Wednesday, January 14, 2009

Why China Works (?)

I was alerted this morning by an article in Economic Observer Online to the existence of this terrific article in Newsweek. I think it gushes a little too much about China's apparent success, but if you can spare about 10 minutes out of your day, it is worth your time.

This is probably one of the best articulations I have seen of the puzzle that motivates my own research. Why is it that liberal, Western economies seem to tumble from crisis to crisis while China continues its steady upward march? Why do economic theories about the pernicious effects of government intervention in the economy not seem to apply in China? How can China's government both own businesses and provide the proper incentives for commercial success?

While I don't agree with everything said in the article (for example, their populist tendency to badmouth all financial derivatives), it sets up the current conundrum quite well.

Though, as the article points out, things seem to be going well in China -- at least from the article's 30,000-foot point-of-view -- it's important not to forget that China is still a society on edge. With falling exports and falling factory employment, the potential for unrest is increasing. Though China has achieved unprecedented levels of growth, I think a lot of people would question whether it is completely out of the woods yet.

I would be very interested to read anyone's opinion on this paradox.

Note: At some point in the future, the Newsweek link above may disappear. I have saved a pdf of the article here.


  1. "Why do economic theories about the pernicious effects of government intervention in the economy not seem to apply in China? How can China's government both own businesses and provide the proper incentives for commercial success?"

    Ignore for a moment the growth of China over the past 20 years and instead focus on the snapshot of where China is on a per capita basis relative to the rest of the world. The picture that you get is not one of the success the Chinese government and management but one of abject failure. China remains incredibly poor with a continuing plethora of issues as you note, but more importantly relatively speaking it is only now just beginning to catch up with no certainty that it can or will given the political issues that they have.

    Don't get me wrong, I want China to succeed. But this notion that China has something to teach the world/US about economic interventions is ludicrous on its face unless of course one chooses to ignore China's rather late starting point and the economic condition of the average citizen.

  2. @Clement Wan...

    Excellent points. Thank you!

    Maybe China has nothing to teach the US, but is it possible that China has something to teach other developing countries?

    I mean, yes, China is still quite poor, but they're nowhere nearly as poor as before. I can think of a lot of African countries who would love to be as "poor" as China. And I can imagine their dictators appreciate the fact that growth without political liberalization is possible.

    Of course, just because China has made it this far is no guarantee that they can continue in the same mode indefinitely.

    I have a feeling, however, that the state will continue to have a heavy presence in industry for as long as they get the results they're getting now. Technocrats know better than bureaucrats that, when what you are doing stops working, you should try something else. It just hasn't stopped working yet. Yet.

  3. I think you're right. It will be interesting to see what comes after the Party and what the technocrats will do when what they've been doing stops working. As others have written, there's a good reason that Chinese officials have their kids go into industry and not into government.

    On a related note, in 2006, there was a survey that found 90% of China's billionaires were the progeny of senior officials. When the Party does finally stop (pun intended), will the next step be crony capitalism like Russia? China's economy is performing reasonably well now, but power being what it is, it will become more difficult to give up power than it was to take it in the first place.

    The Party has allowed for economic liberalization not by design or even by accident - but because they had no choice. I personally only give them fractional credit for having recognized that they would not have survived while the rest of the West was living obviously healthier and wealthier lives. Condemning western decadence as your people starve only gets you so far.

  4. Considering that China's economy opened up about 30 years ago, there isn't much in the way of historical economic data on China.

    As the Chinese economy matures it will suffer economic crises just like the rest of the developed world.

    This quote from the article is more interesting:
    "Why does China's brand of command capitalism work? The question has long intrigued economists, who tend to cast the state as hopelessly stupid, the market as naturally brilliant. Now that the United States and Europe are moving toward state control—by nationalizing the banking and car industries, and imposing heavy new regulation on the financial industry—the question has a new urgency. China, the poorest and most chaotic big economy, looks like the one best positioned to navigate what may be the worst global downturn in seven decades."

    Leaving aside the questionable assertion that China is best positioned to navigate the downturn, we see the identification of a key theme in much thought, and the reason for looking at China - namely the re-emergence of state control as a means of supporting a 'free'-market system.

    It would be better to focus on the effects of state control in various sectors, rather than to peddle the myth that China is sailing on unscathed.

  5. @Chris,

    Thanks for the comments, Chris!

    I agree with your assessment. There seems to be a rush among some commentators to observe that:

    (1) the US govt is becoming more heavily involved in the economy in order to address the current crisis,

    (2) it was that lack of previous involvement that contributed to the problems in the first place, and therefore

    (3) because China has always maintained a heavy state involvement, maybe this is a model from which the US could learn.

    This isn't to say that there is absolutely nothing to be learned from China (as an academic, I am hesitant to make such definitive statements until I think I have enough information), but, yes, the premise that "China is sailing on unscathed" is simply not borne out by the facts.

    I guess the big question, that can only be answered once the crisis has passed, is whether China's heavy state involvement was a help or a hindrance in how it was able to ride out the crisis (assuming it DOES ride out the crisis).

    Unfortunately, I can envision a dark scenario in which things get so bad that social unrest brings about political upheaval. In my estimation, the odds of that happening in China are still small, but in the US, they are practically non-existent.


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