Mental Experiment

by Russ Roberts on March 28, 2006

in Standard of Living

A lot of people are worried about China as an economic threat to the United States. I’m not. China’s economic success is good for Americans. When Americans buy toys and clothes and iPods made in China it means that we have more people and capital available to make other things.

A variation on the Chinese threat is that someday, if they keep growing, they’ll pass us. This is the view that economics is like the Olympics. If you don’t finish first, you’re stuck with the bronze or silver medal or worse, you don’t even get to the medal stand. But economic success is not like the Olympics. It’s not a zero sum game. I care about my children’s opportunity to live a fully human live, choosing to use their skills as they see fit. A successful China enhances that. I hope China does great in the meanwhile. The Chinese are desperately poor. Who would be so heartless as to hope that they stay that way?

So here’s a mental experiment. Even with China’s tremendous growth over the last 20 years, America’s per capita income is many times higher than China’s. What if you woke up one more morning and discovered the whole thing was a lie. The Chinese had mismeasured their national income information and it turned out that the Chinese, in fact, had a per capita income many times that of the United States. It could be true, you know. Maybe they really are really, really, really rich. How would it change your well-being? Would it make any difference whatsoever?

Footnote: I am deliberately ignoring China as a military threat. Some people argue that China isn’t just competing with us economically, but militarily. Could be that China has militaristic and territorial ambition, whatever that means. On military grounds, it would matter if China is really, really, rich. That’s because military competition is a zero sum game. Winning a war usually means that the other side loses. And being rich might make China a more potent military threat. But I actually would argue that Chinese economic growth reduces the chance of military conflict. The more we trade with them and the more our people’s interact economically, the less likely we are to fight a war with them.

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99 March 29, 2006 at 12:01 am

***** "Winning a war usually means that the other side loses. And being rich might make China a more potent military threat. But I actually would argue that Chinese economic growth reduces the chance of military conflict." *****

You may well be right that a rich China is a China we're less likely to go to war with. I think the last time I checked out the CIA's site, I learned that Langley is of the opinion that China's GDP is ALREADY something like 2/3rds of the USA's in PPP terms. Now, I know PPP comparisons aren't valid for all purposes, and I also know that China needs to feed and house a lot more people with its output than we do.

Still, by some measurements, China's economy is likely to be larger than America's in a short while — perhaps in less than ten years. And some day in the not-too-distant future — imagine in 30 years or so — China's economy may well be a very good deal larger than America's.

This may not mean all that much to the average American or Chinese when that day arrives. And America is likely to remain a much richer nation than China for the forseeable future. Still, America is on the verge of no longer being the nation state with the largest economy. In my book that means in some ways (not necessarily miltarily) the US will no longer be the single most powerful nation state. I'm not sure what that means. And I'm quite sure there's not a thing America can do about it. But at the very least it's unsettling.

Dennis March 29, 2006 at 12:57 am

I agree with the theory that China's economic growth, or that of any country for that matter, is good for our economy due to the freeing of human capital to perform more advanced activity. However, I can't help considering that many Americans may not be capable of more advanced activities. We are not talking about the perverbial move from manufacturing of buggy whips to that of automobiles, but rather a more dramatic change altogether.

We seem to be moving from the industrial age to the intellectual age, & I think many will not be able to be productive participants in the "new age". I know this change is unavoidable, & I am not an isolationist, but I can't help but to be concerned here. Some people were made for tedious, unstimulating work. What happens when jobs for which they are mentally capable become sparse? Not everyone is capable to be trained as an engineer, or an economist for that matter.

Brian Radzinsky March 29, 2006 at 3:57 am

A richer China can only be good for us economically, but it can definitely pose a threat militarily.

Economic interdependence doesn't necessarily correlate with decresed agression, as much as Thomas Friedman would like to believe otherwise. However, that doesn't mean that we should throw up our hands and become mercantilists just because a richer China could be a stronger China.

