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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
Yes, MR is not blocked now, but was for quite some time, at least in Shanghai. It was a strange addition to the banned list; no other smaller sites of a political nature ever seem to be blocked, other then the aggregation sites, like typepad. What did you do??
I have watched this for awhile; 5 years ago the NY Times, South China Morning Press, and others would get blocked for a couple weeks at a time, and there would be shorter periods of even larger blackouts. Since then it has changed, with much more access and fewer clampdowns.
Eventually there was the typepad blockage where Brad Delong was out of commission for a couple weeks, that was tough on me, and sites like blogs dot com were blocked for awhile as well. Of course work arounds are easy but still its a pain in the butt. These days things are pretty open all around, and that is the general trend I have seen.
I am counting on a modest real estate bubble burst in the next five years, but have to disagree with the big crash you envision. Overall this is definitely upswing time, I just cannot see your scenario coming to be. But we will see.
Incidentally I share your concern about the US economy. But the China economy has too much gravity all by itself at this point to be seriously hampered by a minor crash in the US.
Posted by: Optimality at Mar 1, 2006 11:53:21 AM
I am not sure that we will see anymore "bone crunching" depressions again (barring some sort of obscene catastophe, Nuclear war, black plauge ect).
The reason is that repressions happen all the time and are usually localized phenomena. Depressions are caused when a recession becomes worsened by government
action. In a Global Economy like the one we have now, imperfect knowledge is less of a factor, and capital can flow instantly any place in the world.
Supply and demand ensure that surpluses (in goods, or capital) can also flow to where they are needed.
IMO, we are past the stage of a world wide great depression ever happening again, unless of course, the Nations of the world turn toward protectionism.
Posted by: Kyle N at Mar 1, 2006 6:18:21 PM
So, if one can't predict that China's amazing progress will continue without even a little business cycle burp now and again.... well then, we are to be consigned to the huge flock who proclaim China to be headed towards "crack up"... with the only question being when?
This dire scenario (possibly quite dire for us too, as you point out) seems to hang a lot on the amazing estimate from USB that no more than 30% of their economy is private. But few who do business in China would find that a plausible number unless one excludes the entire production of firms that are partly or slightly owned by various government agencies.
Charlie Rose has some remarkable interviews this week from India (see his website) and the billionaires there attribute much of their "take off" to continued economic liberalization and getting their savings rate up from the low 20's to the high 20's.
Meanwhile China's savings rate is about twice that and they introduce new liberalizations several times a year!
Professor Cowen, you have so often celebrated the details of the continuing "Chinese Miracle" and the vision of really, really, poor people gaining access to the worldwide cornucopia.... what's so different now?
Have you seen a single major change in the Chinese formula that suggests a larger role for the state than what has brought them to where they are? Is there any evidence that corruption is getting worse? Where is the dynamism in this pessimistic model?
Posted by: Dave Meleney at Mar 2, 2006 3:38:52 PM
How is it that if one can't predict China's amazing progress will continue without so much as a business cycle burp.... well then, we are consigned to the huge flock who proclaim China to be headed towards "crack up"... with the only question being when?
This dire scenario (possibly quite dire for us too, as you point out) seems to hang a lot on the amazing estimate from USB that no more than 30% of their economy is private. But few who do business in China would find that a plausible number unless one excludes the entire production of firms that are partly or slightly owned by various government agencies.
Charlie Rose has some remarkable interviews this week from India (see his website) and the billionaires there attribute much of their "take off" to continued economic liberalization and getting their savings rate up from the low 20's to the high 20's.
Meanwhile China's rate is about twice that and they introduce new liberalizations several times a year!
Professor Cowen, you have so often celebrated the details of the continuing "Chinese Miracle" and the vision of really, really, poor people gaining access to the worldwide cornucopia.... what's so different now?
Have you seen a single major change in the Chinese formula that suggests a larger role for the state than what has brought them to where they are? Is there any evidence that corruption is getting worse? Where is the dynamism in this pessimistic model?
Posted by: Dave Meleney at Mar 2, 2006 3:53:11 PM
What worries me about China is that their business and environmental policies allow them to eat their seed corn while appearing to grow.
The loss of topsoil in China is appalling. If those more than a billion people are going to eat more meat, how will that be maintained as their potential agricultural output declines. I am not talking here about actual output from year to year, but rather the ability of the system (farmland, roads, distribution) to continue to deliver. China is trashing its farmland.
