NCPA - National Center for Policy Analysis

WHEN WILL CHINA JOIN THE ALSO RANS?

June 1, 2010

The current trend in China's economic growth is not unlike what the world has seen before.  Germany and France in the 1960s, and Japan's unerring industrial policy of the 1980s all had economic models that were admired by all.  We now admire the Chinese model, says Paul R. Gregory, a Hoover Institution research fellow and professor of economics at the University of Houston. 

Nobel laureate W. Arthur Lewis's 1954 article, "Economic Development with Unlimited Supplies of Labor," is the crystal ball we need to assess China's future: A country with virtually unlimited supplies of labor locked in unproductive traditional pursuits can grow rapidly by transferring it to a "modern" sector.  However, when the transfer is complete, it must grow, like other countries, on the basis of technological progress, which is an entirely different ballgame. 

According to Gregory: 

  • China's legal and economic institutions are those of a Third World country, with rampant corruption, weak rule of law, poor protection of property rights and the allocation of loans by state banks and political officials.
  • Just as Japan's maligned government-operated postal savings bank system wastes capital, so do China's local and regional officials and the financial institutions they control.
  • The high rates of capital accumulation simply make such waste less visible; indeed, there is a lot of capital to misuse. 

There have been no historical exceptions to the requirements to join the top ranks of countries in living standards.  According to Gregory, such requirements include: 

  • Limited government interference in economic decision making.
  • Equal application of the rule of law.
  • A small government to avoid waste and rent seeking.
  • Low rates of taxation and other burdens on achievement, and free international trade with other countries.  

China is unlikely to improve its performance in these areas.  The Chinese Communist Party is no historical aberration.  China has a long, long history of statism, and no intellectual challenge to this tradition.  The Communist Party cannot introduce a real rule of law without a serious loss of its political power.  When confronted with the impending end of its growth miracle, China will not change its stripes, says Gregory. 

Source:  Paul R. Gregory, "When Will China Join the Also Rans?"  What Paul Gregory is Writing About, March 17, 2010. 

For text:

http://whatpaulgregoryisthinkingabout.blogspot.com/2010/03/when-will-china-join-also-rans.html 

 

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