Wednesday, June 18, 2008

The Chinese Economy

Daniel Drezner is discussing China's power in the world. Soft and economic. I liked this quote from one of his commenters re: the success of state capitalism (i.e. sovereign wealth funds).

18 Jun 2008 at 7:45 am, DWPittelli:

Yes, and Japan’s MITI and other government control of the economy has given it some of the world’s strongest growth rates. Japan will continue to dominate global markets, to increase its share of manufactured goods, and to buy up premium US real estate.

– My dad, ~1989
Trends do not always go in straight lines. What looked smart in the 1930s in Germany didn't look so smart in 1945. The all devouring Japan has hit a wall. It is very nice next to the wall. It is still a wall.

Here is another comment that illustrates the problem:
If I understand the concept of sovereign wealth funds, they are under the control of the government. In that case, they are necessarily under political control.

I have worked at two different levels of government and have concluded that politics permeates EVERYTHING in government. If the funds are under political control, decisions will be made on political rather than economic grounds. The system may achieve economic success for a while, but it won’t over the long term.

Inevitably, political considerations will trump economic ones. That is because in government people are hired, fired, promoted, and demoted on political grounds. If you institute a civil service, you may insulate workers from the broader politics only to create a politics internal to the civil service system. Witness SEIU.

Issues can be decided on an economic basis or a (broadly defined) political basis. There are no other bases, and only an economic basis offers hope for long-term success.
Now if we could just get some bits of the US economy back from the clutches of government (No Blood For Oil or No Drilling For Oil?) then we might have better long term performance than we have seen for the last decade. And it hasn't been a bad decade.

H/T Instapundit


Linda said...

"State capitalism" can work well for "catching up", and it may even be necessary for awhile if the knowledge base is low and management talent isn't widely available. But Japan and some other countries have shown that it quits working once the economy has "caught up"; at that point, the machinery of state capitalism just gets in the way of crucial, but basically random, innovation that wrecks business models (and bureaucrats' careers).

The problem for China is that it has a multi-track economy; the city areas of Shanghai and Beijing are as rich as anything on Earth, while much of the country is still quite poor.

China has a "first world" economy with about 150 million people in it, a "third world" economy with everyone else - and not much "between". This situation has historically been quite unhealthy and unstable.

Foobarista said...

Oops - my wife was logged in my machine; the above was my comment...