Pollution is rampant in China. They are planting trees in rows 1 mile, 5 miles and 10 miles etc from Bejing in anticipation of the Olympics. The coal dust is so bad that they have to plant trees to capture the dust before it reaches Bejing. Otherwise the athletes from the richer countries will see their clothes covered with coal dust and will see their performances decline from the residue of coal dust in their lungs. Not a pretty picture for the Chinese. They are able to produce at a lower price than us because they ignore so many externalites. Coal miners die at a daily rate that matches the US annual rate. Workers are injured or blown up in plants and are just replaced by the millions coming off the farms.
I do not see how China solves these problems without a huge disruption to their economy. Which will impact ours negatively as well. And who will feed China? Not us, that is for sure.
Posted by: Murphy at Mar 3, 2006 9:37:35 AM
think postitive about china auto industry
japan to 40 years to become big in auto world
korea took 15 years to become big in auto world
china will take 5 years!!!!
http://www.chinacarforums.com
Posted by: ash at Mar 3, 2006 5:15:52 PM
From my time in China I see the following challenges:
SOE (State Owned Enterprises) don't make money. Yet have to be kept afloat because they provide employment and the SOE also provides crucial social services, schools, pensions, etc. Massive amounts of money are leveraged from the private sector in one way or another to prop these failing SOEs.
The rural-urban divide; and the coastal-inland divide which is really the same thing. It's staggering to see the divide in amenities like power, water, sewage, roads etc. The country already has a staggering amount of internal immigrants to the coast.
The danger of regionalism, always historically present, and exacerbated by wide economic disparities between the wealthy coastal south and impoverished, Muslim West.
Ripping off foreign investors, in large ways and small, relying on them to continue to invest in the hope for growth.
Indeed if growth starts to tail down, or forecasts show limited economic growth, expect a lot of investors to bail to the extent that they can. Intellectual property in China is more an interesting theory than anything else, and the levels of corruption are staggering.
Corruption. The hidden tax on business in China is corruption. Party officials MUST be paid off, usually through a family member as a "consultant" or something.
Posted by: Jim Rockford at Mar 6, 2006 2:45:17 AM
I think for all the ills and problems we read about, it really boils down to this question:
Can the government simply manage economy to simply outgrow the problem or is the various ills going to eventually catch up and overhelm?
To make an analogy, ideally it is better to eat right and exercise to stay healthy, but there are various diets that you can perform to keep the weight down. Incidentally there is as much debate about various pros/cons about diets as there is about Chinese economy.
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Posted by: gytuk at Sep 14, 2006 1:53:50 AM
If those more than a billion people are going to eat more meat, how will that be maintained as their potential agricultural output declines.
Um, perhaps they'll import meat from elsewhere?
Posted by: Jasper at Mar 2, 2007 8:09:04 PM
Hi guys, I am a guy from China studying economics in US now. I happen to see fogel's comments and then saw so many misunderstandings here. I wish my comments could serve to be a somewhat other side of the story.
First of all, little complaint: the war against Japan was merely defense, not caused by Chinese ourselves and the civil war ended pretty fast and not really devastating compare to the war against Japan. The following revolutions were indeed very very bad. But what do you expect a country so closed to itself thus fell behind the rest of the world and being constantly invaded for more than a century by foreign powers? People in China at the time were indeed ignorant at today's standard and compared to the western world at that time.
Secondly, as I found in many Westerners' comments: it seems that everyone in the western world think that the political progress is such an easy thing to do that the good political environment in the west now were there from the beginning. I was born in 1984, as I remember the living standard were in a constant and dramatic increase. To me and to many Chinese ,I think, political problems and economic problems are both important problems, but as people's resourses and sinue and attention are limited, I would say economic problems deserve somewhat more weight on it. Besides, as I am now more familiar with the politics in US, I would say politically, China is on the right direction.
Thirdly, it is simply not the case that a country has to be politically perfect (say, for example has to be multipartied or 0 corruption) to foster a healthy economic growth. To my knowledge, well streat and washington were not so clean at the time when US economy took off after the civil war. And democracy is not all-heal medicine. Remember people in many democratic countries are not necessarily happier than those living in the not so democratic countries. CCP is not good, but it is not that bad as known among many westerners.
Lastly, please, please don't presume people in another country is stupid. At least, due to the opening up to the rest of the world, and through more education (and internet for example) average Chinese are far more open minded and smart then you guys expect. And don't try to speculate those, say, who invest heavily and continuously in China are just stupid to be fooled. In many case as I know, it is the local government who is fooled by some "investors".
Personally I am confident in China's development both politically and economically, though maybe not as confident as Mr Fogel. The above are some "other side of the story", I hope you would find it somewhat interesting.
Posted by: Chao He at Jul 18, 2007 2:25:46 AM
