Book 1 and Book 2 Watch

There's another Chinese saying, "the hills are high and the emperor lives far away."

China was until recently (and arguably still is) working to consolidate control over what goes on in the provinces. It's taken almost 30 years to achieve something like compliance with the one-child policy, which was a top priority of the central government.

Deng Xiaoping may have wanted to be just as parsimonious with freedom as the Politburo was, but his ability to impose rules fell with the inverse-square of their subjects' distance from Beijing.

Likewise, China entered the communism game thirty years later than the Russians, but started getting out a few years sooner. 30 years versus 60 is a huge difference when the human lifespan is a factor.

Last, Deng and many of the other senior cadres who took over when Mao died had seen a lot of bad times during the Cultural Revolution and even the Great Leap Forward. Where Gorbachev et. al. probably aspired to rolling the clock back to the mid-60s or so, the Chinese didn't have as much memory of communism as a system that worked well. That would only come after liberalization.

Actually, it wasn't just Paul Gregory who wrote this: it was Paul Gregory and Kate Zhou.

This may be a simplier explanation. Today Russia's GDP per capita is about $15K. China is $5K (using a quick google search).

China's reforms have done so well because China was starting at the bottom. When you're sowing your field by hand, adding a donkey to your capital next year will boost your yield dramatically. Adding a used tractor next year will likewise keep boosting your income.

China has a lot of room for growth because its has a lot of room to asorb very basic capital. As that capital soaks into the ground, it will become more and more important for added capital to be invested wisely. At this point, the flaws between Russia and China's systems and a market system become more noticeable.

When the USSR ended, Russia had a lot of capital already. There was no easy gains to be scored by simply letting the peasent have a tractor, so to speak.

This would also explain why China is industrializing so much faster than other countries in history like the UK, US, and so on. China is racing down a path that has been well trodded. At least as far as basic industrial investment goes, what works is well known. As long as those basic market systems are in place, it can happen in China at a rapid clip and with healthy returns.

What remains to be seen is what happens when you move beyond the basic roads and factories type of industrialization. Will their system of economic but not political freedom work as social capital and services become a more important product than industrial output?

BTW, a 50 or 100 year Treasury bond would seem to be a good instrument to short inflationary expectations since I'd expect its price to be hyper-sensitive to inflation.

Here is a suggestion. Don't use Book 1 and Book 2. I read your blog, I might even read one or both of your books, but I can't remember which book is which. Yes, I know you often remind us, but it is still annoying.

I should bookmark this post for the next time you assume that deregulation and privatization is automatically equal to decentralization.