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Source link: http://archive.mises.org/10177/can-china-transform-its-mode-of-growth/

Can China Transform its Mode of Growth?

June 23, 2009 by

Practically since the beginning of the “reform and opening” period in 1978, China’s central government has sought to shift from an extensive to an intensive development model — from growth based on capital accumulation to growth based on improvements in productivity. This year, however, while the planners continue to talk about the need for this long-sought-after transformation, they are moving in exactly the opposite direction, counting heavily on state-sponsored investment to keep the economy growing in the wake of the global financial crisis. FULL ARTICLE

{ 5 comments }

Andras June 23, 2009 at 8:14 am

“…from growth based on capital accumulation to growth based on improvements in productivity.”

This is a clear contradiction. Improvements in productivity is not likely without accumulation of capital (this is one of the main statement of Mises works). It is possible but only if the existing capital is largely misused or if there is countless government made obstacles in place that entrepreneurs must deal with if they want to use the existing capital in production. In both case an increase in productivity is likely to be small.

China have a saving rate somewhere around 50% (or more) an that is a serious accumulation of capital and the main reason for their increase in productivity. But China’s economic growth is only partly because the increase in productivity per capital unit, the main reason for the growth is the much better efficiency in exchange between those productive forces and this is because of the capital accumulation which made countless new companies with new capital.

Capital accumulation per se is not enough for economic growth and prosperity in a developed economy, entrepreneurship, ideas and innovation is also needed. China economy is not so developed right now, so they can get by with capital accumulation only, because all they have to do now and for the foreseeable future is to replicate existing ideas and practices from the developed world. It is relatively easy to build a new road a new hospital a new school a new bridge a new airport etc. when you don’t have one, but it is hard to build a new X when you have all those listed things already and you don’t know what that X should be, because X isn’t invented yet, because your interventionist government killed all the new entrepreneur spirit all the new ideas and all the real innovation in your country.

I don’t see a Henry Ford or a Bill Gates or a Steve Jobs or whatever similar entrepreneur in the new generation, all I see is people who somehow get the idea that they are entitled to everything regardless that they don’t produce anything. In China it is a little different story, they have many people in the new generation who doesn’t ask for favors who just want some opportunity, and who will succeed because the difference between now and the past is that, right now, they accumulated the required capital, they have now a real “power” to succeed, the only thing they need now is capability, and with capital at hand and a strong will to grow to succeed to improve…, building capability is only a matter of time.

fundamentalist June 23, 2009 at 9:12 am

Very interesting article! It appears that the state has fallen victim to the fatal conceit. Deng Xia Ping exercised a bit of humility in recognizing that socialism had failed and in allowing a tiny space for free markets and private property. But the success of free enterprise has blinded that ruling class and convinced them that the state, not the market, is responsible for China’s “miracle” growth.

The excess capacity in so many industries reminds me of what PJ O’Rourke wrote in “Eat the Rich” about Shanghai. At the time of his book, the state had built so many skyscrapers that Shanghai had more vacant office space than New York City had in total office space. Does anyone know if Shanghai has been able to absorb some of that excess capacity?

Nick Bradley June 23, 2009 at 12:42 pm

From the CCP’s perspective, continuing the policy of investment-driven growth is entirely rational.

As long as Chinese workers continue to build cheap products in exchange for little green pieces of paper, they won’t be in the streets demanding regime change.

I expect China to devalue their currency — significantly — in the near term in order to stem the rising tide of unemployment and underemployment in the country.

They will continue to buy our ever-growing supply of treasury products in order to retain political power.

Andras June 23, 2009 at 2:02 pm

Why does China exchange goods for paper? I wrote a few lines about this a few days ago so I would point to that few lines if someone has any comment or suggestion?

http://mises.org/Community/forums/t/8313.aspx

Nick Bradley June 23, 2009 at 2:28 pm

Andras,

Although your theory of why Ford raised the wages of his workers is quite flawed — he attracted the most productive workforce, not so that he could buy his products — your view of what the Chinese are doing is pretty accurate.

The Chinese government, essentially, is importing menufacturing knowledge and experience for their gods and services — they also get those interest-bearing US treasury instruments.

If political factors were not a consideration, one could argue that the Chinese government values the gained manufacturing knowledge more valuable than the devaluated portion of their US assets. If US assets decline 10% — which is about the trading range of the US dollar index — then the Chinese would be paying $200B ($2T in assets) to import manufacturing know-how. But as I mentioned earlier, having an export-oriented economy keeps Chinese social unrest under wraps — priority #1 for the CCP. Furthermore, creating a symbiotic relationship with the US prevents America from becoming too hegeminoc in the region.

What does all this mean? It tells me that the Chinese will continue to trade goods and services for little green pieces of paper — and use the trade surplus to buy our debt.

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