The global Elite Quality Index (EQx) is a novel approach to understand the future and the economic and human development prospects of nations. It is based on the idea that elites are an empirical inevitability, dominating all political economies. They provide the necessary coordination capacity for an economy’s resources, whether human, financial or knowledge based. Without elites there is no progress. High-quality elites run sustainable value creation business models that give back more to society than they take. Low-quality elites do the opposite and operate Value Extraction models based on rent-seeking value transfers. The recently launched EQx 2022 has some surprising results, and you can download the full 320 page pdf report here.

The index project is an international collaborative effort that features leading scholars from China and Switzerland and from many other countries including Singapore, Bangladesh, Mexico, Gahna or the United States. Our own Prof. Yuan Jiang, wrote and excellent article “Towards a micro-level, value creation understanding of diversity and inclusion” that you will read in the next issue of our newsletter is one of these. Prof. Zhang Jun, Dean of the School of Economics at Fudan University wrote the following introduction to the EQx:

 “Mainstream economic theory might have reached its limits in terms of practical application. Fiscal stimuli packages have indebted many countries, while monetary policies have given rise to the bane of inflation. At the same time, sustainable value creation at the micro-level is all too often ignored in macroeconomic policymaking. In China we believe that courageous structural reform is an effective way forward out of crises and in support of inclusive economic development. Reforms must then be based on adjusting the incentive system so that elite business models create rather than transfer value. The elite theory of economic development provides a framework for such structural reform and captures complex trade- offs that require state capacity while at the same time referencing culture and history. Comparing countries based on elite quality and their creation of value is both innovative and difficult. The Elite Quality Index (EQx) is a first valuable initiative in this direction and should inspire debate between researchers, policymakers, and the concerned general public across the world.”

His full country analysis provides a unique perspective to understand China’s past and future:

China: A powerful elite system keeps on delivering value, with state capacity deeply rooted in history

China’s EQx2022 score is astonishingly high (rank # 27) for a middle-income country and reflects the value creation of its elite business models. While high Elite Quality points to fu- ture growth, China’s strong EQx ranking might be puzzling to Western pundits already surprised by China’s emergence as a global economic power over the past 40 years.

In 1978, the senior leader, Deng Xiaoping, decided to adopt the policy of reform and opening up, which completely trans- formed China’s economic landscape. During the 1980s, and well into the 1990s, the West welcomed the changes in Chi- na as a positive development and was generally optimistic about China’s fast integration into the global economy. The US normalized relations with China, committed to promote bi- lateral trade, and supported the involvement of American businesses in China’s economy. However, a decade ago, the international community, again led by the US, dramatically reversed course as perceptions of the possible economic and geopolitical threats posed by China’s economic success be- gan to rise. China accounted for 10% of the global economy in 2012, and today that figure has increased to 18%, second only to the US. As China’s economy has continued to expand it has also become clear that its growth model is essentially distinct from that of the West. Moreover, China’s model is questioned in the West as being irreconcilable with the values of freedom and democracy, and a potential threat to Ameri- can global preeminence. During the presidency of Donald Trump, the US changed its 40-year-old engagement policy to- wards China and redefined the US-China relationship as that of rivals, not partners. The US is now intent on containing and isolating China to slow its rise and rapid technological ad- vancement (RND, ii.6, rank # 14).

Again, the fundamental reason why the West is uncomfort- able with China’s economic rise, and hence has become hos- tile to it, is that China’s political economy and its performance is a puzzle that cannot be properly understood through the lens of mainstream economic and political theories. The EQx provides a framework that can contribute to a better under- standing China’s model, as it links elite business models to Power and Value Creation in the political economy.

