Liberating the mind from superstition and religious straightjackets, as Spinoza proposed, triggers freedom of thought, tolerance, and innovation. He was the first philosopher who prepared the ground for the Enlightenment, which brought about modern economies characterised by sustained economic development.

Introduction

During most of human’s existence economic stagnation was the rule. True, now and again, there were periods of relative prosperity but they did not last. Thomas Robert Malthus (1766-1834) had an explanation. He observed that prosperity triggered population growth. But agricultural production lagged behind resulting in famines. Consequently, the population shrank again and economic growth fizzled out. What he overlooked however, was that the growth of productivity in agriculture could break the cycle – the growing population could indeed be fed by a more productive agricultural sector.

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Productivity growth is the principal explanation for sustained economic growth resulting in higher incomes, better health and education; in short, in a better life. Productivity started to grow during the Industrial Revolution. It was then that technical innovations were applied in industrial and agricultural production processes. Subsequent innovations contributed to further productivity growth. This prompted the question what exactly  inspired these innovations?

 

The Enlightenment was the crucial intellectual change in Europe before the Industrial Revolution. Economic historian Joel Mokyr developed an interesting hypothesis in this realm. In A Culture of Growth; The Origins of the Modern Economy, he argues  that it was the Enlightenment that triggered  the Industrial Revolution. More precisely, Mokyr maintains that it was the Industrial Enlightenment that brought the Industrial Revolution about.

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Francis Bacon (1561-1626) played an important part in changing the intellectual outlook at the time. Bacon said that one could attain material progress through controlling nature, and nature could only be harnessed by understanding her. So, it was the scientific analysis of how natural forces work that brought about material progress. This is what Bacon had in mind: broadening the view of scholars beyond religious notions towards scientific investigation and - equally relevant - the spread of attained knowledge. Think of Denis Diderot’s (1713-1784) Grande Encyclopedie, which spread newly acquired knowledge. All this led to an intellectual and cultural sea change in Europe. Nothing of the sort happened in the Ottoman Empire, India, China, Latin America and Africa.  

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Spinoza’s life

While Bacon was one of the trailblazers of the Enlightenment, Baruch, or Benedictus, de Spinoza (1632–1677) )was certainly another inspirator. British historian Jonathan Israel  argues that Spinoza was the first great philosopher who, in a systematic manner, presented the values of democracy, tolerance, individual liberty and equality, based upon a purely secular social and ethical theory. As for tolerance, the same qualities that make people tolerant also make them receptive to new ideas. And, says Mokyr, ideas eventually ignited the Industrial Revolution.

Israel argues that Spinoza was the principal philosopher of the so-called Radical Enlightenment. Spinoza prepared the ground for democrats, egalitarians, and proponents of freedom and tolerance. Israel provides a popular interpretation of Spinoza’s philosophy. American philosopher Steven Nadler shares Israel’s appreciation of Spinoza to a large extent. Nadler finds Spinoza’s Theologico-Political Treatise one of the most important works of Western thought, as this book provided the foundation on which liberal, secular and democratic thinking could be constructed. As so often, there are other scholars who present a different interpretation of Spinoza’s philosophy. Before elaborating the relationship between the Enlightenment and sustained economic development, I present Spinoza’s life and philosophy, including various interpretations of the latter.

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Being from Portuguese descent, Spinoza was born in Amsterdam. In 1656  he was expelled (herem)  by Amsterdam’s Sephardic community. Despite recent attempts, it was never rescinded. Subsequently he moved to many places, among them Leiden and Rijnsburg (a village close to Leiden) where he associated himself with Collegiants, an anti-clerical sect of Remonstrants, who had tendencies towards rationalism. Finally, he settled in The Hague where he  wrote his magnum opus Ethics. He died in 1677 and was buried there at the Nieuwe Kerk. Unlike René Descartes (1596-1650), who was a professional scholar and teacher (and also lived for a time in Leiden), Spinoza rejected the chair of philosophy at the University of Heidelberg. He made a living by polishing lenses. Astronomer Christiaan Huygens (1629-1695) praised the quality of Spinoza’s lenses which he used in his telescope.  

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Let me first  explain why Spinoza was expelled by Amsterdam’s Sephardic community. His ideas about God, the soul, and his denial that Moses had written the Torah were simply too radical, let alone his thoughts about God’s election of the Hebrews, as expressed in his Theologico-Political Treatise (see box below).

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The ancient Hebrews  did not surpass other nations in their wisdom or in their proximity to God. They were neither intellectually nor morally superior to other peoples. They were ‘chosen’ only with respect to their social organisation and political good fortune, thanks to Moses, their undisputed Leader. Moses was a true patriarch. God or Nature gave them a set of laws (through a wise law giver, Moses), which they obeyed, and made their surrounding enemies weaker than them. The natural result of this ‘internal’ and ‘external’ aid is that their society was well-ordered and their autonomous government persisted for a long time. Their election by God was thus a temporal and conditional one, and their kingdom is now long gone.

