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China and the market

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By Ezra Klein

"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.

The country is run by the Communist Party. The party's office buildings still sport a red flag with a hammer and sickle. This is not how Milton Friedman imagined it going. My guess is that China's decision to open itself to foreign capital and private companies, and the rapid growth that followed that policy, is seen, at least in America, as a win for the free market, because the move toward the free market brought growth after state control brought misery. But that's not really how it's understood in China.

Earlier today, we met with the leaders of a private-sector zone that focuses on software development. Asked why they thought China was able to compete with India -- which has more English speakers and a more mature software industry -- one of the major answers was that China has been able to develop an industry-friendly infrastructure more rapidly, and flexibly, than India could dream of doing. "The Indian government has to consult with interest groups to build infrastructure," our host explained. "The Chinese government has more power. Democracy is good, but the system in China has some unique advantages, including speed."

As I understand the Chinese model, it goes something like this: The failure of central planning was that the people with the power didn't make very good decisions, at least not when compared with the market. On the other side, the difficulty of democracy is that it's slow, and the cacophony of voices can lead to paralysis and social breakdown. China's approach has been to marry market planning with state control. It brings in private companies and then uses the government's power to build the infrastructure they ask for. It lets private banks purchase up to 20 percent of state banks so that it gets private-sector expertise without relinquishing the public sector's control. It lets people buy shares of their financial institutions so it can get the oversight of the market, but it doesn't ever hand the market the reins. It uses the market to help plan, but it uses the state to act on those plans far faster and more decisively than the market ever could.

So though there's no doubt that opening itself to the market has been a major part of China's success story, the Chinese, at least, think the government's ferocious pursuit of growth and its willingness to put the full power of the state behind that pursuit has been the driving force behind the country's incredible economic revival. And the financial crisis only reinforced that view, as the Chinese did a better job protecting their banks before the crisis and were better able to flood their economy with stimulus spending in order to get out of their crisis. The result: Growth is back into double digits, at least according to their statistics. And they think the government, not the market, deserves the credit for that turnaround.

By Ezra Klein  |  May 28, 2010; 11:00 AM ET
Categories:  China  
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Comments

Excellent post Ezra, but two comments.

You write, "It lets private banks purchase up to 20 percent of state banks so that it gets private-sector expertise without relinquishing the public sector's control." A 'public sector' is as distinct an entity within a democracy as a free market. Though this is the only place in your excellent analysis that you don't refer to the Chinese "State" control. A Public Sector is exactly that, a portion of our society under a form of the general public's control, where various private interests can interact and have input; from individuals, to political parties, to private companies, to public companies. China has a unified state with all the control and lack of power sharing you note. China doesn't tear gas illegal protesters and give them due process, it runs them over with tanks or locks them up in the equivalent of a Chinese gulag. The public sector seeks to support the overall 'public' good, while the state only serves it's own.

I would also like to note that everyone, I mean everyone, though the USSR was a titan of industry and all things superpowery. Until of course, like many of our To-Big-To-Fail Banks, they couldn't hold up under the weight of their own self-deluding statistics. I'd be a lot more impressed by China if anyone else could even remotely verify their "State" propaganda.

Posted by: Jaycal | May 28, 2010 11:47 AM | Report abuse

People forget it now, but the Soviet planning system was likewise applauded for the sheer speed with which it enabled industrialization in a nearly medieval country. And despite atrocious brutality, there was some truth to this -- yet the Soviet system was also hollow.

Is China? Is ours?

Posted by: janinsanfran | May 28, 2010 12:11 PM | Report abuse

Very thoughtful post, Ezra (also a telling photo, once again).


A key difference with the USSR is that the Russsian communists funnelled virtually all of their technical expertise to the military, and away from the factories producing both durable and consumer goods. The result was a society in which there were state-of-the-art ICBM's and fighter jets, but consumers continued to buy radios with vacuum tubes instead of solid state technology, their automobiles were atrocious, etc.

One can fairly expect that there are equivalent imbalances lurking within the Chinese model of state control with private participation, and that they will become apparent in time.

Posted by: Patrick_M | May 28, 2010 12:26 PM | Report abuse

"It brings in private companies and then uses the government's power to build the infrastructure they ask for."

That's how it works in America, too. Wall Street, the SEC, the Minerals Management Service, etc., etc. See, we're not so different.

"So though there's no doubt that opening itself to the market has been a major part of China's success story, the Chinese, at least, think the government's ferocious pursuit of growth and its willingness to put the full power of the state behind that pursuit has been the driving force behind the country's incredible economic revival"

There is no doubt that this is true. But this also has wide ranging environmental and personal costs, as lands and farming communities are razed, pollution is pumped into the atmosphere in impressive quantities, and people are displaced.

When the government can wave a magic wand and require no pollution standards and put 100,000 people out of their homes without discussion, or without compensation, and ensure a great deal of slave labor for the manufacture of goods that there is a vibrant, free-world market for . . . it makes sense that they can grow rapidly.

Which is better that them not growing at all, as economic growth will, over time, lead to a better quality of living (and perhaps even more freedom) than complete stagnation, ala North Korea, but still. It's not exactly a model anyone should really want to emulate. Except possibly North Korea.

Posted by: Kevin_Willis | May 28, 2010 12:48 PM | Report abuse

Also crucial to the success of the Chinese model are a host of non-tariff barriers and subsidies to protect 'pillar' domestic industries. The government plays such a critical role in guiding these pillar industries that the borders between private/public, or government-run corporations, are blurred.

Posted by: andrew_W_c | May 28, 2010 2:59 PM | Report abuse

Hmm... I wonder if they could make this system work while living up to normal human rights expectations.

