Advocates of government planning often cite China as an example of economic success. China supposedly achieved success by adopting a mixed economy.
According to Joseph Stiglitz, the Chinese government has avoided the deficiencies of capitalism and communism by allowing a limited amount of private competition, while also retaining strong governmental controls over investment. Chinese GDP statistics seem to support the case for government regulation of markets, but there is a problem with this data. The problem with the statistics that the Chinese have reported on GDP is that they are exaggerated. At the end of last year the World Bank published a report on Chinese GDP. World Bank economists used the standard method of Purchasing Power Parity to measure Chinese GDP in terms of US dollars. The result of this study is that Chinese GDP is lower than previously believed. FULL ARTICLE
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Jeremy: “do you understand my point that if the US had as high savings and as low effective taxes as China does that it would likely be growing in the mid to maybe even high single digits in real terms?â€
Yes, and I agree.
Agnostique: “China is blocking FDI inflow. I’m saying this for the 3rd time here.â€
When did China start blocking FDI? Last year China was second behind the US in FDI flows, not stock, according to the IMF. So if China is currently blocking FDI, it must have been a recent decision or it must be limited.
Agnostique: “Why would anyone want me to look at the IMF data?â€
If you have a better source of data I would be glad to look at it.
Agnostique: “And why would anyone believe China intentionally pegged its currency to the USD at a ridiculously low level?â€
That has been a very common practice around the world for decades. By pegging the currency at a low level, the country encourages exports and discourages imports. Most states in the world still think like mercantilists where exports are good and imports are bad. Also, it causes an inflow of hard currency that enables the state to buy necessary imports, such as oil, when the home currency isn’t traded on the world market.
Agnostique: “Economics 101 textbooks used to have a name for the strategy adopted by countries that allow their currency to depreciate against the currencies of their trading partners. It is called “impoverishing thy neighborsâ€.
I don’t think that’s econ 101. The only reason a country’s currency will depreciate is if the state prints too much of it, that is, more than the people want to hold as cash, so they sell it to other nations via imports. No “impoverishing thy neighbor†takes place. In fact, the impoverishing happens on the side of the state doing the excessive printing of money. A lower exchange rate can only impoverish neighbors in the minds of mercantilists.
Agnostique: “Well then in the late 80s to early 90s, after a G7 meeting, the US arm twisted Japan to raise the Yen exchange rate. So ended the Japan export story and decades of Japanese growth…â€
Then Yen floated on the market; it was not fixed by the state. The Japanese economy collapsed in the early 90′s because the Bank of Japan raised interest rates to stop price inflation caused by earlier excessive money creation. The Japanese economy stagnated because the state refused to allow bankrupt businesses to go out of business. Japan’s is still a major exporter; it just exports different things from what it used to export.
Agnostique: “The world’s monetary excess was originated, initiated and created by the USA, particularly by Greenspan, and exported into China by exchange of real, tangible Chinese exported goods which sustained the otherwise unsustainable standard of living in the US.â€
The first part is definitely correct! The second part is popular Keynesian econ. However, if China’s currency were allowed to float on the market, its value would probably rise substantially. Then China wouldn’t have to impose restrictions on FDI; the market would do it for them. Exchange rates adjust to the changing monetary policies of the home countries. If they change more than people like, it’s the fault of the central banks.
Agnostique: “The continual money printing is on the other side of the ocean that keeps coming into China.â€
So how does the state keep the many state-owned industries afloat even though they are losing money? I don’t want to diminish the role the US plays in causing inflation; it is significant. But the Chinese government isn’t blameless.
Agnostique: “you might want to pay more attention to the direction of economic research here in Asia if you really want to find out more about this topic.â€
I’m open to suggestions.
Agnostique: “Why would anyone …be bold enough to represent the Chinese people and tell me what the Chinese people are thinking and doing.â€
We get a lot of news from China. I’ve been listening to NPR do a series on China for the past three weeks. Maybe you haven’t heard the stories about Chinese fighting for stronger property rights. I’ve read and heard a lot of them.
An interesting anecdote: My niece just returned from spending two years in China teaching English. She was there when the Tibet demonstrations started and she knew about them because of the access to the internet that she had. She tried to tell her Chinese friends about the protests, but they wouldn’t believe her because they had seen nothing on the TV news about it. Then, about a week later, army troops showed up in the city and the TV news began to provide limited info about the protests. Her Chinese friends were stunned that the state-owned media would keep such news from them.
Keep in mind that no one at this web site wants China to fail in its development, as far as I know. China’s growth is exciting! It’s good for the US and for the world. And it vindicates Austrian econ. Our main fight is with socialists, especially Keynesians, who try to use China as an example of the virtues of state intervention.
jeremy,
when i discribed chinese society as “tribal” i never meant for it to be “backward” i only meant that “arrangements” there are more based on relationships and custom than “abstract law” as in the west.
in many ways chinese civilization is more advance than western civilization however, its organizing principles lacks the universality of western canon law. therefore, as china expands its economic influence around the world the most adapt to it or there will be trouble.
thats is why a chinese has very little trouble adapting to the west and westerners have big trouble adapting and understanding china.
the system of universal, abstract law is probably western civilization greatest contribution to the world.
if you want to expand on the subject please read this great book,
law and revolution by harold j. berman.
Agnostique, Another way to look at the US/Chinese exchange rate is that is subsidizes US imports of Chinese products. By keeping the Rmb fixed at a low rate to the US$, imports to the US from China don’t cost Americans as much as they would if the Rmb floated to a higher level, as it probably would. So China is paying Americans to buy its products. It only hurts the Chinese.
“Jeremy: “do you understand my point that if the US had as high savings and as low effective taxes as China does that it would likely be growing in the mid to maybe even high single digits in real terms?â€
Yes, and I agree.”
