Can China End Corruption? – ChinaFile – The Atlantic

Can China End Corruption? – ChinaFile – The Atlantic.

So there is a word for people who are particularly impressed with China and its economic progress: a sinophile.  Its opposite is a sinoskeptic.  I am firmly a sinoskeptic, and have been seen a comparative economics class in college that dissected the foundations of communist economic systems and laid bare their intrinsic faults.  Curiously, despite extensive research detailing the inherent faults behind the Soviet economic structure, no one has taken those lessons learned and applied them to China. Like the USSR, China’s political and economic system stifles innovation and entrepreneurship through a combination of legal limitations and corruption.  Like the USSR, China does not allow for owning private property, which discourages investments in a home or business.  Like the USSR, China’s organization for centralized, top-down planning is inefficient, creating, among other things, a vicious housing and construction bubble that the government is desperately trying to keep from popping.  Sure, to look at the numbers, China is doing quite well for itself, with annual growth rates in the teens (if the numbers can be believed, which I am skeptical about as well).  I have two problems with this data:

First, there is a concept in economics that I am going to call, for lack of a better phrase right now, intrinsic economic potential.  In transitioning from an agricultural to an industrial economy, rapid growth is inevitable even in the most poorly run countries.  The increase in productivity represented by industrialization is enormous and inherent to the very act of industrializing – so the fact that China has been growing so much for the past few decades is not because of some inherent quality to the Chinese system, it is because of the inherent quality of industrialization itself.   As Daron Acemoglu and James A. Robinson note in their book Why Nations Fail, even the Soviet Union grew at an annual rate of about 6% a year during the height of the Cold War while it transitioned to an industrial economy, and look out they ended up.  And at the time they used almost the same verbiage referencing the Soviet economic powerhouse as people use with China today – that in a certain number of years the US will be overtaken, that the way they operate is superior to capitalism, etc.  But as with the USSR, China’s economic growth is concealing poor economic foundations, and as soon as the intrinsic economic potential has been played out, China will be facing some difficult decisions.

Two, China has not been competing on a level playing field with the rest of the world, and has engineered the international economic system that they play in to benefit themselves.  China has been criticized repeated for fixing their exchange rate rather than let it float against other international currencies, which keeps the prices for their goods artificially low.  They institute high tariffs on incoming products to protect national industries.  They have started suppressing the rising cost of wages and resisted the unionization of labor (a curious activity for a communist system) so that their goods can continue to be produced more cheaply than anywhere else.  Winning is quite easy when you cheat.

There are also a number of other flaws that would be laborious to try to outline here that underline the flaws of the Chinese economic systems, and they have likely been detailed by other sinoskeptics with much more time and resources on their hands than I.  But the summation is that China is attempting to walk the fine line between communism and capitalism, between free markets and repressive politics.  This is not a balancing act that can live forever.  But I am not a Sinophobe, by any means – my sinoskepticism is not based on a “jingoistic” dislike of China, as Zachary Karabell commented on in the Atlantic  a few weeks ago.[1]  But as he points out, the US and international economy leans a great deal on China for their own economic well-being, and that is almost certainly a bad idea – because no matter what, the current Chinese economic system is unsustainable.  The best scenario is that it manages the transition from communism to true capitalism well, but that will still result in significant upheaval, both political and economic.  The worst case scenario is that China continues to deny that they need to change at all, and they run full scale into a Soviet-style political and economic upheaval, to the detriment of all.

[1] Karabell, Zachary.  “If You Want a Strong US Economy, You Should Be Rooting for China.” 7 March 2013.


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