China and the market
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.
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