 

Spinoza challenged the accepted notion of a transcendent God. He denied the immortality of the soul, nor did he accept the notion that the commandments of the Torah and rabbinic legal principles were given by God. Indeed, he challenged the fundamentals of revealed religion. In sum, Spinoza left Judaism behind.

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Spinoza was a gadfly not just for Amsterdam’s Sephardic community, but also for those who embraced traditional opinions on religious, ethical, and societal issues. British philosopher Bertrand Russell (1872-1970) believed that Spinoza must have been perceived as ‘a man of appalling wickedness’. But he found Spinoza ‘the noblest and most lovable of the great philosophers.’ Russell added that some others have surpassed him, but ethically he was supreme.

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Religion

Religion constitutes a prominent subject in Spinoza’s philosophy, but not in a purely theological sense; religion’s role  in Spinoza’s thinking can, as Kal observes, be compared with the one played by myths or ideologies.  Spinoza observed that religion and religious institutions had too large a grip on people and on the way people went about their business. He strongly felt that religious leaders had too much power and authority over people. People had to be liberated from their grip; they should be given the freedom to think for themselves. However, Spinoza’s freedom of thought is not  the same as this term is now understood.

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God and Nature

Spinoza elaborated his  thoughts about God. For him, God existed only in a philosophical sense, thereby preventing God’s anthropomorphizing. Discovering and experiencing God, said Spinoza, is through philosophy and science. An anthropomorphic God acting as a judge over man can only have negative effects on human freedom and actions, as it would foster a life enslaved to hope and fear and the superstitions to which such emotions can arise. God and Nature are one and the same, argued Spinoza; Nature’s universal laws reflect God’s decisions, which follow from ‘the necessity and perfection of heavenly Nature.’ God does not transcend nature: God is Nature. God or nature do not act for any ends, and things do not exist for any set purposes - God  is not a goal-oriented planner, so to speak. Hence, all talk of God’s purposes, intentions, goals, preferences or aims is just a anthropomorphizing fiction. Spinoza added that God neither performs miracles - a  very bold statement at the time. Spinoza explained ‘miracles’ in his typical rational manner. After all Spinoza was  a rationalist, like Descartes, who was the principal representative of the Age of Reason.

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Spinoza differed from Descartes’s dualism- that of  mind and body. Spinoza argued that the human being is a union of two ‘substances’, as he put it. The human mind and body are two expressions of one and the same person. The soul, like the body, is not immortal.

 

Ethics

Spinoza elaborated his thoughts about society, and the good life in Ethics, which was published in 1677, after his death. This work shows that man’s happiness and well-being lie not in a life dedicated to passions and material goods, nor in the attachment to superstitions that pass as religion, but in a life of reason. Spinoza strongly believed in the cognitive powers of human beings.

Regarding passions, Spinoza argued that one needed to free oneself from a reliance on the senses and the imagination. Passions are beyond one’s control. The more one allows oneself to be controlled by them, the less free one is. What one needs to do, suggested Spinoza, is to rely on our rational faculties. The result is self-control and a calmness of mind.

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Spinoza’s ‘free person’ engages in ethical, benevolent, behaviour towards other people. He takes care of the well-being of other people by applying his rational benevolence to insure that the beneficiaries achieve relief from disturbances. It is in his best interest to relate to other rationally virtuous individuals, in forming a harmonious society. However, human beings do not always act under the guidance of reason. And at this point Spinoza ushers in the role of the State.

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The State

The state is to ensure that individuals are protected  from the self-interest of other individuals.  Hence the transition from a state of nature to a civil state involves the renunciation  of certain natural rights, such as the right to avenge oneself, and of judging good and evil. These rights and judgments should be the prerogatives of the state.

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Spinoza’s ideal is a tolerant, secular and democratic polity. This he  found in Holland at the time (see box below). In Theologico-Political Treatise Spinoza argued that he was fortunate to live in a State in which citizens were allowed unrestricted freedom to judge and to worship God as these citizens deemed fit, and in which nothing was considered more valuable than this freedom. This statement reflected an ideal situation. That is probably why, on the same page, Spinoza ironically observed that he was often surprised to encounter people who profess to be Christians, i.e. is to practice love, joy, peace, restraint and  loyalty, yet fight others with exceptional intensity and extend one another the most bitter hatred. As a result, concluded Spinoza, one sooner recognises  one’s religious convictions  than one based upon a person’s virtues.

 

Philosophy and religion, reason and faith, represent two distinct and exclusive spheres; neither should tread in the domain of the other. The freedom to philosophise can be granted without doing harm to true religion, i.e., not turning religion into superstition but to practicing justice and charity to one’s neighbour. To sum up, Spinoza presented a society characterised by tolerance, benevolence, freedom of thought and freedom of religion.