Developing countries SHOULD have a high savings rate, because people in developing countries are motivated to invest in education and factories correlating with GDP growth. America is already developed, so people would not have the incentive to save money to undertake large projects like factories.
I don’t think the high savings rate has to do anything with culture. I think that your claim that “culture” has an influence on high savings rate is just prejudice and a stereotype. You should first think about what they are saving their money for, instead of speculating that they just want to save and do nothing with their money.
In order for America to have a very fast growth rate of single digits, their investments must be in the development of technology (or else their investments would turn to malinvestments and it may also turn into overinvestment because of underconsumption from the high savings rate).
If the United States invest on factories more, then it would overproduce factories without enough people demanding the products from the factories. Additionally, people even have less of an interest in purchasing factory products because all their money is invested and saved. Therefore, if the United States has an investment *rate* like China, it would fuel overinvestment.
“You are right that technology and reforms (processes, really) allow much faster growth than otherwise – however I’m pretty sure that if there was a 35% savings rate in America and a much lower effective tax rate (I say effective because official tax rates in China are not what many people pay) that we would have very significant real growth.”
As demonstrated, Americans would not have the economic incentive to have a 35% savings rate because it would lead to overinvestment. (unless all their 35% of their savings is from technology, which is highly unlikely). Also Americans would NOT have the incentive to invest their money in banks because interest rates would become much lower if people invest more.
If the per capita GDP of China is $5,000 and the savings rate is 40%, they would save $2,000 annually.
The United States per capita GDP is $45,000. If the United States savings rate is only 10%, they would save $4,500 annually, which is still $2,500 than China!
Therefore, more developed countries should have a *rate* lower than undeveloped countries because they do not need proportional amount of money. They just need some few thousand dollars on education, healthcare and stuff. These things cost similar in many countries. That is why undeveloped countries has to spend unproportionally amount of their income on these services.
“it is the most capitalist because things just happen and are allow to.”
A lot of people got confused with capitalism and corporatism. The corruption of China and the barriers to entry for new businesses is very hard for start-ups to enter the market.
The unprotection of private property rights is not a problem. They problem is eminent domain and corruption destroying property rights. It is actually beneficial that intellectual “property” rights are not protected in China because intellectual property rights restrains innovation and undermines economic growth. Other land rights can just be protected by putting a fence around some land or hiring some private defense agencies.
There are three misconceptions that you all seem to belief:
1. The assumption that 10% economic growth is “high” for a country with $5,000 per capita GDP.
2. The assumption that a 40% savings rate is “high” for a poor and developing country.
3. The assumption that China is capitalist. In fact, China’s economic freedom is much lower than the United States.
I would not waste my time to argue.
@fundamentalist – Thank you for the clarifications, that’s some thoughtful analysis.
@olmedo – “when i discribed chinese society as “tribal” i never meant for it to be “backward” i only meant that “arrangements” there are more based on relationships and custom than “abstract law” as in the west.”
Totally agree. This is a big problem that people going into China without experience run into, believing the contract means much or what you hear is what you get… ha
@c.p.c.:
“As demonstrated, Americans would not have the economic incentive to have a 35% savings rate because it would lead to overinvestment. (unless all their 35% of their savings is from technology, which is highly unlikely). Also Americans would NOT have the incentive to invest their money in banks because interest rates would become much lower if people invest more.”
Any given amount of savings is optimal. A 35% savings rate would not lead to overinvestment if it is what Americans really wanted to save. It would lead to phenomenal growth.
Overinvestment only occurs when there is a disconnect between investment and what people are actually saving. This is almost always due to artificial manipulation of the interest rate, ie expansion of the money supply and a money supply that is controlled and manipulated.
Savings set by the free market do not lead to overinvestment – no matter what that savings rate may be.
Your assumption is that there is some optimal rate for developed countries to save at. This just isn’t true at all. The optimal rate is what the free market sets it at.
The problem is, we have anything but a free market in money. People have little incentive to save when they know the value of their savings will decline more than the interest they are paid to hold it. In a truly free market, the value of money tends to increase over time, providing strong incentive to save.
Contrast this with the current system where there is much less incentive to save, and you see that savings rates in America and any country with a central bank are artificially low.
“Therefore, more developed countries should have a *rate* lower than undeveloped countries because they do not need proportional amount of money. They just need some few thousand dollars on education, healthcare and stuff. These things cost similar in many countries. That is why undeveloped countries has to spend unproportionally amount of their income on these services.”
Developed countries do have a savings rate lower than undeveloped countries for reasons you the state, and also because as income goes up people ‘tend’ to spend less time working and more in leisure, but this doesn’t mean that the current savings rate is what the free market would set.
“A lot of people got confused with capitalism and corporatism. The corruption of China and the barriers to entry for new businesses is very hard for start-ups to enter the market.”
This is becoming more and more the case – however there are lots of little businesses in China that operate under the law – to the extent that they are able to, this is capitalist.
“The unprotection of private property rights is not a problem. They problem is eminent domain and corruption destroying property rights. It is actually beneficial that intellectual “property” rights are not protected in China because intellectual property rights restrains innovation and undermines economic growth. Other land rights can just be protected by putting a fence around some land or hiring some private defense agencies.”
Agree to an extent about the lack of protection of intellectual property rights contributes greatly to China’s growth – however I haven’t read enough (or a convincing enough argument) to decide whether intellectual property is a valid form of property or not.
You do nothing to address the fact that taxation is far, far lower in China than America when claiming that economic freedom is much lower in China than America. The lower the taxes of a nation, the more capitalist it is, period. A purely socialist system is one that taxes 100% of the income of everyone and redistributes it perfectly equally. Which is America closer to, and which is China closer to?
Maybe I should not have said China is blocking FDI. “Blocking†is too strong, I should have used “slowing downâ€. But still, what is the meaning of being the world’s no.2 FDI country, considering that it has been the world’s no.1 FDI country for so many years? It is the rate of change that shows the direction that China is heading, and I reckons that it will only show with a time lag in backward statistics.
