Arnold Kling  

Book 1 and Book 2 Watch

Debt Rollover and Inflation... Question for Recalculationists...

Paul Gregory writes,

China and russia in the 1980s offer a unique case study in why some reforms work and others do not. The contrast refutes the notion that a strong, perhaps totalitarian state, is required for successful reform. In the Russian case, a one-party state attempted to impose reform from above and failed. In China, a one-party state opened the economy but resisted grassroots reforms, which it grudgingly accepted after their success could no longer be denied. For decades, a small group of Russian liberals lobbied in vain for reform. They finally got their chance when a reform-minded party leader was elected, but there was no real constituency for reform. In China, there was a massive grassroots constituency which clearly understood reform's potential benefits. They acted quietly on their own, according to the Chinese saying, "Do more but say less; do everything but say nothing." The Chinese rural population, as outsiders, had nothing to lose. With more than 80 percent of Chinese people pushing for change, reform could not help but penetrate the social and economic psychology of the Chinese mind.

His thesis is that China's reforms succeeded because they came from the bottom up, but Russia's reforms failed because they came from the top down. The issue of decentralized order vs. central plans is a main theme in both Book 1 and Book 2. In From Poverty to Prosperity, we talk about what William Easterly calls the difference between "searchers" and "planners" (and we interview Easterly). In Unchecked and Unbalanced, I talk about the discrepancy between dispersed knowledge and concentrated power. My goal is to interest people in bottom-up reforms.

COMMENTS (6 to date)
Colin K writes:

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.

David R. Henderson writes:

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

Boonton writes:

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?

Boonton writes:

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.

Mike writes:

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.

david writes:

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

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