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Democracy

Spinoza argued, as I mentioned,  that religious authorities should not meddle into political affairs, nor in those of philosophers. It would be in anybody’s interest to live under the law of reason. It would be best to handing over laws to a sovereign (be it a monarch or to a central authority holding power) who will be keeping all the members of society to the agreement, by playing on their fear of the consequences of breaking the ‘social contract’.

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But how is this democratic handing over of power and rights achieved? Spinoza provides the answer in Theologico-Philosophical Treatise. Instead of religion constituting a threat to the stability and freedoms of a society, religion plays a very  important double role in this book: religion for the common man and religion for those who can think and reason. It is instrumental in creating a so-called religious democracy, in which a central authority nudges  the population to freely handing over their rights and power to this authority. The central authority applies religion, true religion as Spinoza called it, to enforce obeyance from the commoners. As regards the ones who can think and reason, while conforming to the unavoidable universality of nature’s laws, they will – again based upon their common sense - accept to form part of society, as the state so dictates. Subsequently, they will be able to live as a free person. In fact, argued Spinoza, people handed over their rights and power to God, and not to a fellow human being. Hence while handing over their power and rights to God, they preserve their freedom. Spinoza added that it would be advisable that those who can think and reason be granted some freedom. If not, they might undertake activities that would undermine the regime’s exclusive power. And it is this power  that ensures the state’s sustainability.

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Spinoza distinguishes different forms of government: Monarchy, Aristocracy, and Democracy. As a Monarchy may degenerate into a Tyranny, a Aristocracy into an Oligarchy,  Spinoza concluded that the type of government that serves the ends for which government is instituted, and which best reflects the freedom which nature allows people to enjoy, was democracy. It is the most natural form of government arising out of the social contract just mentioned. After all, in a democracy the people obey only laws issued from the central authority.

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It should be underscored, as Kal elaborately argues, that Spinoza’s democracy is not the same democracy as we understand it to be. In Spinoza’s description the citizens of a society hand over their power (and thus their rights) to a central authority. This authority is, therefore, bestowed with full authority  over its citizens. The more citizens hand over their power and rights, the more powerful the central authority would be. As a result, it would not have to be afraid of any opposition, as the citizens have a blind faith in their leaders.  

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In Theologico-Political Treatise Spinoza defines democracy as follows: She [democracy; PdH] is therefore defined as a general association of people, who together wield the highest  right regarding everything she wishes to undertake or establish. Spinoza’s democracy is thus characterised by exclusive power of the central authority, resulting from the free transfer of the  citizens’ power and rights  to this authority. This smacks of an authoritarian form of government; some critics even accuse Spinoza of being an avant la lettre  fascist. Kal rejects such a qualification. Instead he characterises Spinoza as a revolutionary conservative. Kal adds that  Spinoza does not embrace a future-focussed free and open individualism, which is modernity’s central trademark.

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Freedom of thought

Israel and Nadler admire Spinoza for the freedoms he professed. Some others, such as Kal, sketch a more nuanced  picture. Freedom of thought and freedom of expression should be understood in the context of what Spinoza  exactly understood by the term. Surely, the subtitle of Theologico-Political Treatise is about the freedom to philosophise. However, two types of freedom should be distinguished, referring to Spinoza’s differentiation between religion and philosophy.  The freedom  for the common man and freedom for those who can think and reason. The common man enjoys some freedom of thought. However, limited by the accepted religion as proclaimed by the central authority; so, freedoms limited  by religious obligations and acceptance of God’s existence and benevolence.

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As for those who can think and reason, there are no restrictions, as they do not enter the domain of religion, which does not  contain any intellectual pretentions. These people are free to philosophise, based upon Nature’s order.  Regarding philosophers’ political relevance, Spinoza observed that when one of them  demonstrates that a particular law would not make sense, and shares this opinion with the central authority, while not violating that particular law, this philosopher makes a useful contribution to the public good. Spinoza adds that the central authority should allow people who can think ample freedom to do so, to prevent them from stirring up discontent among commoners. Tolerance is the right attitude.

 

In Theologico-Political Treatise, Spinoza wrote that ‘this freedom (of expression; PdH) is of the first importance in fostering the sciences and the arts, for only those whose judgment is free and unbiased can attain success in these fields.’ I’d say that this was a truly inspirational and liberating statement for independent thinkers and curious minds, who - together – created the  Enlightenment.

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Spinoza proposed democracy, tolerance, benevolence, freedom of expression, freedom of religion, and equality before the law. Having presented them around the middle of the seventeenth century, these notions were not just new; they were going against the Zeitgeist. Indeed, one of Spinoza’s central themes was freedom. However not in our contemporary sense but freedom in the context of his philosophy.

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Freeing up the mind, which Spinoza, and subsequent representatives of the Enlightenment, professed led to new scientific insights, inventions of new techniques and their successful application in production processes. All these new ideas and phenomena were developed in Europe by a relatively small band of philosophers, scientists, and practitioners, such as self-made engineers, instrument makers and industrialists.

