Scott Sumner  

China's always been poorly governed

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I often get annoyed reading articles claiming that China has an economic model that others should emulate. China is a poor country, not just compared to the US, but even compared to Mexico. Even if you believe poverty reflects factors outside of policy, such as cultural difference, China does relatively poorly against most of its (Confucian) neighbors, obviously aside from North Korea. It's always been poorly governed, not just relative to places like Denmark and Switzerland, but also relative to Taiwan and South Korea. Thus I'm gratified that the media if finally beginning to figure this out:

Stock market and currency turmoil has battered Chinese leaders' reputation as shrewd economic managers and fed doubts about their willingness to push through more wrenching reforms.
And here's the Financial Times:
China has set up a new cabinet office to co-ordinate financial and economic policy, a tacit admission that its ad hoc and disjointed policymaking is failing.
It's unfortunate that it took a so-called "crisis" for people to see this point, as the government has been shoveling vast quantities of cash into inefficient state-owned enterprises (through state-owned banks) for decades.

People are often fooled by China's growth rates. But when you start from a position poorer than sub-Saharan Africa, and an economic model similar to North Korea, it's not hard to grow fast has you transition from horrendous Maoist policies to a mediocre mixed economy model. Most of the growth has come from the private sector, which thrives despite the Chinese government, not because of it.

Despite my negative view of Chinese policy, I am optimistic about China's future, as their government continues to gradually reform, making their economy a bit more market-oriented each year. (They recently announced a plan to deregulate airlines.) But there is still a great deal of work to be done.

As in other large diversified economies, the year-to-year fluctuations in growth largely reflect changes in NGDP growth, i.e. monetary policy. The consensus calls for 6.4% growth in 2016, which is probably too optimistic. I think the consensus underestimates the drag caused by the Chinese reluctance to devalue the yuan, which I believe will drag growth down to 6%.

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COMMENTS (11 to date)
Pajser writes:

Scott Sumner: "But when you start from a position poorer than sub-Saharan Africa, and an economic model similar to North Korea, it's not hard to grow fast has you transition from horrendous Maoist policies to a mediocre mixed economy model."

It sounds reasonable, but it is not obvious. In 20th century, Western Europe vs world average GDP/capita (PPP) changed from 2.3 to 3.2. Similarly for Western offshoots. Therefore, it was not easy to poor countries to progress faster. China in Maoist period 1950-80 actually progressed (by same measure) slightly, but significantly faster than world average and Eastern Asia average.

David Friedman writes:

On China, I highly recommend How China Became Capitalist by Ronald Coase and Ning Wang.

LD Bottorff writes:

Although China is ranked "Mostly un-free" in the index of economic freedom, it is certainly becoming more free than it was during the 1940-1970 period. It hardly matters that by some measure its growth was better than average; its citizens were being killed or allowed to starve by an evil Maoist government.
This is a testament to the power of freedom. Many critics of libertarianism point out that a truly free society has never existed. True enough, but just a little more freedom in China generated tremendous growth. A little less freedom here in America has made our latest economic recovery one of the worst since the Great Depression.

Emil writes:

The law of diminishing returns truly one of these things that are both obvious once explained and massively difficult for 99.9% of us to actually understand

E. Harding writes:

"I often get annoyed reading articles claiming that China has an economic model that others should emulate."

-Scott, those others are typically African countries. And they're doing way worse than China. They would surely benefit by adopting Chinese economic policies.

Pajser is right, BTW.

Scott Sumner writes:

Pajser, I don't agree that China grew faster than East Asia in 1950-80. In 1980 it was still poorer than India. If it had grown at the extremely high rates of Japan, Korea, Taiwan, HK and Singapore it obviously would not still have been desperately poor in 1980. As in the Soviet Union, the Maoist growth data is unreliable. I recall a professor telling me in 1980 that Romania had been one of the fastest growing countries in the world in recent decades, a claim we now know was nonsense.

That's not to say China didn't grow significantly, as in 1950 they'd just come out of decades of civil war. But in relative terms they had fallen well behind the other Asian tigers, which is why Deng opened up the economy.

David, Yes, an excellent book. My favorite economics book written by a 100 year old economist.

E. Harding, Why not have them emulate Singapore? Or Switzerland? Aren't those two countries far more successful than China? You might say (perhaps reasonably) that those countries are not capable of emulating Singapore. Then why assume they could emulate China?

One reason I don't think China is a model for others is that the Chinese realize that they are not even a model for themselves. Off the record, Chinese officials admit that China must change, the current model is running out of steam.

Pajser writes:

Scott Sumner, the data I cited is published by Maddison project, which seems to take all available literature in account. Maddison wrote about problems with collecting data about "communist countries" and actually, believed that CIA provided very good estimations.

You wrote that we know that it was nonsense that Romania was one of the fastest growing economies in period prior to 1980. I do not know that it was nonsense. How do you know that?

David Iach writes:

Scott Sumner, what model should African countries try to emulate in your opinion? And should there be different models for different countries?


LK Beland writes:

"Why not have them emulate Singapore? Or Switzerland? Aren't those two countries far more successful than China?"

They could start by emulating post-1990 Chile. 6.5% per capita GDP PPP growth since 1990. It went from 25% of the US level to 42%. A real success story, which involved its fair share of natural ressources exports. Probably a more or less decent model for African countries. (Canada and Australia, of course, are probably better models).

Scott Sumner writes:

Pajser, After 1989 there was a general re-evaluation of growth rates in the Eastern bloc, and experts became very skeptical of the reported figures. When Romania opened up to the West, it certainly didn't look like a country that had grown rapidly during previous decades, it looked like a basket case. Having said that, I can't prove the numbers were wrong, but I think that's the general consensus.

I realize that Maddison has the most comprehensive data set, but when I looked at some of his numbers I saw some pretty clear problems.

In any case, regardless of what the actual numbers were for China under Mao (which we'll obviously never know for sure) no one can dispute that Maoist economic policy was a horrendous disaster. Accounts of life under Mao are almost unbelievably depressing. Even in the late 1970s there was widespread hunger. I don't see how it could have been having "tiger" like growth rates over the previous 30 years.

David, I'm not a fan of simply picking a model. Rather I'd suggest that they judge policies on a case by case basis, and try to pick those that are most appropriate for each issue. In most cases I think free market policies are best. As an aside, I don't think the main problem in the world is countries not knowing what model to follow---for instance the North Koreans certainly understand that the South's model is more efficient. Rather the key problem is corruption, leaders enriching themselves at the expense of the public.

LK, Good point.

David Condon writes:

I think that they're implementing the changes they are aware need to change is a sign of better governance than a lot of other countries. They started at communism and look where they are now. Gradual improvement will eventually win the day. No their economic model should not be emulated, but their governance model is promising.

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