Market socialism, Chinese style: bringing development back into economic theory

China became an important engine of growth for the world during the recent global financial crisis, mainly because of the Chinese government's willingness and ability to stimulate aggregate demand quickly and effectively. China has been able to achieve that partly because of the legacy of central planning before the reform. The local governments implement infrastructure and other projects effectively and quickly, and the state-owned banks lend freely, under the guidance of the central government. These institutional arrangements, however, have been responsible for China's sustained growth since reform began in 1978. They are more for development than for aggregate demand management. The recent event only heightens the merits of its growth-promoting system. A question arises regarding the merits of the Chinese system of market socialism in general. Regarding economic theories, the outstanding performance of the Chinese economy has three implications: (1) Keynesianism is still alive; (2) Gerschenkron's theories of economic backwardness remain valid – that is, the larger the gap, the greater the need to socialize investment risks, and the more forceful the government's intervention needs to be; and hence (3) the more imbalanced the development process will be. These imbalances present daunting challenges.