In the EQx’s Political Power Index Area, China ranks rather poorly (i, rank # 60) because its political elites are exceed- ingly powerful. Nevertheless, power can hypothetically be used responsibly to create value. The Chinese model is in- deed characterized by economic prosperity along with state dominance (Regulatory Capture, i.1, rank # 55). This mixture has caused a significant amount of confusion among West- ern economists because it is hard to theoretically explain a model based on state industrial policy that leads to sustained and inclusive economic growth and development. But Chi- na’s growth track record is irrefutable and the EQx shows an extremely high score for Political Value (iii, rank # 9). In short, China’s political domain creates value for society. This is shown in the component constructs of the EQx: In the Giving Income Pillar, covering Indicators on education such as PISA Mean Scores (PIS, iii.7, rank # 1), COVID-19 vaccination and mortality rates (VAX and COM, iii.7, ranks # 5 and #1 respectively) or optimal General government expenditures as percentage of GDP (GEX, iii.7, rank # 1), China scores ex- ceptionally highly. In the Taking Income Pillar (iii.8, rank # 6), addressing Indicators related to public security (Homicide rate, HOM, iii.8, rank # 11), taxation (Corporate tax rate, DCT, iii.8, rank # 6) or public welfare (Death rates from sub- stance abuse, SUB, iii.8, rank # 57) the country also fares well. The EQx framework provides empirical support for the hypothesis that powerful Chinese elites bring about economic prosperity through state capacity. Of particular interest is the relative performance of economic elites: The Economic Value Index Area (iv, rank # 32) is not as high as its Political Value (iii, rank # 9) counterpart.

Western analysts tend to exaggerate the role of the extractive state and see it as a Leviathan with a taking hand, downplay- ing its flourishing role as the helping hand. Interestingly, Chi- na’s powerful state is not only a driver of China’s economic success, but also an agent of change. China’s system adapts and adjusts to changing external conditions and constraints (although the Government responsiveness to change, RTC, i.1, at rank # 44 could still be higher). What is essential is that the powerful economic elites—as evidenced by the low Coalition Dominance ranking (ii.4, # 138)—are not untouch- able, but quite the opposite. This is also shown in the Cre- ative Destruction Pillar where China enjoys a rather high score (ii.6, rank # 6). China’s elite system supports a dynam- ic, Schumpeterian process of economic development and re- newal. In fact, one must understand that the Chinese model and the agency of its elites is deeply rooted in tradition. For- eigners would not be so surprised at the peculiarities and the working model behind China’s rise if they had a better under- standing of the country’s long history and its state formation some millennia ago.

As historian Ray Huang said, China is a politically preco- cious country and finished the process of becoming a mod- ern state 1,500 years before Europe did. Both Huang and Francis Fukuyama were amazed by the exceptionally short feudal reigns by the Chinese aristocracy. The reason was security: the tiny kingdoms that preceded empire were un- capable of resisting frequent invasions from the northern no- mads and could not manage natural disasters such as floods. The first Emperor, Qin Shi-huang, had high legitima- cy for his political unification project to create a powerful, centralized regime, the antecedent of today’s modern gov- ernance as defined by Max Weber. That includes a bureau- cratic system based on impersonal selection and incentives incorporated into a well-developed taxation system. In com- parison, Europe did not start a similar political moderniza- tion process until the 15th century. Nonetheless, China’s po- litical precocity stifled societal vitality and the rise of economic power and civilian merchants, whereas in frag- mented Europe, merchants were already powerful before its centralized states consolidated. The kings of Europe could not eliminate these economic elites, and even had to

rely on them to fight against their political rivals, the local nobility. That is essentially the reason why capitalism could not emerge in ancient China despite its modern state institu- tions. The result was the so-called ‘Great Divergence’, as the West industrialized first and overtook China.

After Qin’s unification, thanks to its huge population and efficient bureaucratic system, successive Chinese empires expe- rienced long periods of prosperity and amazing develop- ments in science, technology, and culture. However, and perhaps out of complacency, China sealed itself off from the rest of the world for hundreds of years, which led to its grad- ual decline. China’s experience in the past 40 years demon- strates that it will grow economically if it has the willingness and chance to integrate into the global capitalist system. That process is still ongoing and the road ahead in terms of open- ness is still long as various EQx Indicators show: Trade free- dom (TRF, iv.10 rank # 80), Barriers to FDI (BTF, iv.10, rank # 69) or Economic globalization (EGL, iv. 10, rank # 104).

China has a long history, and its cultural and institutional leg- acies are conducive to the quick rise of its economy. The fam- ily emphasis on educating the next generation and the higher propensity to save can both be traced back to Confucian traditions. China also owes much of its success to its intelligent state and robust state capacity which includes an efficient bu- reaucratic system. Today, many economies find growth elu- sive because incompetent and weak states cannot prevent capture from interest groups or suffer from rampant corrup- tion. Therefore, for any theory of economic development to make sense in applied terms, it must endogenize the behav- ior and role of political elites along with the principles of the market economy. In this context, the historical viewpoint of state capacity must not be obviated.

Prof. Jun Zhang School of Economics, China Center for Economic Studies, Fudan University, Shanghai, China

Edited by Casas, Tomas