Evan Soltas on Chinese economic reforms
Evan Soltas has a very good post on Chinese reforms:
. . . China realized it faced a fork in the road: market reforms which will cut deep and make it effectively converge with capitalist economic models, or an alternative, which Bo represented, to “turn back” and reaffirm older values of egalitarianism and state-led development. The choice has now been made decisively. It wants to be South Korea.
China’s leadership will undergo change this year, with the exits of Hu Jintao and Wen Jiabao for (presumably) Xi Jinping and Li Keqiang, respectively. You should know that both Xi and Li are seen as substantially more free-market than their predecessors; this is both a generational thing in China and their particular political orientations. (See here and here.)
Furthermore, there’s been a lot of very important quiet stuff going on; the sort of change-the-world news that gets somehow put in the back of the news section. For example, today the Chinese government has decided to liberalize currency trading significantly, according to The New York Times:
“The People’s Bank of China, the country’s central bank, said that effective on Monday it would allow the renminbi to fluctuate up or down in value by as much as 1 percent against a fixed benchmark with the dollar during daily trading…Increasing the allowed range of daily volatility could increase the renminbi’s role in international financial markets.”Another thing you probably missed was the relaxation of capital controls, reported in late March. This is a very big deal because it shows how these reforms are beginning to pile on top of each other — there’s very much a point-of-no-return in liberalization (barring turmoil or outright regime change), and China is nearing it.
I call this the Korea model. Why? It’s because the Jinping-Keqiang wing of the Chinese Communist Party is looking more and more like the story of the South Korean “Grand National Party,” recently renamed Saenuri. Like China, this Korean party began with state-led export-oriented growth under Park Chung-hee, and Park’s successors have clung to this strategy. (I’ve done some reading up on this.) Since then, Korea has liberalized economically and politically, and I expect China to do the same, slowly. Although China has pursued the former more than the latter, I think this is going to begin to change, as it did in Korea, as the forms of liberalization begin to require each other to continue. That has not been true, but it will become increasingly so.
I also call it the Korea model because China’s economic development strategy, in the nitty-gritty details, is looking more and more like South Korea’s two decades ago.
It’s bad enough to come across grad students who are smarter than I am (Noah Smith and Steve Waldman); now I face the prospect of being passed by undergrads like Evan Soltas. Time to retire.
Update: Evan is in high school. Even worse for me!
By the way, many of his links are worth reading. One points out that the next Chinese leader (Xi) was head of Zhejiang province, which is China’s most capitalist and most egalitarian province. Yes, that’s right, I put ‘capitalist’ and ‘egalitarian’ in the same sentence. The fight in China today is basically over whether China will follow the Zhejiang model. In my view it will. The big question is for how long can the reactionaries obstruct the reforms?
PS. For a well-informed but more pessimistic view check out this long comment by Rien Huizer. He concludes as follows:
Unfortunately, the status quo bias is now much higher than in the 1990s and there is real money at stake. So we may see lots of symbols but only piecemeal further reform.
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15. April 2012 at 12:36
So is it just the Chinese leadership cadre of today that happens to be “pragmatic”? It really sounds like what Caplan said about the Soviet Union – Communism ended because the “useful idiot” Gorbachev, merely the “least evil” of the leaders, happened to take power and implemented glasnost, after which perestroika was inevitable. So after seventy years of monomania, the Bolsheviks just suddenly got sick of themselves. This tends to collapse into a “history is really all about individual agency” perspective; as for instance here: http://www.growthology.org/growthology/2012/03/the-neutron-book.html
15. April 2012 at 13:01
Saturos, I certainly agree with that review, and thus China’s path depends on much more than what the leadership thinks. Even so, what the leadership thinks is certainly important.
One reason I am optimistic that reforms will continue is that there will be increasing pressure from below. In the modern world with democracy increasingly becoming the de facto default option of all “normal countries,” with the internet, with the Arab Spring, etc, etc, it’s hard to see how the insiders in China will be able to resist change indefinitely.
15. April 2012 at 15:38
I live part-time in Thailand (soon full) so that makes me a China expert too.
