Arnold Kling  

China's Stationary Bandits

Red-Handed Ratchet Effect... Economics of Free Parking...

Minxin Pei writes,

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.

...Today, Beijing oversees a vast patronage system that secures the loyalty of supporters and allocates privileges to favored groups. The party appoints 81 percent of the chief executives of state-owned enterprises and 56 percent of all senior corporate executives. The corporate reforms implemented since the late 1990s—designed to turn wholly state-owned firms into shareholding companies—haven’t made a dent in patronage. In large- and medium-sized state enterprises (ostensibly converted into shareholding companies, some of which are even traded on overseas stock markets), the Communist Party secretaries and the chairmen of the board were the same person about half the time. In 70 percent of the 6,275 large- and medium-sized state enterprises classified as “corporatized” as of 2001, the members of the party committee were members of the board of directors. All told, 5.3 million party officials—about 8 percent of its total membership and 16 percent of its urban members—held executive positions in state enterprises in 2003, the last year for which figures were available.

Reading this reminded me of Mancur Olson's theory of the stationary bandit, about which Tyler Cowen has expressed skepticism.

The good news is that China's party members have a vested interest in economic success. The bad news is that they can interfere with the natural process of competition and keep funneling the country's vast savings into failing enterprises.

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CATEGORIES: Public Choice Theory

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The author at China Law Blog in a related article titled China Through Rose Colored Glasses, Darkly writes:
    ChinaLawBlog has already been accused of being too bullish on China and I admit I am generally optimistic about China and its potential. But, of course, I do recognize China has its major risks, some of which are nicely laid [Tracked on February 28, 2006 10:53 PM]
COMMENTS (9 to date)
daveg writes:

Yeah, and this is killing china's growth rate. They should just open up all their companies to foreign ownership and pull down all trade barriers, allow foreigners to buy land, newspapers, media etc.

They should also allow free immigration. Basically eliminate the borders of china.

I have no doubt this would improve the lives of all Chinese people and get them away from this sad 10% growth rate they are experiencing.

Patrick writes:

10% growth is not that impressive for a country with a per capita GDP far less than that of Mexico. China should be as rich as Japan today (which is to say, almost five times richer than it is now). That it isn't is a colossal tragedy.

john writes:

Any examples of countries with a higher growth rate, at any per capita GDP?

Ivan Kirigin writes:


is the suggestion that the central managers of China's economy are better than a distributed market system?

I would say the story in China is amazing growth despite the level of government intervention.

Further, if you look at the banking sector, where there are so many underperforming loans, it is clear that the current system is very unsustainable.

john writes:

So, you think China would be better off pursuing the policies listed by daveg? You seriously don't think such policies would cause huge social unrest, conflict and other undesired effects?

john writes:

10% growth is not that impressive for a country with a per capita GDP far less than that of Mexico.

Well from this (see link below) data 10% is the best you can find for any country (for year 2000), so I think you mispoke when you said 10% growth is not very impressive. It is extremely impressive for any country, but it is incredible for a country of 1 billion people. Simply incredible.

It would seem that a controlled economy can do quite well, if the right controls are applied.


john writes:

Another data point that stands out is Singapore:

Singapore: 10.1% (2000 est.)

This country has a reasonable per capita GDP and is about as far away from lassie fair as it gets.

Patrick writes:

According to this list, several countries have exceeded China's growth rate in 2005.

"Catch-up growth" is something often seen in poor countries, and China is still poor (per capita GDP of $6,200/yr--compare to Mexico's $10,000/yr).

I don't see why the size of China's population should make the rate of GDP growth more impressive. Both large and small countries have experienced rapid industrialization.

When Japan and South Korea underwent the same rapid industrialization, their growth rates were even better. The quality of their institutions was better than that of China (although they were, and remain to this day, worse than those of the United States).

However, institutional deficiencies are reflected less in growth rates then they are in the level of affluence achieved once the catch-up growth is over. Whereas Japan has settled in at about 70% of the per capita GDP level of the U.S., China won't make it that far absent stunning reform.

Yes, a controlled economy can do "quite well," if that means grow fast for a while before bogging down at a level of affluence far below that of its neighbors with more liberalized economies.

john writes:

Hmm, lots of example of high GDP countries with high growth rates and highly protected and nationalistic economies as well.

A very good one is singapore:

purchasing power parity - $27,800 (2004 est.)

You also have Japan, S. Korea, Germany, Israel, as well as the Nordic socialist countries.

So I remain unconvinced.

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