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China skepticism
How long will it take before China cracks up?
To most Western observers, China’s economic success obscures the predatory characteristics of its neo-Leninist state. But Beijing’s brand of authoritarian politics is spawning a dangerous mix of crony capitalism, rampant corruption, and widening inequality. Dreams that the country’s economic liberalization will someday lead to political reform remain distant. Indeed, if current trends continue, China’s political system is more likely to experience decay than democracy. It’s true that China’s recent economic achievements have given the party a new vibrancy. Yet the very policies that the party adopted to generate high economic growth are compounding the political and social ills that threaten its long-term survival...
The Chinese state remains deeply entrenched in the economy. According to official data for 2003, the state directly accounted for 38 percent of the country’s GDP and employed 85 million people (about one third of the urban workforce). For its part, the formal private sector in urban areas employed only 67 million people. A research report by the financial firm UBS argues that the private sector in China accounts for no more than 30 percent of the economy. These figures are startling even for Asia, where there is a tradition of heavy state involvement in the economy. State-owned enterprises in most Asian countries contribute about 5 percent of GDP. In India, traditionally considered a socialist economy, state-owned firms generate less than 7 percent of GDP.
Here is much more, and I will go on record in agreement. More specifically, how about a bone-crunching, bubble-bursting, no soft landing, Chinese auto crash-style depression within the next seven years? This is also my biggest worry for the U.S. economy, I might add.
If you are not convinced, raise your right hand and repeat after me: "China in the 20th century had two major revolutions, a civil war, a World War, The Great Leap Forward [sic], mass starvation, the Cultural Revolution, arguably the most tyrannical dictator ever and he didn't even brush his teeth, and now they will go from rags to riches without even a business cycle burp." I don't think you can do it with a straight face.
Had I mentioned that Yana and I are going to Shanghai in April? I'll ask you all for tips when the time comes. I hear MarginalRevolution is banned there...
Posted by Tyler Cowen on February 28, 2006 at 07:33 AM in Current Affairs | Permalink
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Comments
I fear for China's path to economic success. As it is they are living beyond their means. With such a large population economic growth will mean consumption growth - something this planet cannot take more of.
But it must be remembered also that China's economic expansion ideals are basically a copying of Western neocolonial ideals, something Western observers do not want to see because it is to their benefit.
Posted by: signature103 at Feb 28, 2006 7:43:19 AM
Hear, hear!
Posted by: A Tykhyy at Feb 28, 2006 8:10:50 AM
"If you are not convinced, raise your right hand and repeat after me: "China in the 20th century had two major revolutions, a civil war, a World War, The Great Leap Forward [sic], mass starvation, the Cultural Revolution, arguably the most tyrannical dictator ever and he didn't even brush his teeth, and now they will go from rags to riches without even a business cycle burp." I don't think you can do it with a straight face."
:-D
Laughing loudly throughout the open space where my desk is.
Seriously, there must be bumps on the road. Wasn't China in a recession by the end of the 1990's despite official (= fabricated) GDP figures?
Posted by: Pavel at Feb 28, 2006 8:29:10 AM
Tyler, just for clarity: when you say "this" is also my biggest worry for the U.S. economy," do you mean an auto-crash style despression in China, or here in the U.S.? Are you worried that a depression in China will wreck the U.S., or that we're liabile to wreck all on our own?
Posted by: Ogged at Feb 28, 2006 9:12:51 AM
Let's not forget the potential for a significant Muslim fundamentalist uprising and a major flu epidemic.
Posted by: Ted Craig at Feb 28, 2006 9:19:07 AM
I am worried that a Chinese crack-up will have repercussions for the U.S..
Posted by: Tyler Cowen at Feb 28, 2006 9:32:09 AM
The same can be said - with only slightly less force - regarding India. The events are less dramatic, but the culture they've bred - one of pervasive beaurocratic indolence - is just as sticky.
Posted by: Chris Stiles at Feb 28, 2006 9:37:23 AM
I worry about China too. But couldn't we construct the same kind of scary oath about the Unites States at various points in its history? Take the 100 years roughly from 1865 to 1965, give or take. Slavery, bloody civil war, panics, Indian displacement, corruption, unbridled growth, massive immigration, flu epidemic, a couple of world wars sandwiched around the Great Depression, then the unrest and social revolution of the Sixties. All this and we seem to be doing okay. I'll admit there's a very different political culture here of course.
Posted by: Dan Akst at Feb 28, 2006 10:06:34 AM
Of course you can't say it with a straight face. Between the teeth brushing, burps and the "[sic]" it's just too funny. :-)
Posted by: Macneil at Feb 28, 2006 10:14:04 AM
The US is a very different case because America did go through many tough iterations of the business cycle and periods of social unrest in the 20th century without any abrupt regime change or breakdown in the basic political institutions.
It is not clear that the Chinese could even deal with a period of stagflation or recession (at the same or greater level as the US experienced in the early 1980s) without some kind of political blowup involving calls for reform as well as temptation to revolt or crack down. At the very least we'll get a better sense of how many cracks are being papered over if things turn down.