Why the Industrial Revolution was  limited to Europe

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Surely, there had been great  inventions before the Industrial Revolution. Think of water mills, the horse collar, gun powder, the printing press, what have you. But they did not lead to accelerated technological progress. Well before the Industrial Revolution China had introduced impressive inventions, among them cast iron, the plough, the stirrup, gunpowder, printing, and the magnetic compass. So, why did the Industrial Revolution not originate in China, and why had these early inventions not led to accelerated technological progress in China? 

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The answer can best be given by telling the story of Joseph Needham (1900-1995). Needham taught biochemistry at Cambridge University. He firmly believed that all advanced technologies had been developed in England or in other European countries. It so happened that he had a female student, Lu Gwei-djen, whose father was a professor of history of science at Peking University. When Needham once told his students that a certain technology was invented in Europe, Lu corrected him by telling that the invention had taken place in China; she even told him in which book he could find it.

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This triggered his curiosity. He started to study the history of Chinese science and technology. It so happened that during the Second World War, Needham was posted as British cultural counsellor in Chongqing. While travelling in China, Li Yuese (Needham’s Chinese name) collected a lot of historical materials. Needham studied in which year a certain technology, tool or machine was invented. He discovered that before the fifteenth and sixteenth centuries technology flowed one way: from East to West, as China had invented a wide variety of instruments and techniques, mentioned above. But in the sixteenth and seventeenth centuries, some technologies started to flow from West to East. And after the middle of the eighteenth century, the flow was exclusively from West to East.

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The Needham Puzzle

These movements from East to West and then from West to East, formed the basis for the Needham Puzzle: why had China initially been so advanced compared to other countries, and why was China not any longer technologically ahead of the rest of the world? in Demystifying the Chinese Economy, Chinese economist Justin Lin deals with these questions. He proposes a theory to unravel the Needham puzzle, going back to the Industrial Revolution. The defining phenomenon, argues Lin, was the acceleration of technological innovation. This is why the gap between the  West and China became ever wider. In addition, England developed more new industries than China, such as the chemical, automobile, aerospace, and information technology industries.

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Lin introduces the technology distribution curve (shaped like a Bell curve), divided in low technology at the left half, and high technology at the right half of the curve. Factors like talent, newly developed material (such as steel), and knowledge move the technology distribution curve to the right: the more a country avails of these three factors, the greater the chance that more new technological inventions will ensue. He then presents three hypotheses: (i) the more trials and errors that are carried out, the greater the probability of inventing a new technology; (ii) the more advanced the current technology, the lower the probability of inventing a new technology; and (iii) after the discovery of one technology (like steel) more tools are being invented. Based on these hypotheses, Lin answers three questions:

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1. Why was China advanced in premodern times? At the time, invention was based on experience. China had a large population and the larger the population, the larger the number of craftsmen and peasants, and the greater the chance for inventions. Hence abundant human resources laid the basis for technological progress in those early days.

2. Why did China lag behind Europe in modern times? In Europe after the eighteenth century, invention was based on experiment and no longer on experience. Trials and errors were now mainly based on intentional experiments. A scientist in a lab could do more trials than thousands of craftsmen and peasants. So population numbers were no longer an issue. To counter the diminishing experiment results effect, European countries increased basic research, triggering more technological innovations. The precondition for basic research was the Scientific Revolution which, even before the Industrial Revolution, took place in the West (as also argued by Mokyr). The Scientific Revolution contributed to the Industrial Revolution in two ways: (i) it introduced a revolution in methodology (i.e., controlled experiment replaced experience), and (ii) it facilitated the shift to the right of Lin’s technology distribution curve.

3. Why did a Scientific Revolution not also take place in China? Modern science uses mathematical models to formalise its hypotheses and applies controlled or reproducible experiments to test them. Mathematical language is much better than natural languages in disseminating new knowledge. China had a bureaucratic system whereas Europe had a feudal system, more favourable to mercantilist values. With the collapse of the feudal system, capitalism and modern science could fully emerge. In China, merchants had a low position in the Confucian system; they were barred from the civil service examination system. China also did not promote the development of good mathematicians nor did it warm to scientific experiments. When civil service examinations were introduced by the Qin Dynasty, mathematics was one of the subjects. However, towards the end of the sixteenth century, Emperor Shenzong decided that mathematics was of little use and scrapped the subject. Without people mastering mathematical tools, the Scientific Revolution could not take place in China.

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China’s initial inventions and prosperity had a lot to do with its civil service system. However, when the basis for technological innovation shifted from experience to experiment , like it did in Europe, the civil service system lost its superiority; worse, it even hindered scientific and technological progress. The key issue, concludes Lin, was the absence of the Scientific Revolution in China, without which the Industrial Revolution could not have happened there. And without the Industrial Revolution, technology could not accelerate. That is why capitalism, though sprouting in China, failed to develop there fully since the eighteenth century, until four decades ago when China’s economy took-off.