I’ve already said the new regulation was issued in October 2006, and I’ve already stated the name of the local economist who IMHO is the best. Public info is readily available. Even Chinese government and Ministries web sites have English version. What else could I say? Why won’t people do their homework instead of asking to be fed?
And the term should be “beggar thy neighbor†instead of “impoverishing thy neighborâ€. My fault. And I’m afraid I did read it in quite a few Economics 101 textbooks, and I bet some countries still believe in it, especially those which keep asking other countries to revalue up their currencies. Also I’m afraid how forex works in the real world is more complex than what fundamentalist described, and it’s a long story. And I’d also like to point out that Japan’s raising interest rate back then was an integral part of the Yen appreciation game, and that, be it Keynesian or not, the price level at Walmart would not have been sustainable had it not been exports from China (and other emerging countries).
Currently some of the largest companies by market cap worldwide are profitable Chinese state owned enterprises. China has been dealing with its money losing state owned sector for years by all sorts of measures, one example is grouping money losing inefficient assets under the so called “asset management†companies and let them go bankrupt, be restructured, be merged or acquired. Today many sectors in China are dominated by restructured or merged state owned oligopolies. That they could have been even more profitable or the wealth so created should have been more evenly distributed are valid issues, but the simplistic picture of China bankrupt by huge money losing state owned companies is outdated. Make no mistake, I see all sorts of shortcomings in China each and every day and I do have an opinion as to where and what areas China should be blamed, but I also think many Westerners just miss the point.
And when it comes to wishful thinking regarding where China should be ideally heading to attain economic freedom, it seems some areas could make interesting research topic (forgive me if already done) for economic essays (and I mean serious and thorough research with hard evidence): the role of forex in Japan’s collapse, critique of the Liquidity Trap theory, the role of protectionism in the rise of South Korea and to a lesser extent Japan both as a nation and for their leading domestic companies, evaluation of the effectiveness of Malaysia’s close door forex policy during the Asian Financial Turmoil as compared to the alternative standard remedies recommended by the IMF, a measure of the adjustment in volume of trade and the overall impact on the aggregate wealth creation if the price of Rmb (exchange rate) had freely floated in the last 20 years, and a quantification of the magnitude of pain (ideally approximated by the number of people that need to jump out of the window and the number of generations that would be sacrificed) if China were to adopt a totally free and democratic system by shock therapy.
And please don’t talk about Tibet. I’m flooded with China news and data everyday and I can’t afford to read all of them as I have to travel and meet and talk with people and do all sorts of other stuffs. I may be wrong, but hearsay from a limited circle and main stream Western media are simply not good enough for me.
Just on a side note. What happened in Tibet is much closer to a violent riot than a peaceful demonstration. If it took place in the West, say, if you replace Tibetans by another tribe who claimed to be suppressed by the West and claimed to be fighting for their people and nation, it would very probably be labeled as terrorism straightaway, and armed forces would have moved in much faster than the Chinese did, and the poor girls who were burnt to death in flames set by the rioters would have made headlines instead of sympathy with the rioters and China bashing. I’m curious as to whether educated Western readers notice the double standard of mainstream Western media and I’m curious as to how western educated readers justify it if they are conscious of it at all.
Another side note. It just so happened that a reporter from the London based The Economist magazine was in Tibet a few days before the riot for unrelated research and interviews. His presence went unnoticed by the government, or noticed but no one bothered him (indeed the Chinese government did absolutely nothing until the end of the riot, which arguably is not fair to the victims). He had a total free hand to do whatever he wanted. As he described in his own words, he went wherever he wanted, talked to whoever he wanted, shot whatever pictures he wanted, for more than 2 weeks til after the end of the riot. He published his works, wrote his findings in a negative tone against China (I presume otherwise western readers won’t believe him), but still you get a glimpse of what happened, and I bet it was not what some Western governments was waiting to see. His works seemed to go largely unnoticed in the mainstream. Why? Can people honestly and critically think about it? (Look at some of the German media; they reported outright lies, which they had to publicly apologize after being found out.) I’m not even asking western readers to read the story from both sides. I’m just curious as to whether educated readers ever doubt that western media is as biased, and whether the portion of readers who care to do more research to form a full picture view is substantial, and whether western readers believe Western media without critically asking themselves if lies are being sold to them because it proves to sell and because it is what they want you to believe.
c.p.c. You might want to compare Africa to Japan and rethink your savings and education theories. You might also want to consider aggregate numbers and the USD exchange rate as well and not merely nominal per capita numbers. You might greatly benefit from traveling and seeing with your own eyes. Meeting and talking with more Asians will also help you take a more informed position as to why they save and whether or not and how it is related to their tradition and culture. I have to agree with the comments of the others on your other points. Yet your property rights theory, though certainly outrageous for the lawyers, matches with what I see from my personal experience. I would love to see someone write a thoroughly researched essay on it.
c.p.c. “If the United States invest on factories more, then it would overproduce factories without enough people demanding the products from the factories. Additionally, people even have less of an interest in purchasing factory products because all their money is invested and saved.â€
Jeremy has already dealt with this very well, but I want to add my two bits because it’s such an important issue. What you have stated is very popular thinking on economics, but it’s just not true. If people invest their savings, either in a bank, mutual fund, stock makret or other interesting paying institution then that money goes to expand businesses and hire more people or raise wages. As a result, workers earn enough to buy the new products produced. As the great economist Say used to say, production creates its own consumption. What you describe will only happen if people hoard money, that is, put it in a hole in the ground or under their beds. But people only hoard money during crises such as the Great Depression when they have lost confidence in insitutions like banks.
