This year, the Nobel Prize in Economic Sciences was awarded to three economists, Daron Acemoglu, Simon Johnson, and James A. Robinson, who argue that institutions are the fundamental cause of long-run growth.

The Nobel laureates are key theories in the school of New Institutional Economics. Built upon empirical data from ex-colonial regions, their research categorizes institutions into “inclusive” and “extractive” models and argues that the former, which enforces property rights and protects democracy and freedom, fosters economic development while the latter, which concentrates power and resources to a small circle of elites, is obstructive to growth.

Having established their theory on colonial history, their studies were criticized as ignoring the brutality of colonialism and showing bias toward the Western developmental model. In addition, the economic success of China is cited to prove the inadequacy of their theory, as pointed out by political economy professor Yuen Yuen Ang:

Congrats to AJR! 🌟 They are brilliant.

But I don’t agree with their idealised portrayal of institutions in Western development

It is historically inaccurate, if not ideologized

Thus, not only do they struggle to explain China, they also can’t explain why Western economies… https://t.co/6VZkwRdsId

— Yuen Yuen Ang (@yuenyuenang) October 14, 2024

Opinions in China are divided. Surprisingly, a few critical views have emerged, calling for institutional reform to address the country’s economic woes.

Nationalist influencers such as Sima Nan criticized the three economists through a Weibo video for being uncritical of colonialism and ignoring the fact that China has outperformed India and other democratic states in economic growth. 

Another lengthy academic piece published on Guancha (a nationalist Chinese think tank platform) written by Wen Yi, a professor of Economic Management,  argued that the foundation of China’s economic miracle was state power rather than a free market or inclusive institution:

没有中央集权提供政治稳定、社会安宁、基础设施，不可能有市场，尤其是安全统一的大市场。而如果没有安全统一的大市场，规模化大生产不可能盈利，即使有国际组织把技术免费送给你也不行。没有这样的市场条件，外资也不可能进来。资本家和企业家难道不比新制度经济学家们更知道哪里或什么样的制度条件下才能赚钱和积累财富？仅凭这一点就说明新制度经济学关于国民财富起源和工业革命机制的理论是错误的！[…]所以，缺乏国家力量主导的自由市场经济，不过是一盘散沙的小农经济，是羊肠小道，不是高速公路。

Without the centralization of power to maintain political stability and social order and build infrastructure, it is impossible to have a market, especially one that is large, secure, and unified. Without a large, secure and unified market, large-scale production cannot be profitable, not even if an international organization gives you the technology for free.

Without such market conditions, foreign capital cannot come in either. Don’t capitalists and entrepreneurs know better than the new institutional economists where or under what kind of institutional conditions they can make money and accumulate wealth? This alone shows that the theories of the new institutional economics on the origin of national wealth and the mechanism of the industrial revolution are wrong! […] Therefore, a free market economy that lacks the dominance of State power is nothing more than a scattered small peasant economy, a sheep’s footpath, not a highway.

However, on Chinese social media, more have embraced the views of the three economists and used their theory to call for institutional reform. 

Academic Wang Deshang argued on WeChat that China had transformed from an extractive institution during Mao Zedong’s era into an inclusive institution through Deng Xiaoping’s Open Door Policy beginning in 1978. However, the country has shifted back to an extractive institution since 2012 with the expansion of the state sector. Although the extractive model brought growth, it was not sustainable, as Wang pointed out:

例如，中国的基建和房地产经济依赖于国家投资和地方政府债务的不断扩张，形成了所谓的“债务型经济”。这种模式的重复不仅导致了债务危机、房地产泡沫和地方财政困境，也未能激发经济中的颠覆性创新能力。新质生产力的缺失，使得中国无法通过创新驱动实现长期经济繁荣，反而深陷经济通缩和就业困境中。

For example, China’s infrastructure and real estate economy has relied on the expansion of State investment and local government debt, resulting in the so-called ‘debt economy.’ The repetition of this [extractive] model has not only led to debt crises, real estate bubbles, and local fiscal woes but also failed to stimulate creative destruction in the economy. The lack of new innovative productivity has prevented China from realizing long-term economic prosperity. Instead, the country is mired in economic deflation and employment difficulties.