China, once a forerunner in innovations and technological prowess, ended at the wrong side of The Great Divergence, resulting from the economic take-off of European economies as opposed to economic stagnation of practically all other economies.

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Mokyr summarised these historical developments very well:

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While most societies …were able to generate some technological progress, it typically consisted of one-off limited advances that had limited consequences, …and the growth it generated fizzled out. In only one case did such accumulation of knowledge become sustained and self-propelling … That one instance occurred in Western Europe during and after the Industrial Revolution…. The big difference between Europe and the rest of the world was the Enlightenment and its implications for scientific and technological progress. But the rise of the Enlightenment …. was the culmination of a centuries’ long process of intellectual change among the European literate elite.  

And it was Spinoza who prepared the ground for the Enlightenment.

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Democracy revisited

As we  saw, Spinoza argued that democracy, as he described it, was the best form of government. If you had to answer the question what system promotes economic development  better in a poor country: democracy or a benevolent autocracy, which one would you chose? I would not be surprised if you chose autocracy; your thinking may be that a poor country needs a strong leader to pull off economic growth, unhindered by troublesome opposition groups.  If your answer would be along these lines, you are in good company. Take New York Times columnist Thomas Friedman, who some time ago wrote the following about China:

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One-party non-democracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, ……. it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.

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Friedman may have suggested that democracy would retard economic growth. But was he right? According to Daron Acemoglu he would have been wrong. Acemoglu and colleagues wrote a paper in which economic growth of 175 countries was analysed during the period 1960 – 2010. This growth was paired with the political systems of the countries concerned.

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The paper’s main finding is that over the long run democracy has a significant positive effect of around 20% on Gross Domestic Product (GDP) per capita. The paper’s other findings suggest that democracy contributes to future GDP growth by increasing investment, encouraging economic reforms, improving the collection of taxes, provision of public goods like schooling and health care, and reducing social unrest. The paper underlines that the findings do not imply that non-democracies never invest in public goods or enact far-reaching economic reforms. However, the average democracy is more likely to do so than the average non-democracy.

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Another question is whether economic growth precedes democracy or is it the other way around? The authors conclude that the impact of democracy does not depend on the level of economic development. In other words, democracy doesn’t need growth first to take-off. Take Portugal: the democratisation of the country after the Salazar dictatorship resulted from mounting discontent with Salazar’s military regime. Once in 1976 democracy was established, Portugal’s economic growth started to improve. Subsequently, the government introduced the National Health Scheme, cutting infant mortality in half. School enrolment almost doubled over the next 30 years. Or take South Korea, a dictatorship before 1987. The dictators intended to continue their rule, but this met with massive student protests. Although in the past pro-democracy protests had also been staged, this time the government gave in. It helped that the regime was afraid that the country’s image would be badly affected in anticipation of the  Olympics to be held in South Korea in 1988. Hence democracy was ushered in and economic growth shot up to 4.7% a year during the next two decades.

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As this essay is about the relation between the inspirational forces of the Enlightenment and sustained economic development, the question is whether Spinoza was right in proposing democracy, being the political system best suited  to free the minds, which in turn is crucial in promoting sustained economic growth. Spinoza favoured tolerance, freedom of expression, and equality before the law. He believed that democracy was the best system to organise a society and to ensure that the ‘social contract’ would not be broken. Acemoglu et al. came to the conclusion that democracy is the political system best suited for sustained economic growth.

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China’s future

Mokyr presented a thought experiment towards the end of The Culture of Growth:

Imagine a New Atlantis run by a central administration in which technological progress is brought about by civil servants supported by a benign and progress-minded bureaucracy. Could such an organization have brought about the modern world without anything resembling the European Enlightenment? The economist’s logic would probably judge such a scenario as unlikely. It is one thing for such a political situation to be brought about in a single period; the likelihood that it could be sustained and avoid being corrupted and disrupted by greedy and ignorant outside invaders or inside rent-seekers in the long run seems dim.

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After having read this text, I couldn’t help thinking of China’s future. After all, terms like central administration, technological progress, a prominent role of civil servants and bureaucracy at large, are all applicable to China. So far, its leaders have rebuffed the notion that democracy would be the sole system capable of creating and maintaining sustained economic growth. Indeed, China has been able to sustain spectacular economic growth over the past four decades. And after the outbreak of Covid-19 in Wuhan, the country handled the pandemic more effectively than e.g., the US, and Europe. 