The US should save more than it does. We rely on Chinese savings, and savings from other parts of the world for creating new businesses and to help finance our government budget deficits. We don’t save more partly because of high taxes on savings and partly because of social security and other welfare benefits. Inflation is hard on savings, too.
c.p.c.: “The unprotection of private property rights is not a problem. They problem is eminent domain and corruption destroying property rights.â€
Actually, corruption and eminent domain are part of the problem of the lack of protection for private property.
Agnostique: “Even Chinese government and Ministries web sites have English version.â€
What are you saying, that we should only pay attention to Chinese state statistics and Chinese economists? Believe me, we are very aware of the biases of the Western media. The reason that Western media criticize China more today than in the past is because China abandoned pure communism and introduced small amounts of capitalism. The socialist Western media will never forgive China for that betrayal of their ideals.
For statistical data, we have found that few state statistics are totally honest, but we have developed ways to squeeze the truth out them no matter how hard the state tries to hide the truth. In that regard, we don’t find Chinese state statistics any more reliable than Western data. For an example, see Robert Murphy’s article on this site “The Government’s Statistical Whopper of the Year.â€
Agnostique: “And the term should be “beggar thy neighbor†instead of “impoverishing thy neighborâ€. My fault. And I’m afraid I did read it in quite a few Economics 101 textbooks, and I bet some countries still believe in it, especially those which keep asking other countries to revalue up their currencies.â€
“Beggar thy neighbor†and “impoverishing they neighbor†are the same. It doesn’t matter. You’re probably right that some text books teach mercantilism. And you’re completely right that most nations believe it’s true. Even most people in the US, especially politicians and the media, believe it’s true. That doesn’t make it true. Imports do not harm a nation and exports don’t benefit a nation. Free trade is the only beneficial system. Good economists have known that for over 300 years. It takes other people a while to catch up.
You hear a lot of people in the US calling for China to let the Rmb float freely because they believe imports from China hurt the US economy. I apologize for their stupidity. We have tried to eduate them, but it doesn’t seem to take. Austrians couldn’t care less whether China retains a fixed exchange rate. The only reason I mentioned it was because you blamed the US for inflation in China. I responded that if the Chinese didn’t like that inflation, all they had to do was to raise the fixed exchange rate, or let it float freely on the open market.
Agnostique: “Also I’m afraid how forex works in the real world is more complex than what fundamentalist described…â€
No, it’s really not. Check out Mises’s explanation in Human Action. That’s what I gave you in a nutshell.
Agnostique: “And I’d also like to point out that Japan’s raising interest rate back then was an integral part of the Yen appreciation game, and that, be it Keynesian or not, the price level at Walmart would not have been sustainable had it not been exports from China (and other emerging countries).â€
The BOJ may have been pressured by the US to raise interest rates in order to reduce Japanese exports to the US, but again, I can only apologize for the economic ignorance of our politicians. Japanese imports to the US increased our standard of living dramatically and we should have been grateful for them. If nothing else, their cars forced US car makers to improve their quality dramatically. But the BOJ had plenty of reason to raise interest rates in order to stop high inflation in Japan which the BOJ had caused.
As for the price levels at Wal-Mart, you’re completely correct. And we thank you, especially for China subsidizing our purchases of Chinese products with your low, fixed exchange rate with the US$.
Agnostique: “… it seems some areas could make interesting research topic … for economic essays (and I mean serious and thorough research with hard evidence):â€
You present some interesting areas for research, but if you approach history (especially historical data) without an sound theory of economics, you’re sure to reach the wrong conclusions. History is so vast that any theory, no matter how stupid, can find supporting evidence in it. You should become very familiar with Austrian econ if you want to understand the past.
@Jeremy:
“Any given amount of savings is optimal. A 35% savings rate would not lead to overinvestment if it is what Americans really wanted to save. It would lead to phenomenal growth.
Overinvestment only occurs when there is a disconnect between investment and what people are actually saving. This is almost always due to artificial manipulation of the interest rate, ie expansion of the money supply and a money supply that is controlled and manipulated. ”
That is not my point. My point is that if you force all Americans to have a 35% savings rate, Americans are going to malinvest because not all of them know how to productively spend their 35% of their savings. Therefore, they would spend them on nonproductive and duplicate projects, which creates an increased artificial investment.
“Your assumption is that there is some optimal rate for developed countries to save at. This just isn’t true at all. The optimal rate is what the free market sets it at.”
My point is that it is not possible for an already developed country to have a large investment *rate* than undeveloped countries. My point, as a general rule, is that both savings and investment are natually a large percentage for developing countries. Once the country has become fully developed, the natural free market rate of investment would drop. If the savings rate is artificially high in an already developed country, then it would become malinvestment. The investment rate for developing countries should be *comparatively* higher in developing countries than developed ones. So you claim that country-X has a “high” interest rate cannot be verified. If it cannot be verified, then why do you said that? It is up to individuals to subjectively determine.
“This is becoming more and more the case – however there are lots of little businesses in China that operate under the law – to the extent that they are able to, this is capitalist.”
No, you seem to not have any knowledge of how corrupt and corporatist China is. These laws are very corrupt and they tend to monopolize a small group rather than competition. Most of these corrupt laws are useless and it creates barriers to entry that makes it harder for businesses to enter and compete.
If more and more laws were enacted, the more corrupt and corporatist the state would become.
“I haven’t read enough (or a convincing enough argument) to decide whether intellectual property is a valid form of property or not.”
IMO, those who support intellectual “property” do not really support the free market.
“You do nothing to address the fact that taxation is far, far lower in China than America when claiming that economic freedom is much lower in China than America.”
While its *absolute* taxes collected is lower because of its low GDP, its tax rate or per capita share of tax is not much lower. The top tax bracket for personal income is 45%. Its overly complicated value added tax, resource tax, etc. are corrupt and high. And don’t forget about the “inflation tax” that destroys the wealth of people. I don’t know where you got that information. Probably because foreigners pay less taxes than citizens and some foreigners are exempt. (Jeremy was a foreigner in China).