I have trouble reconciling their increasingly repressive political regime with greater commercial freedoms.
Also not often noted is that every public Chinese company is controlled by the Chinese Communist Party either through voting stock or board seats.
We see Burma, we see Vietnam, and as Scott Sumner points out the broad trends point towards democracy.
But then, maybe Arab Spring will mutate into repressive Islamic theocracy, and China will remain a politically repressive place. Everyone thought Russia was going to be wonderful, and now it is regarded as a thug state. And it is getting worse, not better.
My final analysis: I can’t even figure out Thailand, after reading two daily Thai newspapers for years and living there part-time. A Western newsman who had lived there 40 years wrote that he did not understand Thailand, it was not transparent.
Okay, so what is going to happening China?
15. April 2012 at 17:05
Everyone should read this and take notes:
http://blakemasters.tumblr.com/post/21169325300/peter-thiels-cs183-startup-class-4-notes-essay
15. April 2012 at 20:41
“it’s hard to see how the insiders in China will be able to resist change indefinitely.”
“it’s hard to see how the insiders in Argentina will be able to resist change indefinitely” sounds just as plausible to me.
I’m not a skeptic about China per se, because I don’t know anything in detail about it. I defer to anyone else’s knowledge of it.
I am a skeptic in principle about any $8,000 per capita PPP GDP country making a straight run to 1st-tier economy status, because there are so many things to stop it and so few make it. I mean, just look at the list of all the world’s countries, Afghanistan to Zimbabwe. And China has the extra major handicap of having a one-party govt trying to maintain its monopoly power and plan the economy.
OTOH, that said, there is the matter of *scale* to consider. I definitely can imagine China making a straight run to Argentina’s status ($17,000 per capita) in another dozen years — which would entail more then doubling the income of a billion people, after maybe 300 million of them have already just had the greatest aggregate increase in welfare in one living generation of any population in human history.
If China “only” makes that run to Argentina-like status and stalls out there, after doubling the incomes of a billion people in a dozen years, I won’t be one to carp and nit-pick, I’ll call it a staggering achievement and throw all the laurels I can find.
~~
For the record, Murdoch’s NY Post ran its Bo Xilai murder corruption story today, which is of course much more informative/entertaining/lurid (your choice) than the Times stories…
… plus a pic of the kid posing with a couple sexy girlfriends. It all comes off something like the Borgias.
15. April 2012 at 22:52
The comparison to Korea is a bit off. China is presently stuck owning a vast array of low-efficiency state-linked heavy industries next to a growing and dynamic private sector. South Korea entered the 80s with high-efficiency state-linked conglomerate-owned heavy industries next to an anaemic small/intermediate/domestic etc. goods sector.
For Korea, making the jump toward wider import liberalization was relatively easy from that point. First it liberalized markets for goods with no domestic competitors, which created businesses which could then lobby for liberalization in other sectors and so on. The entire liberalization exercise did not seriously threaten the grip of Korean conglomerates – that is to say, the conglomerate model even prior to liberalization was quite functional. It took until 1997 for any challenge to the system to occur.
But that’s not going to be the case in China, where we are all acknowledging that liberalization is going to make a lot of entrenched state industries – from which the state draws substantial support and hidden policy power, like Korea with its chaebols and Singapore with its GLCs – deeply unhappy.
Zhejiang ‘works’ because special economic zones approximate the political economy of Korean conglomeration and Singaporean statutory boards – state power buried in interlinked corporate and state organizations that can mobilize to resolve the political issues that rapid creative destruction inevitably generates. But the whole point of SEZs in China is that they do not threaten the non-special economic zones that enjoy continual state largesse. Their inability to exert political pressure toward wider liberalization is precisely why they exist at all – it is not accidental that SEZs/OCCs are almost all in cities far, far away from the capital. I don’t think the analogy to Korea is meaningful.
And that’s just economic policy. Comparison to political liberalization in Korea is even more strained. We already know what Beijing is prepared to do in response to a hypothetical June Democracy Movement, to be perfectly blunt. If anything, any state-led political liberalization in China is going to be copied from Singapore’s book rather than Korea’s.
