It is remarkable that China, one of the world’s most prominent communist states, has built one of the most powerful capitalist economies. This is especially significant because we are constantly reminded that Western capitalism defeated communism at the end of the Cold War, symbolised by the collapse of the Soviet Union. But should we not instead see China as the real winner – not because it abandoned communism, but because it demonstrated its capacity to re-engineer capitalism, placing it under effective state direction?
By all its important characteristics, the Chinese economy is capitalist. It has private enterprise, is driven by profit, competition, entrepreneurship, markets and private investment. The OECD estimates that private enterprises account for 80 per cent of employment, 60 per cent of GDP, 70 per cent of technological innovation and two-thirds of investment. The crucial difference is that China has not allowed capital to become autonomous from the state, as it largely has in Western economies. The Chinese call this “Socialism with Chinese characteristics” and it appears to work.
Triggered by Deng Xiaoping’s reforms in 1978, China did not abandon communism; it used capitalism to strengthen the state and its economy. In the process, nearly 800 million people have been lifted from extreme poverty.
China has built extraordinary manufacturing capacity, infrastructure and export strength, while rapidly deploying technologies such as electric vehicles, solar power, telecommunications and high-speed rail. By contrast, Western economies have experienced declining industrial capacity, slower infrastructure development and greater reliance on finance rather than productive capacity to drive growth. China’s distinctive strength lies in combining market dynamism with strategic state control.
Some still argue that China’s ascent is far from complete. They point to America’s strength in innovation, productivity, finance and high-value services. While the American model excels at generating high-value innovation and services, the Chinese model is better at mobilising capital, infrastructure, labour and industrial policy to build productive capacity at scale. Arguably, this gives China a foundation for sustained economic growth and eventual leadership across more parameters. Yet critics have a point: To sustain its spectacular rise, China must address challenges including an ageing and shrinking workforce, which is reducing labour supply while increasing the pension burden.
While the Cold War ended with the widespread belief that capitalism had defeated communism, history has produced a more complicated outcome. China’s political system survived by adopting capitalism’s most productive mechanisms: Private ownership, entrepreneurship, profit incentives, competition and capital mobilisation and investment. In doing so, China demonstrated that the West has no monopoly over capitalism. If the capitalist West can swallow its pride, it may have much to learn from communist China.