The goal for foreign policy makers is to deal with threats as they come. If China's growth leads to increased militarization, so be it. There isn't much we can do to prevent her rise. All we can do is adapt to the situation accordingly, either by curtailing her power or balancing against her. But an argument that is opposed to China's liberalization solely on the basis of the military threat she might pose to the world's last remaining superpower years down the line is no real argument at all.

Ken King | King Marketing March 29, 2006 at 7:34 am

Russell,

The logic of your mental experiment is sound, but you're ignoring a key aspect of our psychology. People don't measure themselves by an absolute yardstick, everything is relative – salaries, homes, cars, clothes, even spouses and children are routinely compared with those of our peers.

The perversity of this mindset is demonstrated in the ultimatum game – http://en.wikipedia.org/wiki/Ultimatum_game – in which one person is given a sum of money and instructed to offer a portion to a second person. The second person may accept or reject the proposed split. If the offer is rejected, neither person gets to keep any money.

By your logic, the second person should accept any offer, as they will be no worse off than before. However, players of the game regularly reject anything less than 20%, and offers often end up being close to 50%. Economics grad students are an exception, and generally play by logical rules. Maybe this is why trade agreements negotiated by economists are regularly torn apart by politicians? ;-)

JohnDewey March 29, 2006 at 8:04 am

Dennis,

Is it possible you underestimate the capacity of your fellow humans? Even a person with intelligence well below average is capable of performing work that would be stimulating and non-tedious, at least to them. Not all technology jobs require engineering or computer science degrees. Health care organizations employ more non-degreed workers than MD's and RN's.

Unfortunately, outsourcing will not eliminate most of the tedious jobs in the U.S. We will still need truck drivers, meat cutters, supermarket inventory stockers, security guards, and many more jobs many consider unstimulating.

I think the U.S. worker has adapted very well as automation eliminated tedious work. I don't see why he can't adapt just as well to outsourcing.

Half Sigma March 29, 2006 at 9:24 am

I think it's bad for mankind if the world's most powerful nation is a totalitarian state and not a democracy.

Ann March 29, 2006 at 9:39 am

I don't think that China will represent a significant military threat to the US even once it's rich, unless we object to them taking over their own region. They wouldn't mind if we took over Mexico, central America and perhaps even south America, as long as we don't mind their claiming the entire South China Sea (look at a map to see how ridiculous this claim is), keeping Tibet and eventually discovering historical documents showing that, say, Myanmar, North Korea, Outer Mongolia and a few other countries (Vietnam?) are traditional parts of China.

As long as we're willing to ignore the fates of the people of Taiwan, Tibet and several countries to be named later, China's military might won't threaten us at all.

If China grows economically, will the Chinese Communist Party get so rich that they'll forget about regional domination? It worked with Japan, but that may have been due to other factors (the surrender, occupation, etc.).

The US shouldn't try to torpedo China's economic development – both because the Chinese people deserve a chance to work their way out of poverty, and because the Chinese Communist Party would turn nasty very quickly. But we also shouldn't give them military technology, as we did under Clinton, and we should pressure China on human rights, including respecting the rights of the Taiwanese and Tibetans. Right now, the business lobby pressures us to let China get away with all kinds of bad behavior, because businesses think they'll all get rich there.

John Dewey March 29, 2006 at 10:34 am

Ann,

I agree with most of your post. But not the part about the motives of the business lobby.

IMO, business leaders realize that human rights and elimination of poverty depend on economic development. In the long run, by building up China's economy and introducing Western capitalism, American businesses will have a huge impact on the everydaqy lives of that nation's population.

Certainly, a major motivation of business leaders is profit. But business leaders I've known are also human beings. Fred Smith at Fedex truly cares about all his employees, including those in Asia, as much or more than he cares about Fedex shareholders.

Fred Smith also cares more about customer service than about profits. He always took pride in the very personal stories about his huge company saving the day for an individual or for a small business. Profits, on the other hand, were a means to an end.

I'm not going to argue there are no ruthless, unethical business leaders. But I believe that most corporate leaders share Fred Smith's ideals, though certainly not his ability.