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As we have seen, a central theme of Spinoza’s democracy, is society’s unity. Pluralism had to be prevented so as to preserve unity. Surely, some freedoms were permitted as long as this unity was not in jeopardy. German philosopher Friedrich Hegel (1770-1831) developed a political philosophy in which he portrayed dualism between a liberal society and an authoritarian state, in which an emancipated citizen can be found next to an autocratic monarch. Hegel introduced the notion of subjective liberty. However, this does not represent true liberty. True liberty can only be attained when one would conform to the rules of the state, thus achieving objective freedom. In actual practice, a citizen will adjust to  society’s ‘rules of the economic game’, and for the rest, one will mind  one’s own business.

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He elaborates this dualism as follows. In the context of societal and economic life, entrepreneurial citizens live and work pretty freely, but within a conservative, authoritarian state, which expects from its citizens to be law-abiding and loyal  to the autocratic leadership. Such a hybrid system is typical for contemporary China.

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President Xi Jinping and the Communist Party have a firm grip on the country and its economic development. Under Mr Xi, the Communist Party reinstated itself into every organ of society.  He also ensured that the party operates inside private enterprises and NGOs - Mr Xi’s mantra: stability is paramount! China’s autocratic one-party system may also be able to achieve sustained economic growth in the long run. At any event, China firmly believes that it is successfully developing according to its unique economic model rather than getting wealthy through the market.

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Obviously it is far too early to evaluate the political and economic sustainability of China’s unique development model. Only in the (very) long term success of China’s  model can be confirmed or must be refuted. So, what are the perspectives? Although they seem to be quite good, I will look into some drawbacks of China’s economic and political outlook.

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Made in China 2025

Technological progress tops China’s economic agenda. The leadership rightly understands that technological progress boosts productivity. In May 2015, Prime Minister Li Keqiang launched Made in China 2025 (MIC 2025), a high-tech expansion program. Its objective is to further develop China’s manufacturing sector into a technology-intensive powerhouse less reliant on foreign suppliers. MIC 2025 consists of 10 key strategic sectors, such as Artificial Intelligence, 5G, aerospace, robotics, semi-conductors, electric vehicles and green energy at large, biotech, and pharmaceuticals. These sectors will boost China’s international prominence, expected to capture global markets, perhaps surpassing American exporters.

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The government had already invested $300 billion in MIC 2025. After Covid-19, another whopping $1.4 trillion was invested in the plan. This investment raised concerns, ranging from public investment overstretch to unfair international competition. Regarding the former, commentators inside and outside China observe that MIC 2025 is absorbing a disproportionate part of risky state-funded expenditure in new technologies. Others say that it would be better for a middle-income country like China to bet on market-based innovation to become a high-income country. Moreover, MIC 2025 is an exclusive, state-dominated, undertaking, and running the risk of wasteful investments. China’s competitors claim, as in the past, that the Chinese government is subsidizing its industries, thereby distorting the free functioning of the international market.

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Through MIC 2025 the standard of living of the average Chinese citizen will improve. MIC 2025 will also provide employment for university graduates, many of whom are still being educated at American and European top universities. This triggers two questions. First, will China will have built up sufficient high-tech research capacity at home to match the high-tech demand from MIC 2025? Another question, although not directly related to MIC 2025, is whether the growing number of highly-educated citizens will accept having their freedoms restricted by the government? Is there, in other words, a relationship between the level of educational achievement and the demand for freedom of thought? If so, would this then be accommodated by the regime? I don’t know, but the prospects seem dim, given Xi’s firm grip on the population, as, for example, human rights activists and the average Uyghur would attest.

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MIC 2025 reminds me of the Soviet Union’s investment in a few strategic industries at the time: heavy industry, defence (think e.g. of the development of the hydrogen bomb) and aerospace, while neglecting other economic, social, and political demands. The end-result was the implosion of the Soviet Empire, leaving behind an impoverished population, economic stagnation typified by outdated loss-making, poorly diversified industries, and corruption. Word has it that Mr Xi was horrified at how the Soviet Union’s Communist Party had evaporated overnight. 

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MIC 2025, investing in sectors  that will dominate the Fourth Industrial Revolution, makes economic sense. However, as I mentioned before, MIC 2025 may result in wasting scarce financial resources. It may also trigger  obstruction from international competitors claiming that China applies unfair competition.

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A comparison with the Soviet Union’s trajectory may not be justified altogether, given many differences between the former Soviet Union and contemporary China. Yet what I want to flag is that state-conducted investment in a limited number of sectors, may overlook necessary investments in other vital aspects of China’s society which could undermine its cohesion and resilience.  In this sense, The Economist observed that there is a rather large contrast between China’s world-class physical infrastructure  - featuring, among others, the longest high-speed rail network - and its badly lagging soft infrastructure, with a social safety-net akin to those of much poorer countries.

