China's Economic Growth After WTO Membership

We assess the prospects of China's future growth performance in two steps. The first step is to project the potential growth path by determining whether past successes were generated by economic experimentation that produced non-capitalist institutional innovations (e.g. incentive contracts to state enterprises, profit-oriented supervision by state industrial bureaux, collectively-owned rural enterprises), or by institutional convergence toward the advanced WTO economies like France, Japan and the United States - two interpretations known respectively as the experimentalist school and the convergence school. Because WTO membership would harmonise China's economic institutions with those of capitalist economies and reduce the scope for experimentation, the experimentalist school would project a lower potential growth path than the convergence school. The fact that China has sought WTO membership voluntarily and with great tenacity is recognition of the correctness of the convergence interpretation. The second step in assessing China's growth prospects is to project the extent and duration that actual growth would deviate from potential growth. We assess the possibility of a WTO-induced macroeconomic shock that would generate such great political turmoil that prolonged economic stagnation would result. This macroeconomic shock could take two forms: a flood of imports that would cause widespread unemployment; and the entry of foreign banks that would bankrupt the domestic banks, and hence shut down the national credit system, crippling production economy-wide. Our main conclusions are that the government has the technical means to avert such this WTO-induced macroeconomic shock, and that the real threat to macroeconomic stability is China's weak fiscal position.