Half Sigma March 29, 2006 at 11:37 am

Nazi Germany had a powerful economy. There is no guarantee that a powerful Chinese economy will mean more freedom for Chinese citizens. But a powerful Chinese economy does guarantee a more powerful Chinese military.

Patrick March 29, 2006 at 11:52 am

I think a couple of things are clear: China intends to continue their rapid economic growth, China will be a large military power, jobs and services will continue to be outsourced to China.

What's not so clear, or rather apparent, is the fact that being a dominating economy is not compatible with communism or totalitarianism. To break through the per capita income, real GDP and other barriers, China will have to release it's iron grip on the citizenry. That may not happen for 20 or so years, but it no doubt will. It may mean the break up of China a la the Soviet Union into regional powers like Mongolia, Tibet and various provinces. One thing is for certain: the better China does economically, the better we all do. As an insurance professional, I salivate at the fact that there may be over a billion new insurance clients in this one country. Imagine all the goods and service a large and happy China will be able to buy. That can't be anything but great for the US.

On the military front, now why in the world would you get into it with your biggest customer? I mean, would FedEx start a fight with Amazon over a non-business related issue like politics, property rights, sports or anything else? Hell no, that would be economic suicide. And the Chinese, despite their communist sentiments, are not stupid enough to tangle with the people that buy at Walmart.

Ann March 29, 2006 at 1:33 pm

"To break through the per capita income, real GDP and other barriers, China will have to release it's iron grip on the citizenry. That may not happen for 20 or so years, but it no doubt will."

You're assuming that, if the Chinese Communist Party has to choose between power for themselves and prosperity for their country, they'll put the country's needs above their own and go quietly. Do you have ANY evidence whatsoever that they have done this in the past or are likely to do it in the future? This is the Party that starved to death 10 to 30 million of their own people during the Great Leap Forward because they didn't want to admit that Mao's policies might not have been perfect. Better that millions should die than that the leadership risk embarrassment.

Right now, the CCP is trying to have it all. If they are eventually forced to choose, I think they'd sooner invade Taiwan than risk losing political power.

John Dewey –

I wasn't saying that all businessmen (and women) are evil. What I think is that they've been ridiculously naive where China is concerned. I was teaching finance at a business school in Hong Kong for much of the 1990s. The Hong Kong and other Asian businessmen (and occasional women) had a far better understanding of China than the foolish Westerners. The Westerners read a few guidebooks about guangxi and thought that losing money in China meant that they somehow became a friend and partner that the Chinese would watch out for in the future.

Meanwhile the Chinese had a saying that loosely translates to "to screw foreigners is patriotic". They had a zero-sum game view that every yuan a foreigner made in profits in China was a loss to the Chinese, while every yuan lost by a foreigner inevitably brought some hidden benefit to the Chinese even if it seemed to be just thrown away.

I'm not against trading with the Chinese, and I want to see the people prosper. But this Party has one of the worst records in modern history – it's killed far more of its own people than all except possibly the Soviets. Hitler's death toll was tiny compared to Mao's. Patrick says that the CCP would never tangle with the people that buy at Walmart. But if they'll murder millions of Han Chinese, do you really think that 'white ghosts' are exempt?

We shouldn't ignore their past, including relatively recent actions such as challenging the Philippines over the Spratley Islands or the Japanese over the Senkaku Islands, or what they're doing to Tibet or the threats they've made over Taiwan (and even their threats on Hong Kong, to get it back).

Giving the Chinese Communist Party unlimited dual-use technology and helping them censor the internet, and then expecting it all to magically work out because we assume that they think the way we do, is dangerous.

Noah Yetter March 29, 2006 at 3:16 pm

Ken, only an economist who doesn't understand non-material value would be surprised at the results of the ultimatum game. And I would wager that such economists are very few and far between.