Posted by: blah1 | May 28, 2010 5:05 PM | Report abuse

Chinese banks are walking zombies, far more dependent on state support than even our own.

Posted by: tomtildrum | May 28, 2010 5:56 PM | Report abuse

"Chinese banks are walking zombies, far more dependent on state support than even our own."

A "zombie" bank is one that is still solvent, but unable to perform the basic function of providing capital financing. The Chinese banks are not in that condition. They are funding profitable enterprises, and the money invested is being repaid to the banks. They are functioning banks.

The statement that a communist state-owned bank is "dependent on state support" is something of a non-sequitur. I would say that my own wallet is dependent on my own support too. But the wallet is my own wallet, so thinking about it that way does not really explain anything.

Posted by: Patrick_M | May 28, 2010 9:03 PM | Report abuse

--"The failure of central planning was that the people with the power didn't make very good decisions, at least not when compared with the market. On the other side, the difficulty of democracy is that it's slow, and the cacophony of voices can lead to paralysis and social breakdown."--

More Klein nonsense and confusion. Democracy is not the opposite of central planning, nor is it a variant of central planning. Central planning is one method of attempting to control an economy. Democracy is one method for administering the political sphere of a country. Strictly speaking, they are completely unrelated. Though one could attempt central planning via democratic methods, it's not likely to work on a large scale.

So, I think Klein is just gibbering again. He sort of sounds like he's in over his head in sino-land.

Posted by: msoja | May 29, 2010 12:57 AM | Report abuse

Ezra is getting it completely wrong here.

"it's worth wondering why anyone thinks of China as a free-market success story."
They opened their markets to private operation, they had success. Socialism failed. People made profits, even if the banks owned it. The real freedom they had was lower wages.

"Earlier today, we met with the leaders of a private-sector zone that focuses on software development. Asked why they thought China was able to compete with India -- which has more English speakers and a more mature software industry -- one of the major answers was that China has been able to develop an industry-friendly infrastructure more rapidly, and flexibly, than India could dream of doing."
They are way behind India in software. Making software is a design activity, not a manufacturing activity.

"It uses the market to help plan, but it uses the state to act on those plans far faster and more decisively than the market ever could."
This makes no sense at all.

"And the financial crisis only reinforced that view, as the Chinese did a better job protecting their banks before the crisis and were better able to flood their economy with stimulus spending in order to get out of their crisis. The result: Growth is back into double digits, at least according to their statistics. And they think the government, not the market, deserves the credit for that turnaround."
The government does deserve credit, for not being so deeply in debt. They could actually afford to get out of the mess.

Posted by: staticvars | May 29, 2010 1:01 AM | Report abuse

"Democracy is not the opposite of central planning, nor is it a variant of central planning. Central planning is one method of attempting to control an economy. Democracy is one method for administering the political sphere of a country. Strictly speaking, they are completely unrelated. Though one could attempt central planning via democratic methods, it's not likely to work on a large scale."


Shorter (and less drunken) msoja:

Democracy and communism are the same!

Anarchy is good!

I need more everclear!

Posted by: Patrick_M | May 29, 2010 1:03 AM | Report abuse

I think talking of Democracy and Economic Growth, these are unrelated things. Democracy is all about ability of a nation to sustain 'pain / compromises' when one faces challenges collectively.

Of course the job of 'government' is to provide infrastructure so as private sector can flourish. But the question is who do we call this 'government'? The one which does not have any semblance of electoral inputs and which keeps drawing the legitimacy from a well past dried after the 'revolution'?

Economic growth, environmental balance and sustainability; all that one can argue as the 'dynamics' between how a government and private sector operates. Questions are about who can make up this government and what ways do you have to stop those who make government to re-appear in Private Sector to steal the fruits of growth.

Posted by: umesh409 | May 29, 2010 1:26 AM | Report abuse

Patrick M,

You're not offering arguments.

"Democracy" and "central planning" are an apple and an orange. Klein tried to juxtapose them in his trademark ignoramus way, and you come back at me with the ad hom.

I'll sober up in the morning, but you'll still be rock stupid.

Posted by: msoja | May 30, 2010 1:18 AM | Report abuse

msoja,

It will be a formidable task, but I will now try and "dumb down" Ezra's post, so that even a Tennessee anarchist with a partial lake view can finally understand it.

Ezra does not say that democracy is the opposite of central planning.

We all know that the Chinese communist state under Mao was a party-controlled totalitarin regime. There was no democracy and there was no market economy. The Party controlled all the levers of governmental authority and economic life.

With the passage of decades, and as China failed to develop, it became increasingly obvious that the model was failing. Government officials acknowledge that the top-down approach was isolating the leadership, and the information vaccum of this bubble inevitably led to bad decisions.

Conventional advice from the West, of course, was that the Chinese leaders needed to both democratize and to open up a free market economy, to break up the inherent flaws of entirely top-down guidance.

Obviously, the PRC has not democratized, and the Chinese argue that they could not have moved as quickly as they did if they had been burdened with "the cacaphony of voices" that democracy brings.

Therefore, the casual observer might conclude that the Chinese have retained a communist state, but have moved at least partially toward a free market economy.

The point of Ezra's piece is that there still are no true "free market" forces at work. The Chinese argue that they were able to get the needed expertise to make good decisions without giving up their central planning of the economy, by permitting minority participation in the banks, creating zones where foreign companies could build factories to take advantage of Chinese labor, etc.

That is the point, the Chinese have not moved toward a more democratic government OR toward less central planning of their economic development. They are attempting to become a modern economic powerhouse by making an end run around both the democratic systems of government and the free market capitalism that are the prevailing common characteristics of Western industrialized economies.

Posted by: Patrick_M | May 30, 2010 9:32 PM | Report abuse

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