The Economist: Chinese Economic Model Dead

Please welcome our newest contributor, Michele!

From the Economist‘s May 2nd blog post: “Do recent events and the extraordinary growth of China prove quasi-capitalism with lots of government manipulation work [better than the laissez-faire American system]?”  Given the political bent of this magazine, it is no surprise that the blog writer answers with a resounding “No.”   Looking closer at the post, however, the Economist’s logic proves to be inconsistent:

China has and continues to experience lots of growth, but that did not occur in a vacuum. It came largely as a result of [1] demand from American consumers and [2] the government’s manipulation of the currency, which has ensured Chinese products remain attractive to Western consumers.

 

  1.  China may have relied on US consumption, but didn’t the US also depend on low prices as a result of Chinese goods? Americans have been able to consume so much recently not because real wages have risen (they have actually decreased), but because Chinese factories have been producing low-priced goods for the last twenty years. Wal-mart, who is responsible for10% of the US trade deficit with China, probably would not exist and a host of other companies like Nike and Adidas could not remain competitive without China.  China’s growth may not have occurred in a vacuum, but in the 21st Century, no country’s does. 
  2. If the Chinese had to manipulate their currency to keep exports competitive, that means that without government intervention the country could not have developed so quickly. This shows that a relaxed, hands-off government could not have guaranteed China’s continuous growth.  That runs contrary to the point the author is trying to make.     

 

The post goes on to say:

[3]The only source of sustainable growth is technology, and so far China has been importing much of their technology from the West. Unless that changes, at a certain point Chinese growth rates will look more like Western rates. It remains to be seen if the Chinese market, as it currently operates, can provide the incentives and support for useful innovation. </blockquote>

  •  What is the author defining as sustainable growth?  This year most developed economies, especially ones heavily dependent on technology exports like Japan, Taiwan and Korea are expected to shrink, while the Chinese economy will continue grow (albeit at a slower rate than in 2008).  China might not have a Microsoft, but there are signs that it has been making great strides in improving on or developing already existing technology.  A Chinese firm began producing the first all battery-powered automobile last year in Shenzhen.  Another company has been manufacturing environmentally-friendly, low cost air conditioning units for over a decade.  The number of patents issued, a somewhat reliable indicator of the level of technological innovation, has been growing by a rate of around 20% annually for the past several years. 

The overall argument of this post is that the Chinese model is ineffective, while the American laissez-faire model is superior.  But looking at recent events, it is obvious which one has failed miserably.  The American people have already rejected wholesale the laissez-faire model and it appears that the country is now moving toward a watered-down form of European socialism.  Even before the election of Obama, the Bush administration abandoned laissez-faire economics overnight when Bear Stearns collapsed.  The Chinese government, on the other hand, does not appear to be changing its economic model in the slightest to combat the recession.  They have stepped up government intervention and are planning on expanding government-funded social services.   

The question that the Economist should be asking is not, “is China’s model better than America’s?”  The question should be, “Is China’s current model good for China?”  So what do you think?  Will the current model be able to sustain long-term growth?  What recommendations or concerns do you have for the future course of the Chinese economy?  

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0 thoughts on “The Economist: Chinese Economic Model Dead”

  1. The vast majority of first-level pundits are very fair-minded and they never go to extremes. That’s why I stopped paying attention to seemingly extreme articles or blogs because they are tools to draw attention at the price of integrity.

    Going back to the topic: The current model is to some extent good for China, but there’re many problems. With improving oversight and law enforcement, it’s going to change. There, the most moderate answer is the blandest.

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  3. I think you did’t finish the reading of that article!
    obviously, chinese economic mode is not the only reason for success growth,but also need much more conditin of outside,like US consumers and the government’s manipulation of the currency,ect.
    But Chinese economic mode dead is totally not objective and irresponsible,If you want the reader of your blog can really get correct information and idea,please do not do this anymore!
    Be objective~

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  4. The mere comparison shows how confused our world has become, when everything is measured in short-term GDP growth and nothing else, and economists are treated as the new priests. No one looks at where the growth comes from, how it is shared, or how sustainable it is.

