Why China Might Fail

I found Scott‘s post very confusing, for many of the same reasons discussed here by Noah. [1] Scott says:

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore(or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

First of all, what I agree with in the post. China is poor and has for the last 40 years not been run by bloodthirsty foreigners or a psychotic madman. Growth from the abject poverty that was 1970s China is inevitable under those conditions. What is clear from Scott’s post is that China’s growth has very little to teach the wealthy West other than “don’t let genocidal maniacs into government” something we learned the hard way a little while ago.

Scott seems to think that China has got its act together and that it isn’t in anybody’s interest to derail its development. Things will be better for everyone when China is like Singapore and therefore we shouldn’t worry that China’s growth will decline disastrously or go into reverse. Technocrats are good! Just like the technocrats in the Fed…oh never mind.

Although I kinda agree that China looks like it has a good culture, strong infrastructure and abundant human resources, so did Argentina 100 years ago, and look what happened to them. What matters are institutions, Argentina’s stank and so do China’s. I am curious that Scott seems so keen to give a clean bill of health to China’s crony-capitalist economy and dictatorial, judicially-repressed polity.

I think he is being naive. Elites rarely do the right thing because they are oh so wise, they do the right thing if they are forced to.

Think about China this way: Whether its Township and Village Enterprises or Foreign Direct Investment into Free Economic Zones, a significant proportion of the growth which China has enjoyed has been controlled by the Chinese Communist Party. Not control as centrally planning, but control as the ability to cut of freedom of action of each. This ability to cut off these developments has kept party chiefs on the same side as China’s bourgeoisie.

It becomes difficult to keep control of growth when you hit middle-income – the low hanging fruit has been picked. One reason Michael Pettis is so worried about Chinese is that consumption repression has always been at the heart of the Chinese growth model. This has been fine for capitalists operating export orientated firms or contractors building infrastructure or real estate, but again places great power in the hands of China’s elites. To reverse this would require a massive transfer of wealth and power from political control to private control. I think Scott underestimates how much the Chinese Communist Party fears the consequences of this.

You can see this in the security apparatus of the Chinese State and its repression of free speech and its tight grip on the internet. they know that as their population gets wealthier they are going to demand more freedoms and more political representation; likewise they are going to demand more economic freedom and more social mobility, something which by definition must damage the interests of the current ruling elite. Powerful magnates will arise to  challenge the power, wealth and status of the current Chinese elite.

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients.

Scott says that he cannot see a stable China with a middle-income coast and a poor interior. You can be rich and surrounded by poverty, look at North America! Just look at it! Its been rich and surrounded by poverty for centuries. China still operates a hukuo system of local registration which until very recently prevented anyone from moving anywhere without official say so. You think the Chinese can’t stymie growth by reintroducing the hukuo system of internal border control? Urban Chinese still seem pretty dismissive of “farmers” judging even by the international lot I meet at LSE.

We’re back to my new favourite book to think with: Why Nations Fail. Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right. The point isn’t to describe how China will fail, I’m not sure it will, but only to highlight that there are powerful pragmatic reasons for those in power to want China to fail.

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[1] I will not that Noah has still not commented on my rebuttal of his bullish post on the potential for Chinese industrial espionage. Noah should note that I argue Scott is wrong for the same reasons I argue he is wrong. They both slightly misidentify how the drivers of long run growth operate.

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3 thoughts on “Why China Might Fail

  1. Unless China manages to sort out its social inequalities, no amount of economic prowess will ever be enough to propel it above America

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