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The political outlook

President- for-life Xi Jinping is the undisputed ruler; he has no identifiable rival, or successor. But is his rule indeed undisputed? Not necessarily. Senior Lowy Institute Fellow, Richard McGregor recently published a little book: Xi Jinping: The Backlash, zooming in on some of Xi’s policies which are meeting resistance inside China and abroad. China’s politics have gone back in time, echoing the Maoist era. The anger towards Xi is building up, says McGregor. Mr Xi has unwound most of the political advances that were instrumental to China’s economic success. After having built up a personality  cult, Xi stifles criticism and, say his critics, has mishandled relations with Washington. Criticism is getting louder – not just criticism on Xi’s economic policies, also deeper undercurrents are unmistakable.

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Xi’s anti-corruption campaign ended the careers (and emptied bank accounts) of scores of senior Party and army officials at the national and lower levels. Millions of officials have been investigated and punished. Xi destroyed the lives of millions of people in the elite, who now all hold a personal grudge against him. McGregor observes: ‘Xi might have won popular support but he also earned himself a bucketload of bitter enemies, all itching for revenge.’

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In 2018 the National People’s Congress created a new agency: the National Supervision Commission, which took in the operations of the Party’s anti-graft body, thereby extending the extra-judicial reach of the Party, resulting in alienating large sections of the legal intelligentsia, representing yet another group having an axe to grind with the President. 

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As for China’s position overseas, McGregor argues that the backlash against Xi Jinping is reaching full bloom, due to Xi’s assertive policy not just against America but also vis-à-vis countries from Germany, Canada to Malaysia and India to Kenya; let alone vis-a-vis neighboring countries South Korea, The Philippines, Japan and Vietnam. Take the relationship between China and Germany. Before the launch of MIC 2025, Germany took a laidback position towards China. This attitude was in particular taken by German automakers whose largest export market is, indeed, China. But once MIC 2025 was launched, the Germans got nervous. China is now perceived as a hostile power wanting to replace German cars by Chinese vehicles. Berlin-based Mercator Institute, a think tank, observed  about MIC 2025:

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‘In essence, Made in China 2025 aims for substitution. China seeks to gradually replace foreign with Chinese technology at home, and prepare the ground for Chinese technological companies entering international markets.’

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The countries that feel threatened by China’s economic and geopolitical ambitions are now consulting like-minded countries  to find common ground in their relationship with China. What is at stake is maintaining a global rules-based system, including collectively accepted sanctions. 

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There is more: China’s Belt and Road Initiative (BRI), a huge infrastructure investment program, involving many countries from the East to the West. It is to ensure smooth transportation lines from and to China to facilitate imports of raw materials and exports of finished products. But it also is a hefty geopolitical instrument. While China is prepared to provide state-backed lending for the investment  of participating countries’ infrastructure through BRI, China is also  ‘buying’ political support from these countries in the international arena, such as the United Nations. Should borrowing countries not be able to repay their loans (which happens more and more), China can decide to seize or block the separate bank account which recipient countries were forced to open. In exceptional cases, like the port loan to Sierra Leone, China can take over the port, should Sierra Leone default. China is also investing in European (e.g., Servia, Hungary and Montenegro) and Asian countries (Cambodia and Laos),  putting the European Union and ASEAN  on the alert.  

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BRI is being criticized for its overreach. In addition, international concerns are expressed about the increasingly unsustainable debt levels of countries having received BRI-related  loans. The IMF already warned for ‘debt distress’. Xi has listened and, subsequently, scaled back BRI’s ambitions. However, BRI loan defaults and the large debts incurred by, among others, Chinese loss-making state companies may further undermine Xi’s position.

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Summing up, if Spinoza would have been alive, he would conclude that China reflects the opposite of what he proposed: democracy, tolerance, freedom of thought and expression. He would be bound to conclude that China’s model could not last. Even liberal-minded scholars would acknowledge that the People’s Republic is on the way to become the world’s largest economy, pulling hundreds of millions Chinese citizens out of poverty. But would China indeed present a better development model than the market-based democracies in the past? Mokyr is skeptical, as reflected in the above quotation:

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It is one thing for such a political situation to be brought about in a single period; the likelihood that it could be sustained and avoid being corrupted and disrupted by greedy and ignorant outside invaders or inside rent-seekers in the long run seems dim.

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All I can say is that time will tell. However, there are the backlashes I presented which may undermine not just the Chinese leadership’s confidence but, eventually, may put an end to the system.

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Peter de Haan, 

 

Mokyr, J. (2017) A Culture of Growth; The Origins of the Modern Economy. Princeton: Princeton University Press.

Israel, J. (2007) In Strijd met Spinoza; Het failliet van de Nederlandse Verlichting (1670-1800). Amsterdam: Bert Bakker, 5. Spinoza’s Theologico-Philosophical Treatise includes the statement that any person may think what that person  wishes and express these thoughts.In De List van Spinoza, Vincent Kal analyses Theologico-Philosophical Treatise from a conservative vantage point. On p. 265  Kal observes that this freedom of thought begins where religious disciplining ends. Freedom of thought in the domain of philosophy is based upon the order of Nature, which is beyond the state’s purview. This is why the state does not need to limit philosophers’ freedom of thought. On p. 267 Kal observes that Spinoza argued that people who philosophise belong to the educated classes. Giving them this freedom prevent them from mobilising the masses against the State. Source: Kal, V. (2020) De List van Spinoza; De Grote Gelijkschakeling. Amsterdam: Prometheus.

