I don’t know why I get so annoyed by these endless debates over the “lessons” of the “Chinese miracle,” but I do. Here is Ezra Klein (and Matt Yglesias):
“Something that emerges quite quickly and a bit unexpectedly from being taken around on an economics-focused tour of China is that the Chinese economic miracle is really a great deal less of a ‘free market’ miracle than the conventional understanding in the United States would suggest,” writes Matthew Yglesias. That’s definitely correct, though it’s worth wondering why anyone thinks of China as a free-market success story.
It would really help if people stopped calling one of the poorest economies in East Asia a “miracle.” The problem seems to be that people insist on thinking in binary terms; free market or communist, successful or unsuccessful. Here’s what really going on.
1. In 1979 China had an incredibly inefficient communist system and was poorer than India, poorer than sub-Saharan Africa. It was an almost completely statist economy with incomes below 10% of US levels.
2. China has moved to a mixed economy. These reforms might allow China to eventually reach something like 60% of America’s per capita GDP (which isn’t very impressive.) During the transition from Maoism to this mixed economy, China can expect to grow really fast. There is no miracle here; all the other capitalist East Asian economies also grew fast during earlier decades. Chinese incomes will plateau well below US levels without further market reforms. If they take further market reforms (and it seems almost certain they will) then they may plateau at 80% of US incomes, like some other developed economies. If they go toward a low tax, relatively free market model (such as Hong Kong), they might even surpass the US some day.
3. East Asian countries with Confucian cultures that have much fewer SOEs are much richer than China, just as you’d expect.
4. East Asian countries with more SOEs than China (North Korea and Vietnam) are poorer, just as you’d expect.
5. Regions of China dominated by SOEs (i.e. the Northeast) have grown slower, just as you’d expect.
6. Regions of China dominated by private business, rather than SOEs (Zhejiang) have grown fastest, just as you’d expect.
What’s so hard to understand? SOEs are usually inefficient.
Of course there are many other complications:
1. The inefficiency of SOEs is not due to government ownership, but rather government subsidies and barriers to entry. Without those factors, SOEs can be highly efficient (see Singapore.)
2. There may be areas (such as transport) where the government should be involved. Ezra Klein mentions how good the Chinese government is at building infrastructure, and I agree. But that has nothing to do with whether the Chinese system of heavy state involvement in manufacturing and services is wise. It isn’t.
3. In a related post, Tyler Cowen makes a very good point:
It’s also possible that the successes of state ownership “decay” with time, as was arguably the case with the French model before the privatizations and has been the case with NASA in the United States.
I strongly agree. This is one factor that hurt the Soviet economy over time.
So to summarize, to the extent that China is a free market, it is an economic success, and to the extent it is statist, it is mostly a failure (excluding some sectors like transport.) But the question “Is the Chinese miracle due to a free market economy?” is nonsensical. It isn’t a miracle at all; it is a country rapidly transitioning from being extremely poor to having a so-so economy. That is all.
I want to personally apologize to Ezra Klein for the exasperated tone of this post. His post is no worse than 1000 other similar posts; I’m not even sure he disagrees with me. Indeed the conventional view in the US is wrong, just as he says. It’s just that I just get annoyed seeing the debate constantly framed this way.
BTW, Tyler also links to this Yglesias post:
By the lights of the American conventional wisdom, this whole situation seems mostly like a warning sign—beware! you’re violating the terms of The Washington Consensus!—but nobody can doubt that they’ve had a great run for the past 20 years. What’s more, though the prevailing policy consensus in the United States would lead you to believe that a country with France’s policies would necessarily be a basketcase, France is itself a very successful and prosperous nation and society. A crucial difference, however, is that the French economy takes place against the backdrop of the kind of social welfare provision that you see in all different kinds of European countries, something that’s overwhelmingly lacking in China.
There is some truth to this, but one shouldn’t push this comparison too far. The French state does seem to handle its duties better than almost any other bureaucracy. But let’s not forget that France also has a very strong private sector. China would have to do a massive amount of privatization to approach French levels of state ownership in manufacturing and services. France has private banks that lend to private firms (something pretty rare in China.) And the fact that even Mitterrand privatized French SOEs in the 1980s suggests that the French recognized that the old model was slipping. At some point the Chinese will have built up their infrastructure, and investment will slow sharply. Consumer spending will rise. At that point they’ll be much better off with a free market model, as compared to an SOE-dominated model.
One other point. Yasheng Huang (who knows much more about this than I do) argues that the infrastructure projects that impress Western businessmen, and even Western liberals, are very anti-egalitarian. He argues that more free market reforms are needed to improve life for the rural population, whereas instead the rural people are being exploited to build fancy 325km trains, maglevs, and ultra-stylish airports. Something to think about. Anyone who reads Huang will come away with a much different impression of China from what’s presented in the news media.