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  demand from American consumers and  the government’s manipulation of the currency, which has ensured Chinese products remain attractive to Western consumers.
- 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.
- 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:
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?