Hit by the trade war with the U.S., the COVID-19 pandemic lockdown, and the burst of the domestic property market bubbles, China has been struggling with an economic downturn in recent years, resulting in deflation and youth unemployment.

Recently, Beijing attempted to rescue the economy with a multi-trillion yuan stimulus plan, which immediately boosted the Chinese and Hong Kong stock markets. However, whether it will have long-lasting positive effects is still in question.

Nie Hui Hua, an economist from Renmin University, believes that to address the current economic crises, China needs institutional reform to let the private sector grow. He wrote a commentary on WeChat urging for structural reform:

阿西莫格鲁等人连同早期诺斯等人的制度经济学研究，对于中国进一步深化改革和实现可持续增长具有重要的启示。第一，既然制度是长期经济增长的根本因素，那么我们的改革和发展就必须不断破除阻碍生产力前进的体制机制约束，不断解放和发展生产力。在短期内，经济刺激政策肯定是有用的，但是长期来看，仍然需要进行结构性改革。结构性改革就是进行制度改革。[…] 第二，制度的核心是保护产权和契约关系。… 根据制度经济学的研究，关键是保护企业家的“两权”——人身安全和财产安全。惟其如此，才能促进民营经济持续健康发展。

The institutional economics research of Acemoglu, Johnson and Robinson has important lessons for China in further deepening its reforms and realizing sustainable growth. First, since institutions are the fundamental factor in long-term economic growth, our reform and development must continue to break down the institutional constraints that constrain the advance of productive forces. It is necessary to continue liberating and developing the productive forces. 

In the short term, economic stimulus policies are certainly useful, but in the long term, structural reforms are needed. […] Second, the core of the institution is to protect property rights and contractual relations…. According to the study of institutional economics, the key is to protect two fundamental rights of entrepreneurs — personal safety and property security. Only in this way can we promote the sustained and healthy development of the private economy.

Under the leadership of Chinese President Xi Jinping, the Communist Party of China has strengthened its party control of the private sector since 2012, first by setting up party branches and then by acquiring the so-called “golden shares” in private companies, especially in the tech sector. The series of regulatory measures have curbed the private sector on the one hand and expanded the state sector on the other. 

The three Nobel economists have made similar but more critical comments about China’s political and economic development in recent years. In 2022, Daron Acemoglu pointed his finger at Xi Jinping and stated that his consolidation of power would damage China’s economy in an article titled “China’s Economy is Rotting from the Head.”

In response to the cultural argument that Confucian Chinese do not need an inclusive institution to drive economic growth, Acemoglu and James Robinson saw Taiwan as a counter-example, as the island has transformed into a democratic institution with sustainable economic growth. In another piece, America’s Real China Problem, co-authored with Simon Johnson, Acemoglu argued that China’s extractive/repressive model had contributed to the country’s growth at the expense of the exploited Chinese workers and unemployed U.S. workers.

Amid the Russia-Ukraine War, Simon Johnson urged Western firms to leave China in another co-authored article in December 2023 as the writers foresaw the failure of the Wandel duch Handel principle — a foreign policy principle that advocates trading with authoritarian states as a strategy to promote democratic reform, and the inevitable expansion of trade war against China.

The discussion seems to suggest that the institutional transformation of China is not merely an issue of sustaining domestic economic growth since its state extractive model has become a problem for its Western competitors, as highlighted by many Western think tanks, such as the U.S.-based non-partisan Aspen Economic Strategy:

This form of globalization is also unhealthy, as it is the result of high household savings rates and faltering domestic demand, which have led China to become reliant on exports to support its economic growth. This export-led growth model is driven by extensive government… pic.twitter.com/vc9I3g2rGn

— Aspen Economic Strategy Group (@AspenEcon) October 17, 2024