Also, don’t forget the things that are much more destructive laws than taxes: corruption, regulations, etc. They are actually much more damaging to economic growth than taxes.
Taxation is only a tiny variable in determining “economic freedom”. Others are much more significant in suppressing economic growth.
@Agnostique:
“That they could have been even more profitable or the wealth so created should have been more evenly distributed are valid issues, but the simplistic picture of China bankrupt by huge money losing state owned companies is outdated.”
State-owned enterprises are are hugely corrupt and inefficient. Just do a search on Google on how these high inefficient parasites drag down on China’s economic growth:
http://www.mtholyoke.edu/courses/sgabriel/soe.htm
http://www.sjsu.edu/faculty/watkins/chinasoes.htm
“Just on a side note. What happened in Tibet is much closer to a violent riot than a peaceful demonstration.”
The Western media uses propaganda to exaggerate violence there, just to make money. But I do not advocate any military intervention.
“You might want to compare Africa to Japan and rethink your savings and education theories.”
You are comparing apples and oranges. Africa is competely socialist and incredibly corrupt. Their high tarrifs, lack of economic freedom to invest hinders investment.
@fundamentalist
“What you have stated is very popular thinking on economics, but it’s just not true”
I meant that people in developed countries would naturally invest less (such as creating less factories). If there is too many factories and production in a developed country, the costs of production exceeds the demand for the products, so Americans would not have to invest their money in factories.
But in developing countries, the demand for these products are constantly expanding because of per capita GDP growth, so people has to invest in more and more correlating with GDP growth. Once the maximum level of factories are made, then adding extraneous factories would make the cost of production more expensive than the demand of products produced by the factory. So I am just suggesting that Westerners do not have the economic incentive to save and invest in extraneous factories.
“As the great economist Say used to say, production creates its own consumption.”
I know how Say’s law works, and it is unrelated with the above example of factories.
“If people invest their savings, either in a bank, mutual fund, stock makret or other interesting paying institution then that money goes to expand businesses and hire more people or raise wages.”
I mentioned above that investing in innovation and technology are an exception. The stock market (because some stock markets are innovative) and the businesses that depends on innovation would excel in developing countries. But the investment rate depends on the amount of innovation. If innovation is high, then the savings rate must be high. But America, currently, has low innovation so it does not increase investment much.
The original point that I made my comments to Jeremy that this is not the belief I am advocating is that I am criticising Jeremy’s belief. I was simply saying that developing countries naturally invest more in factories because its economy is expanding. I was criticising Jeremy’s video about Westerners building less factories: http://youtube.com/watch?v=1VHP94jGQrk
In Jeremy’s video, he presumes that Westerners, as a whole, “stunts” the economy because more of them do not save at same rate than Chinese people. People in all developing countries have lower time preferences so they would invest more, NOT because of some cultural explanation. Their savings rate would eventually decline as they get richer. Westerners already invest much more than Chinese, as a whole, and Jeremy’s video is presuming that Westerners invest less.
Jeremy’s comments suggest that he is advocating compulsory savings rate on Westerners (although he is not). However, the economy would be better in the free market because it would correlate with people’s time preferences. If he is not advocating this, then why would he say it?
cpc: “Jeremy’s comments suggest that he is advocating compulsory savings rate on Westerners (although he is not). However, the economy would be better in the free market because it would correlate with people’s time preferences.”
I could be wrong, but I think Jeremy is saying that the market in the US is not free, and that’s why Americans don’t save. State intervention discourages savings because most politicians are follow Keynesian econ and Keynes thought saving was evil. You’re right that people in advanced economies will have a tendency to save at a lower rate, but there is a lot of state intervention that also punishes savings.
CPC – Thank you for the thoughtful responses.
That video is meant to be a lighthearted treatment of China’s growth vis-a-vis the US as opposed to a ‘this is the way things are, period’ kind of video.
I completely agree that developed countries will tend to have a lower savings rate (percentage) than developing ones with similar economic freedoms. However, I don’t agree with this statement:
“That is not my point. My point is that if you force all Americans to have a 35% savings rate, Americans are going to malinvest because not all of them know how to productively spend their 35% of their savings. Therefore, they would spend them on nonproductive and duplicate projects, which creates an increased artificial investment.”
If the savings preferences in America were higher (and I do think they would be higher, though not 35%, in a truly free market for money) and the money supply was stable or relatively stable, I do not believe that Americans would make malinvestments. They would not chose to invest most money in factories, you’re right, – it would be spent wherever the profit potential was greatest.
Malinvestments on a broad scale occur precisely because of manipulation of the money supply & interest rate. What I’m saying is that any savings rate, if it was set by preferences of the savers in a free market, would be optimal. And yes, I think if America had a truly free monetary system that savings rates would be considerably higher.
“While its *absolute* taxes collected is lower because of its low GDP, its tax rate or per capita share of tax is not much lower. The top tax bracket for personal income is 45%. Its overly complicated value added tax, resource tax, etc. are corrupt and high. And don’t forget about the “inflation tax” that destroys the wealth of people. I don’t know where you got that information. Probably because foreigners pay less taxes than citizens and some foreigners are exempt. (Jeremy was a foreigner in China).
Also, don’t forget the things that are much more destructive laws than taxes: corruption, regulations, etc. They are actually much more damaging to economic growth than taxes.”
Sorry but you obviously don’t know much about how much people in China tend to pay in taxes. Tax evasion is enormous… way higher than you would guess based on official law.
Teachers, businessmen, restaurants, shop-owners and small manufacturers of all kinds, nearly everyone is in on this game… and it applies to both income and the VAT.
It is decidedly not like the US where you are very likely to get caught (or at least seemingly so) for avoiding taxes.