16. April 2012 at 03:17
“It’s bad enough to come across grad students who are smarter than I am (Noah Smith and Steve Waldman); now I face the prospect of being passed by undergrads like Evan Soltas. Time to retire.”
Scott,
you forget that compared to these youngsters you still have a comparative advantage in teaching and research. A lot of the choices you have had to make in your life they still have to make, these are opportunity costs that you do not face. Related to that: your cost of entry into the profession is already sunk, their cost of entry still has to be paid.
16. April 2012 at 05:47
Ben, Obviously it is very complicated, and time will tell. But I don’t agree that China is getting increasingly repressive, I’d argue just the opposite.
Morgan, Why should we read that?
Jim Glass, For the record, I also expect Argentina to become much more like Chile over the next 25 years.
David: 2 points:
Korea was also quite willing to brutally repress demonstrations, as late as the 1980s.
I don’t believe the Zhejiang model is based on SEZs. That was the Guangdong model.
Martin, I know that, but they are very far ahead of where I was at that age.
16. April 2012 at 06:10
Scott,
“I know that, but they are very far ahead of where I was at that age.”
In fairness, you didn’t have the benefit of reading economics bloggers.
16. April 2012 at 09:35
Scott-
From NYT:
“Liu Xiaobo is a writer who is perhaps China’s best-known dissident. He has been in jail since 2008. In October 2010 he was awarded the Nobel Peace Prize in recognition of “his long and nonviolent struggle for fundamental human rights in China.”
Mr. Liu was arrested in December 2008 for playing a leading role in drafting Charter 08, which demands gradual political and legal reforms based on constitutional principles. In 2009, he was given an 11-year prison sentence on subversion charges, one that was widely regarded as unusually harsh.”
–30–
There is also the Han-ification of Tibet and other regions of China (their own form of imperialism). Non Han-Chinese might have the view that Han-China, becoming more powerful, is also becoming more repressive through increased capacity, and it would be hard to dispute that. Inner Mongolia has been Han-ified successfully,
Certainly, China is being eyed warily all along its rim, even as they become the largest trading partner. As successful and intelligent entrepreneurs, Han Chinese also often make an impression as “Ugly Chinese” defined by avarice and callousness towards native populations.
Let us hope that Chinese of good intentions rise to the top in China.
I can’t imagine a ruling class of anybody but monkey-thugs that would put Liu Xiaobo in prison for 11 years. It is hard to explain.
16. April 2012 at 09:49
According to his “about” sidebar, Evan Soltas won’t even start college until next year!
16. April 2012 at 14:01
Wait, Evan Soltas is in highschool?
Seriously? Seriously?
Scott at least has the advantage of being able to retire. I’m still in my thirties. How am I supposed to compete with that?
16. April 2012 at 14:45
Cameron, That’s right!
Ben, I’m a big fan of Liu Xiaobo, did a post on him when he won the Nobel prize. But I still say China’s becoming less repressive. Of course it used to be as repressive as North Korea is now, so that’s a low bar.
Wonks, That’s even worse!
Josiah, Yes, I’m counting down the days.
16. April 2012 at 15:53
Josiah:
Black Adder, is that you?
16. April 2012 at 16:00
Ben, I’m a big fan of Liu Xiaobo, did a post on him when he won the Nobel prize. But I still say China’s becoming less repressive. Of course it used to be as repressive as North Korea is now, so that’s a low bar.
Why should China become less oppressive? GIVEN THAT OPPRESSION IN CHINA EXISTS, wouldn’t it make more sense for intellectuals like Xiaobo to harness that oppression and only slightly redirect it to minimize its damage to people? For example, the Chinese government can credibly commit to a political prisoner growth target of oh I don’t know, 5%, rather than letting nominal political prisoner population be so volatile.
If only we can do what’s right, band together, and start blogging about political prisoner growth targeting, then maybe we can make a positive difference in people’s lives. Of course it’s not the ideal, but we’re not dogmatists. We’re pragmatists. China isn’t going to turn into a free market Utopia tomorrow.
