Tuesday, 28 February 2012

Is China’s economic future a rosy one?

So asks Gary Becker. He writes,
Starting with the opening of agriculture to private incentives in the late 1970s, China has experienced faster and more prolonged economic growth than any other country. In a mere three decades China has moved from a very poor nation to a middle-income level country, a development that pulled hundreds of millions of Chinese out of poverty. China’s aggregate GDP is now second in the world only to that of the US. While its per capita income is still much smaller than that of America’s, many are predicting that even China’s per capita GDP will surpass that of the US in a few decades.
But as Becker points out, good economic growth today doesn't always mean good growth tomorrow. At different times the Soviet Union and Japan had faster growth than any country in the West but they didn't manage to become the world's economic superpower. We know what happened to the Soviet Union and Japan's rapid growth stopped abruptly during the early 1990s, and Japan has largely stagnated economically for the past two decades.

A major problem for China is its efforts to maintain growth may be political rather than economic. Economic growth will come at the price of political power. As people become wealthier, they have more to lose to the grabbing hand of government. People will want, and will demand, protection from the state and this means the Communist Party in China will lose power. Limits on the arbitrary power of the state are needed if growth is to continue at the rate it is now. The incentives are wrong for growth if people are not sure they will keep the rewards of their efforts. Even in the West we see an example of this problem in the effects of Regime Uncertainty. People don't invest when they fear the loss of any return to their investment.

A related problem is that the party will also have to give up its economic power. As an example of this problem look at the SOEs in China. As Becker notes
The China 2030 report argues that the SOEs must operate more like commercial companies, but that is not easy since officials from the Communist Party usually have high positions in these enterprises, and many of the larger SOEs are closely related to the Communist Party and the military. The ideal solution would be to privatize most SOEs, but that does not seem likely in the near future. This is partly because government officials would lose power if SOEs were privatized, and partly because the government fears that privatized companies would greatly cut employment and increase social unrest.Unfortunately for China, it would not be possible to close rapidly the per capita income gap with rich countries as long as a large fraction of manufacturing output in China is produced in over-manned and inefficient state enterprises.
So for growth to continue at anything near its current rate, at some point, the Communist Party in China will have to give up some, if not all, of its political and economic power. And its unlikely they will be too keen on that.

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