The portion of corruption that is seen by those not paying taxes, helps push China’s development, fair or not to those who do pay taxes.
There are of course lots of regulation and other forms of corruption that inhibits freedom and long term growth in today’s China.
I agree w/ Jeremy on the tax evasion. CPC clearly doesn’t have close knowledge of how things work in China. Most Chinese people, especially those in the private sector, do not pay as much tax as they should. The system is much more lax in China. Not only that–most Chinese people living in America don’t pay a lot of taxes. The main problem I see is the high tariff on luxury goods, which is thought to be a deliberate effort to boost the economy of Hong Kong, since a huge chunk of the Hong Kong economy is from the shopping trips of mainlanders. W/ the same tarriff on imported goods as Hong Kong, there will not be a city in Asia (or in the world for that matter) that can compete w/ the major Chinese cities for shopping.
Fundamentalist: “What are you saying, that we should only pay attention to Chinese state statistics and Chinese economists?â€
Did I say that? I guess I’d better go back to school to study English rather than Economics.
No need to apologize for anything. I don’t represent China, and am not trying to be nationalist or anything. I just want to contribute my 2 cents.
Some of the research topics I mentioned were already covered by various people, which all have insights, but not totally conclusive or convincing IMHO, which is why I’m interested to see how the Austrian School would look at these topics. And I believe that without a conclusive view and explanation on these topics, discussions on where China should be heading is groundless.
As to the currently hot topic of whether China should revalue its currency peg, I am irritated to see Austrian School supporters describing the peg as “lowâ€. As I explained before, maintaining a stable peg should be in line with Austrian School and I’m actually surprised that the Austrian School did not advocate for it. Describing it as “low†seems to be based on common misconception in America and counter Austrian School logic.
Taking it as a subsidy from the Chinese to the Americans is one way to look at the fact. But if anyone would want to imply that it hurts the Chinese so the peg should be revalued, then I’m afraid the logic is not sufficient, not until it can be proved that, with the volume adjustment pursuant to a higher price (of Rmb), the overall impact is positive. (And non quantitative positive effects of the peg should also be considered, e.g. at a stable peg and with the USA’s continual money printing, China accumulated the USD created by the USA and became the World largest holder of USD assets, with theoretically the power to turn USA economy into chaos, which is an effective and peaceful way to counter the dominance of the World’s single military super power.) I have yet to see coherent thoughts based on Austrian School logic in support of appreciation of the Rmb.
c.p.c.: “State-owned enterprises are hugely corrupt and inefficient. Just do a search on Google on how these high inefficient parasites drag down on China’s economic growth: http://www.mtholyoke.edu/courses/sgabriel/soe.htm http://www.sjsu.edu/faculty/watkins/chinasoes.htmâ€
Well I did click into the 2 web sites you suggested. The first one is dated May 1998, and the second one talks about China in 2000 and quoted Chinese official statistics of 1996… Honestly I’m again speechless… Are the links wrong? Are you serious? Are you aware of what happened in the last 10 years? Do you not want to find out and verify things for your own sake after reading what I said about the SOEs? Or are you just trying to be sarcastic, or humorous? Am I supposed to laugh?
c.p.c.: “But I do not advocate any military intervention.â€
Fine. But don’t tell that to the victims’ families.
c.p.c.: “You are comparing apples and oranges. Africa is completely socialist and incredibly corrupt.â€
Ok. Then why is it ok to compare China to the USA? Did you not say that China is not capitalist, corrupt and has much lower economic freedom than the USA? What is the threshold to render a country comparable to the USA in your mind? How about comparing Singapore, Hong Kong and Japan to the USA or to Western Europe? Check their savings and education investment etc. and tell me again what you think. With all due respect, I don’t believe not even for a second in this talk about developed countries should have lower savings.
And am I right to understand that your basic assumption is that with more savings at their disposal, Americans will malinvest? Is it fair to assume that people in developed countries, with supposedly the best education and technologies a country can afford, and with freedom in the market and freedom to act, are still not smart enough to channel their money into positive yielding opportunities the world not just their own country has to offer, even if opening an account and buying emerging market stocks is just a few clicks away and takes only minutes? The monetary excess created in the USA found its way into emerging countries and yielded superior return. Swap the fiat money printed with real savings. Is it fair to assume now that these real savings will be used to build factories in the USA?
Agnostique: “As to the currently hot topic of whether China should revalue its currency peg, I am irritated to see Austrian School supporters describing the peg as “lowâ€.
You implied that the Rmb is low when you describe price inflation in China as being caused by the US. It’s true that the US is inflating its currency. But China could neutralize the effects of US monetary inflation simply by raising the exchange rate. The inflow of US$ into China is causing monetary and price inflation. That would suggest that the Rmb is too low.
@Jeremy
“That video is meant to be a lighthearted treatment of China’s growth vis-a-vis the US as opposed to a ‘this is the way things are, period’ kind of video.”
I am sorry that I misinterpreted your video which made my lengthy responses and rebuttals.
“Sorry but you obviously don’t know much about how much people in China tend to pay in taxes. Tax evasion is enormous… way higher than you would guess based on official law. ”
If lots of people evade taxes, then the government must print the equivalent amound of money out of thin air to fund itself, which would accelerate inflation and malinvestment. Tax evasion without cutting government spending is much more harmful than actually paying the full tax.
@Agnostique
“Are you aware of what happened in the last 10 years?”
I know that the GDP and living quality growed many times over the last 10 years, but that grow is predominately contributed by the private sector.
But you cannot compare what the growth rate of China if these state-owned enterprises are abolished. Its growth rate may be even greater. Without private sector growth, the state-owned enterprises would not have the resources to expand and steal from the market.
But its impoverished past and low initial GDP with its economic reforms are the predominant reasons of why the growth rate is considered “high” for some.