    China is, obviously, going to suffer from this crisis more than most other countries, and the steps it is currently taking in order to maintain its nominal GDP growth, for purely political and PR reasons will only bring additional suffering to the Chinese people. One example is the fact that while factories are being closed and real estate developers go bankrupt because a lack of local and foreign demand, the Chinese government encourages additional investment in new factories (30% increase on last year!) and real estate projects. Thus, instead of letting the bubble burst slowly, the Chinese government is pouring public money in order to make sure the bubble keeps on growing. This means that China might show high nominal GDP growth, but it is only getting itself in bigger trouble and lays the ground for the next big crisis, which might be the last one for China’s current rulers.

    If the current crisis teaches us anything about economics, it is the fact that things go out of balance in a major way when the world’s third largest economy does not play according to the basic rules of global trade (currency manipulation, etc.). If China had a freely-fluctuating currency, the current crisis could have been averted – the price of goods would have gone up gradually and tamed american consumption and Chinese growth. More importantly, it would have allowed China to grow in a sustainable way and learn to do a few new things other than just focus on low-end manufacturing and foreign investment in infrastructure and real estate.

    Today, China finds itself with a nice-looking nominal growth and a pile of US T-Bills – but it has a very limited ability to control its own faith and depends completely on recovery in other countries in order to regain its previous growth levels. All the Chinese government can do is pour money into the Real Estate and Manufacturing industries in order to delay the collapse and pray for a speedy recovery in the US and Europe. Unfortunately, even after the recovery, the demand in the US and EU will probably not go back to 2007 levels any time soon.

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  5. wooddoo: Good point. Sometimes I just see an article that’s way out there and it makes me want to respond. I imagine most readers of the original Economist post, however, had the same reaction as you and disregarded it.

    dongdong: The title of my post was kind of tongue-in-cheek. Every other week, there’s an article about how the Chinese economy is going to fail or it’s growth is illusory and I thought this Economist post fit in this vein. The Economist wasn’t implying that the Chinese model is dead, but rather that it is inferior to the US laissez-faire model. Chinese government currency manipulation is part of the Chinese economic model and saying that it is dependent on other country’s consumption doesn’t invalidate its efficacy.

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  6. Dror: Thanks for the detailed comment. I agree with most of what you say and recognize that the trade imbalance created a lot of the excess investment in the US which then led to overconsumption. But part of the blame still has to fall on the lack of regulation at the SEC and places like Standard & Poor’s. There would have been serious problems with or without stricter regulatory laws, but allowing Wall Street investors to obscure the true value of and risks inherent in their investments cannot be blamed on the Chinese. Without all the ‘free money’ flowing in from China and other Asian countries, there would not have been as many of these bad investments, but the US regulatory system shouldn’t get away with failing to do its job.

    China’s reaction to this crisis has most likely created some future problems. In addition to what you said, there have also been millions of dollars in loans given out in the first quarter that most likely will turn into non-performing loans over the coming years. But it seems that China is aware of this and simply trying to slow down the descent. The policy-makers in Zhongnanhai believe a rapid economic downturn could lead to social unrest and turmoil that would disrupt the economy far worse than bubble bursting will down the road. These may be overblown concerns (given there were far more layoffs and higher unemployment during the privatization spree of the 90s), but we can’t blame politicians for taking them into account.

    I agree with you, however, that we should look at long-term developments before making any sweeping statements.

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  7. Thanks, Michelle. I am a bit tired of discussing the causes for the crisis etc., but in general, I think that China and the US are equally responsible. As I noted elsewhere, blaming the SEC/S&P/Whoever for using a long rope (excess liquidity) to hang themselves (and us) is one thing, but one should also ask why they had so much rope to begin with. Anyway, keep up the good work…

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  8. Thanks for the interesting read Michele. I think Poleg’s first comment says most of what needs to be said on the substance.

    A couple of other points though:

    “it’s obvious which one has failed miserably” – better not to get carried away by the tabloid headlines. the financial crisis was precipitated by several regulatory decisions on both sides of the Atlantic but the “American” model as a whole has not failed. Regulatory change is needed, but modern American and European models are marked by regulation. Few that are aware of the development of capital markets would regard today’s western models as “laissez-faire”, a term you use inaccurately.

    The conclusion that you seem to imply but do not state is that the “Chinese model” is superior. Superior to what? If you mean true laissez-faire economics, then most everyone would agree. If you mean the “US model” (which you did not define, but then you didn’t define the Chinese model either) then time will tell – [reliable] data just isn’t yet available. Interesting though that almost all of today’s influential Chinese economic policy-makers were trained in the UK and US. I wonder if there really is a Chinese model that differs from Western ones. Seems to me that the model is the same – it’s just incompletely applied in China – it has to be to deal with the political reality here.

