plenary Session of the 19th CPC Central Committee, outlined many notable strengths of China’s state and governance systems. Of note are the centralized and unified leadership of the CPC, the synergy between the socialist system and the market economy, and unity of independence and self-reliance and opening up.

These strong institutions fully account for the formation, basic characteristics, and major embodiment of China’s remarkable state capacity. As an institutional factor, state capacity has a salient feature of path dependence. China’s state capacity originates from the vital institutional legacy of time-honored historical and cultural traditions, in addition to the strong leadership of the CPC under the guidance of Marxism. Thus, the nation’s state capacity is an important result, and prominent manifestation, of adapting the basic tenets of Marxism to fine traditional Chinese culture.

For over one hundred years, the CPC has adhered to the guidance of Marxism and rebuilt powerful state capacity during socialist revolution and construction. This was accomplished by capitalizing on its organizational capabilities and useful experiences developed and accumulated in different stages. In so doing, it managed to maintain national independence, complete socialist transformation, promote educational and medical care systems in urban and rural areas, and effectuate preliminary industrialization, making technical preparations for high-speed economic growth.

With strong state capacity, the Chinese government continued to make institutional changes after reform and opening up started, supplying a wider range of public products and services, maintaining macroeconomic stability, and optimizing the economic and industrial structures. As a result, the Chinese economy achieved takeoff and caught up with leading economies over the past 40-odd years, narrowing the income and technological gaps with developed countries and steadily orienting itself towards the ranks of high-income economies.

Since the 18th CPC National Congress, China’s state capacity has grown even stronger as the country strives to advance national rejuvenation across the board. The extensive application of digital technology has enhanced operational efficiency for both the economy and society, and fueled continuous economic restructuring as well as the optimization and upgrade of the industrial structure, enabling the Chinese economy to transition from high-speed growth to high-quality development.

Through targeted poverty alleviation, China has eradicated absolute poverty and lifted nearly 100 million rural people out of poverty, thus attaining the impressive goal of building a moderately prosperous society in all respects and laying solid material and institutional foundations for Chinese modernization. As China faces more complicated and severe external shocks and challenges, the country has ensured economic and social stability with excellent state capacity, creating favorable conditions to effectively grapple with momentous changes of a like unseen in a century across the world.

Advancing high-quality development

State capacity has different dimensions and types. For example, basic capacity refers to a state’s ability to achieve its goals through consultation, negotiation, and persuasion, while coercive capacity means the state can materialize its objectives without consultation. Different dimensions or types of state capacity play varying roles in different stages of economic development. This suggests that with the shift in development model, state capacity’s main features and application methods should change to adapt to the new development model.

As China’s income levels improve and its economic development stage evolves, the economic growth driver has gradually turned from factor accumulation, resource reallocation, and technological imitation to independent innovation, and from high-speed growth to high-quality development. This has fostered an internal momentum for transforming state capacity. Advancing the modernization of China’s system and capacity for governance, as emphasized in the fourth plenum of the 19th CPC Central Committee, is exactly a response to this major issue.

In the economic takeoff, low-income, and medium-low-income phases, a country’s late-mover advantage is more prominent, as shown in the evident technological gap between lesser-developed countries and developed nations. Therefore the latecomers can realize high-speed economic growth and quickly upgrade their industrial structures by promoting and applying mature technologies and products. State capacity, in the early stage, can generate obvious effects on economic growth by directly acting upon the accumulation of material capital, improvement of human capacity, and re-distribution of resources. However, when a country develops from medium-high to high income levels, independent innovation has to carry increasing weight in economic growth as its technological level approaches the world’s frontier. This aligns with China’s recent call to accelerate the development of new quality productive forces and steadily advance high-quality development.

High-quality economic development necessitates a high-quality institutional environment. This requires nurturing, maintaining, and developing a vibrant market economy with strong state capacity to ensure the smooth operation of the market mechanism, while providing necessary infrastructure, basic public services, and social security systems to push ahead with varieties of innovative activities characterized by creative destruction. After all, technological progress and industrial structure upgrade will intrinsically power high-quality economic development.

In the digital economy age, as economic forms are more intricately related to diverse markets, industries, sectors, and enterprises, the government should collect and process more sophisticated information to understand interest appeals of different groups when formulating and implementing economic policies. All these have raised higher requirements for state capacity.

In addition, high-quality economic development also calls for enhanced rule of law and a clear boundary between the government and the market, to establish a credible institutional framework for the exercising of state capacity and offer explicit policy expectations for market entities. Market orientation and the rule of law are essential to high-quality economic development, and modernizing state capacity and advancing the rule of law will provide solid institutional guarantees for China’s high-quality economic development.

Guo Jinxing is an associate research fellow from the Center for Studies of Political Economy at Nankai University.