Empirical GDP statistics over the past years are inaccurate and could represent inflation led growth, at least as a factor.
“Do you not want to find out and verify things for your own sake after reading what I said about the SOEs?”
I interpreted your last sentence as that you actually think that these SOEs does not present any serious harm: “but the simplistic picture of China bankrupt by huge money losing state owned companies is outdated”. So I replied to you about the ineffiency of them. It is almost impossible to estimate how much damage the SOEs have done, as growth could be much faster. Sorry that if I misinterpreted your statement.
“I don’t believe not even for a second in this talk about developed countries should have lower savings.”
Sorry if I didn’t represent my thoughts clear enough. What I said was a general theory on savings rate between developed and developing countries, corruption has a large impact, and I did not deny that some countries would have some variations.
In the general theory, I did not say about the absolute savings, but the savings rate. (as a rebuttal to Jeremy’s claim) I actually gave an example above that America has a higher absolute savings rate than China.
But my point of my savings arguments is that government interference and corruption has a much greater impact on savings rate than culture.
“Check their savings and education investment etc. and tell me again what you think.”
My point is that it is predominately the government damaging investment. It is impossible to estimate the natural rate of investment.
I will criticize some other arguments by you:
America actually has one of the lowest education levels in the world. It’s partly due to illegal immigrants and bureaucracy. The public education system in America, China and Japan would not motivate them to save as much on education.
I accept the fact that some high-IQ countries like Northeast Asians tend to invest more on innovation and education than low-IQ countries in Africa (most of them are illiterate). But not all Northeast Asians share a common culture. Most people in the PRC is non-religious, but many of them have Confucian and Taoist beliefs, which would motivate the parents to invest more in education on their children. It only applies in education, not intrinsically in business and “working hard,” as you said: “being hard working etc. are deeply rooted from the Confucian.” Do you think that Confucians are very radical religious people and they just work hard for the sake of it? No. People would work harder to make more money so they can spend it, not because that their religion told them to work hard for the sake of it. Also, “working hard” is different than “working smart.”
@fundamentalist
“But China could neutralize the effects of US monetary inflation simply by raising the exchange rate.”
I don’t think that they can sustain neutralize inflation.
Exchange rate is different than money supply, and does not represent inflation. It is equivalant to the fact that the consumer price index is not an accurate measure of inflation. According to the Austrian theory of the business cycle, different goods cost different, such as the claim that capital goods would cost much more than consumer goods. Exchange rate also depends on the rate of investment and demand for money, so exchange rate is not an accurate measure of inflation comparisons between the two countries.
Additionally, Jeremy has mentioned that a lot of Chinese people evade tax, so the printing of the money may not be as fast enough to sustain their government. Therefore China may have to print extra and its actions may inflate China’s currency more than United States.
Hi CPC,
“Exchange rate also depends on the rate of investment and demand for money, so exchange rate is not an accurate measure of inflation comparisons between the two countries.”
I think in the short run you are right, but in the long run the exchange rate is a very close approximation of how much two given countries inflate their currencies. I can’t give a coherent argument as to why – but I believe this as an economic principle.
Given this, and the RMB’s long term relationship to the dollar, one could make the claim that the Chinese banking system is inflating less than America’s.
This would make sense in a practical sense, as too much inflation could literally cause a revolution in China today. Better to steal the wealth of 2/3 of your countrymen, who are still mostly piss poor (2/3 of China’s population are still farmers), a little bit at a time instead of all at once.
Since we are defining taxation as both the direct and indirect kind (taxes + inflation), I would not hesitate to say that direct effective taxation (what is actually collected) is much lower in China, and would guess that indirect taxation is slightly lower in China than America as mentioned above.
Then again, consumer price inflation is high in China, and it may be the case that China’s current inflation of the money supply is higher, in percentage terms (which are the only terms I’m using), than America’s.
But I still think the overall tax burden (direct plus the hidden taxation we speak of) is much lower in China than America, and that this is a major contributor to its very fast growth rate.
You’re absolutely right that completely doing away with China’s state owned enterprises would cause China to grow much faster – but I don’t think anyone here has disputed this. In China, the fear is that this would cause massive unemployment. In truth, what is causing such unemployment (besides wages above what the market – although SOEs are in no way a market institution – will bear) is the lack of profits to invest in new, profitable enterprises.
By the way, thanks for the interesting discussion.
fundamentalist: “You implied that the Rmb is low when you describe price inflation in China as being caused by the US.â€
Now that’s a big jump into conclusion and I’m afraid that reflects more about your beliefs. My view remains that per Austrian School logic a stable forex rate is better than an interventionist forex rate manipulation in response to the counterpart country’s interventionist monetary policy. People who think otherwise consciously or subconsciously perceive the peg as high or low, and that IMHO is counter Austrian School logic. Seeing that coming from Austrian School supporters is what irritated me.
As regarding whether China or USA is more inflationary, note that China has been raising interest rates, raising bank reserve requirements, and restricting investments since recent time and the USA has been doing the exact opposite. I guess it is clear as to which side is currently more inflationary and expansionary in terms of policies. Inflation in the USA is perhaps lower than China as the monetary excess created in the USA flow into China while cheap Chinese goods so produced flow back to the USA to keep prices down.
And as regarding exchange rates in the long run, I guess no one would disagree on how things should work. I agree with cpc that forex rate manipulation is unlikely to be able to solve problems created by monetary policies, though not totally for the same reasons but then again forex in real life is a long story.