For what it's worth, I don't see the Chinese being quite as peacable as the 1990s Japanese have been since their bubble burst.
Posted by: John N at Feb 28, 2006 10:22:29 AM
There are always going to be two main China camps: "The China is going to bust camp" and the "China is
going to take over the world camp." Both are going to be true to a certain extent because China will have
its ups and downs. But in the long run, China is going to be just fine and within ten years we will have
moved on to another country to fret about.
Posted by: Dan Harris at Feb 28, 2006 10:24:43 AM
How long did it take Nazi Germany to crash? If I were living in Asia or the western pacific, I think I'd be moving (not that the rest of us should feel safe). Do you think China is going to "peacefully" implode like the soviets?
Posted by: Keith at Feb 28, 2006 10:26:50 AM
I was in Shanghai a few months ago and MR was visible.
Posted by: Frew at Feb 28, 2006 11:28:14 AM
Here's an investor noting the environmental externalities that Communist China's heedless pursuit of growth is causing:
Click on Big Trouble in Big China, article is page 2-7
http://www.aireview.com/welcome.php
Anyone care to go on record for the recession starting September 2008 (same month as the Beijing Summer Olympics)?
Posted by: Bond investor at Feb 28, 2006 2:42:49 PM
I understand the point, but you could have written that sentence in 1980. Is there a good history of the subsequent years that explains how this total basket case managed to turn itself around?
Posted by: weichi at Feb 28, 2006 3:07:28 PM
What about breaking up into smaller countries/
territories?
Posted by: Sandy P. at Feb 28, 2006 3:23:21 PM
It starts breaking up, mfg. will come home.
We still need trinkets made.
Posted by: Sandy P. at Feb 28, 2006 3:25:43 PM
China has become extremely hard to forecast. Clearly there is a whole host of problems, many of them listed in the original post and others mentioned by discussants here. Lacking democracy, many of these are not easily resolved politically.
OTOH, the recent economic performance of China is unprecedented and keeps blowing away the forecasts. For several years it appeared that China was overstating its GDP growth, in good old fashioned socialist tradition. However, more recently if anything the evidence is the other way, that they may have been understating it. Now, for lots of reasons we would expect it to slow down, even if China does not have a revolution or break up politically (not holding my breath on that last one). But, one might hold one's breath for some time before it does.
The hard fact is that despite lots of ugliness associated with it, including ongoing political repression, Chinese growth is continuing and may even accelerate in the near term. Its weird "market socialist" economy is actually working very well, and so far keeping at least one step ahead of a variety of environmental, distributional, institutional, and political devils.
Posted by: Barkley Rosser at Feb 28, 2006 4:23:33 PM
I'm in Shanghai. No problems accessing Marginal Revolution. Drop a line if you want tips or would like to meet up for coffee or tea to talk about China's impending crises or lack thereof.
Posted by: Calvin at Feb 28, 2006 5:25:21 PM
Via Dailypundit:
The US Director of National Intelligence, John
Negroponte, warned that China's steady military and
economic expansion may ultimately lead to Beijing
attaining superpower status on a par with the United
States.
"Globalization is causing a shift of momentum and
energy to greater Asia, where China has steadily
expanding reach and may become a peer competitor to
the United States at some point," Negroponte said at
a hearing of the US Senate Armed Services Committee on
global security threats.
Posted by: Sandy P. at Feb 28, 2006 5:35:44 PM
When you refer to state contribution to GDP you're talking companies like Baoshan Steel, Petrochina, Sinopec, etc.
So the real question is: how crooked are the biggest H-share listed companies in China. I think they're a vast improvement on old town and village enterprises and the like but they're certainly not GE.
As for whether China can or will become belligerent remember that its population is ageing rapidly due to the one child policy and parents have generally 1 child and only one son - you can imagine the reception of a war where China put every family's only son at risk.
Travelling there and having lived there for a while, the real challenge is keeping the place together.
Posted by: Banker in China at Feb 28, 2006 8:09:42 PM
I'm Shanghai-based and this site, and other TypePad blogs, were blocked in China but became visible after TypePad conducted its server migration. What is bringing you to Shanghai?
Posted by: myrick at Feb 28, 2006 10:21:05 PM
Via Lucianne:
Is 'Made in U.S.A.' back in vogue?
Insiders say a manufacturing boom is underway in
California as U.S. retailers look closer to home to
offset the challenge from "fast fashion" sellers like
H&M and Zara.
-----
CAFTA and delivery times are more attractive.
Posted by: Sandy P. at Feb 28, 2006 11:17:30 PM
Yeah, I'm in Beijing right now and can view your site fine as well... hae fun in Shanghai!
Posted by: KawikaP at Mar 1, 2006 2:26:23 AM
I don't know about Shanghai, but I'm reading this on a mobile device while riding in the back of a Buick minivan in Beijing. Ahh, globalization...
Posted by: foobar at Mar 1, 2006 2:54:43 AM
