No Economic Reason to Fear China
By Pierre Lemieux
An article in The Economist (“The Lives of the Parties,” December 15, 2018) reminds us why China is not to be feared. If the domination of Chinese society by the state persists or grows, the country will crash as the Soviet Union did, and for basically the same reasons. Like the Soviet Union, China grew rapidly for a while, helped by its mimicking of Western ways in technology and management and by the displacement of poor workers from agriculture to manufacturing. And contrary to the citizens of the Soviet Union, the Chinese were allowed to participate in global trade, which benefited them (and us) a lot. As The Economist puts it, “world trade helped discipline Chinese firms.”
But according to The Economist, China is starting to look a bit more like the Soviet Union in its twilight. State firms account for nearly half of output, and are apparently growing again. Here is the picture conveyed by the newspaper:
China’s GD per person, at purchasing-power parity, remains below that in the Soviet Union on the eve of its collapse. And despite its capitalist trappings, the Communist Party is piloting China’s economy in a direction similar to that of the Soviet Union in its twilight.
Just like in the Soviet Union before the collapse, Chinese productivity is now apparently slowing down if not decreasing:
Indeed, productivity is actually declining, and at an increasing pace, according to recent work by Harry Wu and David Liang of Hitotsubashi University in Japan. Unpublished estimates by Mr Wu suggest that in 2016 total factor productivity, or the contribution to growth not accounted for by the addition of labour and capital, dropped back to levels last seen in the early 1990s. The problem is the same as that which plagued the Soviet Union: capital, directed by political interests, piling up in inefficient parts of the economy.
The problem is well-known: a state-dominated economy is not flexible enough to shift enough resources out of declining industries and into profitable sectors. Rent-seeking is endemic.
If the situation continues to evolve this way, Chinese companies will become as competitive as Soviet ones were—that is, they will be no match for lean capitalist businesses in the West and part of Asia. Capitalist businesses will soon have no reason to fear Chinese competition.
If, on the contrary, China is becoming a capitalist country, there is still no reason to fear trade between individuals there with individuals here—but for a different and more general reason. After all, competitive pease of businesses is not the criterion of efficiency nor should it be a political goal. “China” either refers to the Chinese government, and no capitalist has to fear its economic competence. Or else “China” means the collection of individuals and private ventures within the country’s borders, and it is in the interest of individuals in other countries to welcome the Chinese in their exchange networks. More exchange means more specialization, a more extended market, and more benefits from comparative advantage.
In a 2012 book (How China Became Capitalist, Palgrave Macmillan), Ronald Coase and Ning Wang argued that China had become or at least was becoming capitalist. My review of the book in the Winter 2012-2013 issue of Regulation suggested that China could also be seen as evolving towards a sort of crony capitalism, which is not actually capitalism. Is the glass becoming half full or half empty? One way or another, the Chinese economy is not to be feared.
The only reason to fear China would be political-military. The rulers of any state who wields military power at the world level are naturally tempted by imperialism and war. But the way to dampen the temptation is not to isolate China but, on the contrary, to promote free trade and Chinese participation in trade. Let’s teach them individualism by example. Chinese (and American) consumers and businessmen are more likely to resist the sirens of nationalism if they realize that the benefits of trade would be destroyed by war. As William Polachek wrote (“Conflict and Trade,” Journal of Conflict Resolution 24-2 [March 1980]—his emphasis),
Ceteris paribus, the greater the amount of trade, the higher the price of conflict, and the less the amount of conflict that is demanded.