As to SOEs in China, simply put, they are far from being good, but they have come a long way and they are not as bad as many thought they were. Improvements that were achieved, and the policies and actions that led to those improvements, should not be neglected or understated. BTW, many of the SOEs are publicly listed and the biggest of them are listed in Hong Kong with International Financial Reporting Standards and western styled transparency, and info on them can easily be found as they are public. They are known as Red Chips and H Shares, and they are profitable. And BTW generally Foreign Invested Enterprises have always paid higher wages than SOEs in China for local talents.
cpc: “Jeremy has mentioned that a lot of Chinese people evade tax, so the printing of the money may not be as fast enough to sustain their government. Therefore China may have to print extra and its actions may inflate China’s currency more than United States.â€
First, as I said, the current monetary policy in China is contractionary instead of expansionary, and second, just for the sake of logic, has it ever occurred to you that, with the sheer trade volume and economic growth, a lower than official tax rate would have been sufficient to fund the government without the need to decrease its spending, such that the government might have already taken tax evasion into account when adjusting the tax rate, so that the government despite its enormous power chose not to implement severe measures to more effectively catch on a grand scale the numerous people and enterprises that evade tax?
And thank you for clarifying your position. I reckon it is right to maintain the view that the correlation between the degree of development of a country and its low saving rate does not hold, there being much more counter examples than supporting evidence in real life.
cpc: “I accept the fact that some high-IQ countries like Northeast Asians tend to invest more on innovation and education than low-IQ countries in Africa (most of them are illiterate). But not all Northeast Asians share a common culture.â€
African countries might have lower education levels but I do not believe Africans have lower IQ than Northeast Asians. And Northeast Asians do share a lot of common elements in their cultures although their cultures are not the same.
cpc: “Most people in the PRC is non-religious, but many of them have Confucian and Taoist beliefs, which would motivate the parents to invest more in education on their children.â€
Am I to understand that you are now embracing the culture theory? i.e. tradition and culture and belief affect people’s psychology and value and habits leading to differences in their human actions and investments and economic behavior?
cpc: “It only applies in education, not intrinsically in business and “working hard,” as you said: “being hard working etc. are deeply rooted from the Confucian.”
I’m curious as to what makes you think so. What do you think about their views on other important issues in life apart from education of the kids, like retirement, ageing, family liens, pride, self worth, peers recognition, life and death……? Would their culture affect their views on these issues and subsequently their human actions, and their decision in relation to investment and their economic behavior? And these are not businesses?
Not hard working? Not in business? Let me tell a joke. A real one in business circle here. Back quite a few years ago, some European countries implemented laws to restrict the maximum working hour to 39 per week. A European businessman told a South Korean businessman: we have the 39 hours limit in Europe now (there are other versions that replace the South Korean with Chinese or Japanese). The South Korean was totally stunned. He said, “You westerners are awesome. How did you achieve that? There are only 24 hours a day!†That is the kind of mindset in Asian business circle.
cpc: “Do you think that Confucians are very radical religious people and they just work hard for the sake of it?â€
You probably know the answer yourself. Confucian teachings are not radical and it is not even a religion, and neither is Taoism, and arguably, Buddhism can be practiced as a philosophy rather than a religion. You seem to have assumed that people have to be religious to make it work. Does that stem from the importance of Catholicism as a foundation of western culture? IMHO some Asian culture is imprinted in Asians in thousands of years of belief and habit and is manifested in what they do and how they behave consciously or subconsciously day by day rather than dictated by an authoritative religion as a Westerner might have thought. All in all, does that not support the culture theory?
agnostique says:
“My view remains that per Austrian School logic a stable forex rate is better than an interventionist forex rate manipulation in response to the counterpart country’s interventionist monetary policy.
austrian theory says nothing of the sort. what fundamentalist has been saying is correct – to the extent that the pbc inflates its currency (don’t just look at the most recent braking, look at the very fast chinese money growth over several years), it can counter upward pressure on the rmb. had the rmb not invested such vast sums in us treasuries, the us dollar would look even sicker than it currently does. so the chinese government already intervenes heavily; the fact that the americans pursue disastrous monetary follies doesn’t at all oblige the chinese to do likewise.
anyway, the austrians would recommend that the freer the policy, the better the outcome (whilst still condemning the fiat money system for creating the imbalances in the first place.)
this tactic is a national wealth-destroyer, but makes sense if the chinese political agenda is to reward favoured industries in the export sector. mercantilism isn’t a chinese invention, but they’re as guilty of it as the us.
China has the potential and confidence to maintain this rapid growth in the foreseeable future. So the goal of doubling GDP that was set out in China’s eleventh Five-Year Plan is within reach. Its faced with a number of important social and economic challenges, including various economic imbalances, China also has to increase government expenditure on social services, like health and education, as well as basic pensions, thus possibly reducing the need for precautionary saving and raising consumption.
Andira: “China has the potential and confidence to maintain this rapid growth in the foreseeable future.”
And we wish them the best. I just wish they would liberalize more so that they could grow even faster. What’s happening in China is very exciting.
Before you speculate that it is a “cultural” explanation of the high savings rate, please see Japan’s low saving’s rate of 3.1%. http://search.japantimes.co.jp/cgi-bin/nb20070113a3.html
Before you speculate that it is a “cultural” explanation of the high savings rate, please see Japan’s low saving’s rate of 3.1%. http://search.japantimes.co.jp/cgi-bin/nb20070113a3.html
It’s the One-Child Policy that makes China a big saver.
If China does not keep their currency low in relation with the rest of the world their economy, as they know it, will collapse. The only thing that props up their economy is cheap, sometimes even slave labour. If people think the Chinese have revolutionized capitalism they are delusional.
Artificially low interest rates in the countries they export to, globalism and a regimented facist government is the three legged stool propping up their regime. Take away any one of the three legs and it will topple. As I write this the Chinese government is on a huge internal “stimulus” program building apartments in areas that have 40% vacancy rates, bridges that have wagon tracks for roads leading to them ect. They don’t want the boom to stop.
In regards to their wage rates they are going out into the more rural areas to force the peasants into the cities due to the rising number of factory workers who demand increased wages!
The whole distorted mess may soon blow up in their faces.
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