16. April 2012 at 16:25
Gwangju was seen as a mistake in Korea almost as soon as it happened. That is why the June movement succeeded – the government hesitated to crack down to order to avoid Gwangju redux.
The lessons that Beijing learnt are not from Korea but from Russia and the commitment to June Fourth is still being reiterated. This is not unique to China; you can see politics like this in (e.g.) Malaysia where a commitment to violently prevent a repeat of some given disorder in the past is still publicly upheld, even by elected civilian leaders in peacetime.
As for Zhejiang, it is not an SEZ but a Open Coastal City (I think?) and the principles are similar, albeit focusing on domestic investment rather than foreign. The political-economy issues remain: whilst the government of Zhejiang can work very well with it, higher governments cannot.
16. April 2012 at 19:59
David,
All good points. It is easy to make sweeping statements about future developments in Asia. Those usually reflect beliefs in certain “templates” or rather, perceived ones.
The Korean “model” was heavily dependent on two things: (1) an authoritarian state with strongly “Japanese” (the Japan of WW II that is and especially the industrialization of Manchukuo, still one of the most remarkabl;e feats of rapid industrialization) characteristics, including a highly competent and disciplined senior bureaucracy (do not laugh, present Japanese bureaucrats are also very competent, but politically constrained). Park Chung Hee was one of the few Koreans who was trained as an officer in the Japanese Imperial Army. Two of the prominent Chaebol families (the Lees of Samsung and the Lees of LG) made their early careers under Japanese gvt (and the Samsung Lees still patronize Japanese universities). (2) US -linked factors: trade openness whilst allowing Korea to be highly mercantilist and extraordinary levels of early workforce socialization resulting from millions of peasant sons passing through US managed military training.
The Japanese element prioritized sector by sector waves of industrialization (giving lottery tickets to the Chaebol (which in the early days led to great almost Schumpeterian mobility among the entrepreneurial class) and until the middle 1980s that worked quite well (complete with chronically insolvent banks providing loans that did not have to be repaid) but then the system started to ossify, mobility dropped (the top ten positions of 1990 are basically still the same, except the payback case of Daewoo) and Korea became a more normal country with innovative forms of mercantilism (Hyundai and Kia cars are designed and engineered in Germany by former GM people mostly).
China is completely different and I agree that Singapore is far more intereting as an example. Though, as PRC visitors always used to say: only applicable in city states.
That is not to say that not having Korea as a pilot is bad. China is large and diverse enough to develop something better that bureaucracy-led industrialization. China’s authoritarianism/state are also not as strong and disciplined as Korea’s was.
Will China cross avoid the middle income trap? Yes, partially (in the coastal citis) if they can either
-leave a big part of the country relatively underprovided (a kind of in-house Mexico) and there are no signs that the urban residence system is likely to disappear
– solve the problem of how to migrate the elite from a “communist” style to a “liberal” style whilst maintaining order with benevolence. There you point about Russia is relevant. Russia did not do this well enough and it did not get productive capitalism but quasi-authoritarian rentseeking. The Chinese will do well to watch Singapore struggle with its upcoming transition…
18. April 2012 at 11:49
It’s easy to see the similarities between the East Asian economies, but what should be emphasized are the differences. It should first be noted that the account of what happened in Korea is a bit off. Korea’s political liberation came at the end of decades of violent protest, sacrifice and a little bit of luck. Economic liberation began rapidly only after the IMF imposed measures during the Asian financial crises (called the “IMF crises” in Korea). Political and economic liberation came when there was really no other choice for the elites.
In short, it was not the conscious effort of the ruling party. Also remember that South Korea was under dictatorship during its development. Power lay with the President, not the party.
Chaebols are also not SOEs. They respond to incentives in ways that SOEs may find difficult. Though it may seem to outsiders that these Chaebols are so politically connected that there is no difference, there is one, trust me.
The easy part of development is over. China will have to blaze its own path from now.
19. April 2012 at 07:09
David, I don’t recall the term ‘open coastal city,’ but I agree with most of your points.
Park, Good points.