    Of the three questions in your last para, Poleg has commented on the first two. As to the third, people have said it time and again – a heavily regulated economy characteristically carries with it certain weaknesses that freer economies don’t have to carry; weaknesses that result in lower growth and more human suffering. What’s the evidence? Just look around the East Asian region since the end of WWII – the differences in growth rates and living standards shout back at you. China (for better or worse) is not just SH, GZ and BJ.

    Can China carry off a more decentralised economic system and one where resources are distributed more evenly and fairly than in the last thirty years? Or would that require a change in political regulation too? Those at the top here should have the best idea – but continuing opacity in decision making processes gives us no reason to expect improvement – we can but hope for it.

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  9. Moules: I’m sorry I didn’t properly define the “China Model” or the “American Model.” I was working with the Economist’s post, which also left them unclear. That was an oversight on my part. I don’t think it’s easy to define either of them, which is probably why both the Economist blogger and I lazily side-stepped the issue.

    The main point that I was trying to make was that the Economist can’t argue that the Chinese model is weaker simply because it depended on foreign consumption for growth. Each country faces a different set of problems and while all economies are interconnected, it does not mean that there is a one-size-fits-all economic model.

    Laissez-faire is a contentious term and I was using it as the other post did, to mean a government that rarely intervenes in the economy. This model is more theoretical than anything at this point.

    I also didn’t mean to imply that the China model, that is, one with more extensive government intervention, is superior to any other, but simply that it may be what is necessary for China at the current time. In the future, however, it seems almost definite that there will have to be structural changes to maintain growth.

    The political question you posed at the end is interesting. The current system has advantages built-in for the big cities and certain industries, but I’m not sure that less regulation and reduced intervention would result in a more fair distribution of resources. Over the last 30 years in the US, the richest 1%’s share of national wealth has increased from 11% to just over 22%. This pattern may not continue because, as Michael Pettis notes, economic crises often result in a more even distribution of wealth. It will be interesting to see if that holds true for this one as well. Hu Jintao is a member of the political faction that with a rural base (unlike Jiang Zemin and Xi Jinping). The fact that there has been almost no attempt to reduce the urban-rural income gap (which is currently at its greatest disparity since the reform and opening) under his government does not bode well for the future.

    Thanks for pointing out some of the flaws in my argument. I need people like you and the other commenters to keep me on my toes.

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  10. I think that both the US and Chinese model are quite far from Laissez-faire. In China, this is obvious. In the US, ironically, with the decline of government regulation and the advent of electronic communication since the late 1970s, there is more and more power in the hands of a small group of people who exercise a lot of control over the market and the way it is/isn’t regulated. So, the market in the US is far from being free (it is important to note, however, that this ‘group’ is not constant and that different people enter or leave it based on their ‘achievements’).

    Personally, I think the ideal model is somewhere in the ‘middle’: The market knows best, but the public should be influence the economy from the bottom through common ownership of corporations, shared decision mechanisms, and a better connection between ownership, management, and employees and NOT through government control. In this way, the economy can grow (or decline!) to its optimal level, while income and POLITICAL power is spread more evenly.

    Economic and political power are inseparable.

    There are also other, global issues at play that cannot be left out of any serious economic discussion. We live in a world in which the GDP of 4 million Norwegians is about 40% of the GDP of more than 1 billion Indians. Originally, this should not have bothered anyone but Globalization means that an Indian needs to pay like a Norwegian for basic resources (oil, wheat, iron, even water). It also means that the hourly wage of a Norwegian needs to compete with that of the Indian. Everything becomes a commodity, which means the world will either become one huge working-class controlled by a few people with power, or that a fundamental change will take place.

    In any case, it will be interesting.

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  11. This type of analysis is always going to be problematic. The economist article, as usual makes good points, with some possible weaknesses. However, there are so many ways to argue on both sides of this issue. The Chinese model, for one thing, has a huge advantage in that it’s growth is relative to the overall backwardness of the China. When you have been doing things wrong for so long it takes decades, maybe centuries to “develop” a nation.

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  12. We are all fast becoming members of the Generation-E (Environment, Energy, Equity, Enterprise and E-commerce). There are both threats and opportunities presented to us. It is also the major reason why we should “Skill-up and Power-down” in the not-too-distant-future. The following article might be relevant for our deliberations: http://tinyurl.com/p62o69

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