Russell, B. (1979) A History of Western Philosophy. London: Unwin Hyman Ltd, 552.

Ibid., 552.

Ibid., 7.

Theologico-Political Treatise, 86.

True religion, a simplified version of religion and a practical orientation for the common man, to be understood by commoners, is applied by the authorities to maintain obeyance, and thus control over these

people. Spinoza argued that superstition had to be removed from religion. In addition, religion had to play a constructive role in society, preventing that power hungry theologians would usurp it.

De List van Spinoza, Chapter  15: Democratie als waarborg voor macht (Democracy as a safeguard for power).

The term Modernity includes more than Kal’s interpretation of the term; the modern world consists of various political and philosophical systems than only individual liberalism. 

Lin, J. (2012) Demystifying the Chinese Economy. Cambridge: Cambridge University Press, 30-53.

Acceleration is promoted by bringing together knowledge and brilliant minds to develop new ideas and innovations. A couple of random examples: Ptolemeus III (246-222BC) established the world’s first large library at Alexandria, Egypt. At the time, Egypt was a prosperous country. Ptolemeus, himself a Greek, wanted to assemble all available knowledge in the world in this library. He sent out emissaries to collect important documents, so as to include them, properly catalogued, in the library’s collection. As of the 17th century, Leiden University attracted world famous scholars. As mentioned, Descartes was one of them. Swedish botanist Carl  Linnaeus was another. More recently, Albert Einstein regularly visited Leiden to lecture and to meet professor  Hendrik Lorentz (whom he admired) and brainstorm with professor Paul Ehrenfest. Niels Bohr also visited regularly, not in the least since Leiden’s physics and astronomy faculties were world famous at the time, thus attracting brilliant scholars. During one of his visits, Einstein took the time to visit Spinoza’s house in Rijnsburg (now a small museum), as Spinoza’s philosophy had inspired him to write Weltanschauung. Before the Second World War, Cambridge University attracted many economists during John Maynard Keynes’s tenure there at King’s College. Among them, Friedrich Hayek, Tibor Scitovsky, John Kenneth Galbraith and Milton Friedman who was a Keynesian before he changed his views. Silicon Valley is, of course, a very prominent contemporary place attracting brilliant minds, who, together, developed many innovations.

A Culture of Growth, 339.

Acemoglu, D., Naidu, S., Restrepo, P., Robinson, J. (1 May 2015)  Democracy Does Cause Growth. To be downloaded via www.economist.com/democracy

A Culture of Growth, 341.

‘By 2012, …. private firms were responsible for about half of all investments in China …Xi’s ascension marked a turning point for entrepreneurs. Since 2012 this picture of private, market-driven growth has given way to a resurgence of the role of the state in resource allocation and a shrinking role for the market and private firms.’ Source:  McGregor, R. (2019) Xi Jinping: The Backlash, 53.

Germany’s Industry 4.0 Strategy, is not state-dominated; it invites foreign investors.

The Economist. Socialism’s Precariat, May 19th 2020, 37-38. The outbreak of Covid-19 exposed this contrast in an embarrassing manner. After the outbreak, the government gave an extra 12 yuan ($1.70) a week to its poor. Those with nothing can apply for a guaranteed minimum income (dibao). But this offers on average only 600 yuan a month. True, the State Council  recently announced that it would increase both unemployment and dibao benefits, but no details were supplied.  Government expenditures on health, education, and social assistance are lower in China than the average among China’s peers. Should economic growth and employment opportunities falter, inadequate social services might eventually result in widespread social unrest.

 

McGregor, R. (2019) Xi Jinping: The Backlash. Melbourne: Penguin Random House Australia.

Ibid., 35.

Ibid., 97.

Francis Fukuyama et al. observe that not in all cases this seems to work: ‘Today many of the nations that are the largest recipients of Chinese lending have the poorest, rather than the best, bilateral relations  with China. High levels of Chinese investment in Sri Lanka, Myanmar, and Ecuador provide the starkest example, as local agencies mired in debt have generated a substantial backlash. Many South Asian nations that are amongst the largest recipients of Chinese Belt and Road lending have shifted to realign strategically with India, Japan, or the United States’. Source: Batainich, B., Bennon, M., Fukuyama, F. How the Belt and Road Gained Steam: Causes and implications of China’s Rise in Global Infrastructure. Stanford: CDDRL Working Paper, (May, 2019), 28-29.   The authors also mention on p. 29 that the American Congress passed the BUILD Act, to help US companies competing  with Chines state-backed financing overseas. Yet US programs pale in comparison with those of China’s international lending institutions.