Broocks March 29, 2006 at 3:21 pm

Just in relation to 99's comment. I don't believe that Mr. Roberts meant that China's Gross Domestic Product even on a PPP scale will not soon surpass the United States, but that China's per capita income is nowhere close to the United States. I believe that the American market is close to 20 times larger than the Chinese market, because of the fact that Americans are much greater consumers of luxury goods than the Chinese. For example, if you were to try and live off $6,000 a year (in modern day America) saving a large amount of that, and having to pay a large amount in taxes, how much would be left over for the rest of all your luxury items. In the United States, since we are able to save much less and are taxed less, we have a much greater amount of money to spend on luxury items. It seems from this that it will take a much longer time for China to catch up to the United States economically than in just real Gross Product terms.

In relation to China's military prowess, I don't seem as worried. I think that many of the things that people have pointed out, such as the fact that China is a totalitarian regime, and that it often willing to make friends with enemies of the US (and often enemies of other countries) leads for the US to have a great number of natural allies that it wouldn't otherwise have. For example, India is a country that is a rising power as much as China is, and given that India is radically opposed to China in almost every facet, and that they are a free-democracy seems to make an India a natural ally of the United States. The same can be said for European nations or even perhaps Russia.

Mr. Econotarian March 29, 2006 at 3:41 pm

"You're assuming that, if the Chinese Communist Party has to choose between power for themselves and prosperity for their country, they'll put the country's needs above their own and go quietly. Do you have ANY evidence whatsoever that they have done this in the past or are likely to do it in the future?"

Taiwan and South Korea are examples of dictatorships that moved to democracies to achieve economic growth above the $3000/person level. While neither of these governments were quite as totalitarian as China's, they've seen the examples of how to grow.

"This is the Party that starved to death 10 to 30 million of their own people during the Great Leap Forward because they didn't want to admit that Mao's policies might not have been perfect."

Of course, now they do admit that Mao's policies were not perfect. And to some extent, today's Chinese Communist Party has far less concentrated power than under Mao.

All that said, I say 50/50 chance of a massive, violent, democratic revolution in China.

James of England March 29, 2006 at 3:46 pm

Just to note that the military side isn't wholly zero sum. We have many enemies who are not Chinese. Contra Ann, the Chinese are extremely involved in Latin America. They're also probably the best hope for African development. I'm as keen on America reshaping the world in its own image as anyone, but having other people breaking down statist protectionism and forcing isolated and potentially failed states to integrate into the global economy is a great thing.

Competitive liberalisation is one of the great hopes for the world. The Chinese help with the Container Security Initiative has been invaluable. It's true that they could be better allies, but the barriers they break down are often later crossed by our closer allies, like India and the UAE. Intelligence enhancing free trade agreements are being brokered with China all over the world, and most states that get one go on to immediately start negotiations with others. In foreign policy, the Chinese have a lot in common with the neoliberals. Sadly, they have a little more enthusiasm for irksome Latin American commies, but it is to our benefit that someone talks to these people (North Korea is a different case).

happyjuggler0 March 29, 2006 at 5:02 pm

There are two basic reasons countries choose to invade other than self defense. 1) religion 2) to capture that country's wealth.

We definitely don't have to worry about reson number 1 with the Chinese. As for the second reason, the more and mor ethe Chinese get wealthy by creating the wealth, the more more likely they will see that war with another country is counterproductive to being wealthy. Thus a more wealthy China is likely to be a more peaceful China.

As far as a wealthier China hurting our ability to be wealthier, this is just plain wrong. The wealthier they are, the more they can buy from others, including the US. The more productive they are, a precursor to increased wealth, the better teh price/quality factor of the goods and services we buy from them will be, and therefore we get more for our money, and the wealthier we are in the process than we'd be from buying more expensive goods of the same quality, or lower quality goods at the same price.

Voluntary trade is win/win, and the increased wealth of others, assuming it is not stolen, is helpful for everyone else who wants to become wealthier.

If you are good at writing code, but horrible at plumbing, then you benefit from making money by selling your programming services to others, and you benefit from buying the services of a plumber. The time and agony you save by not screwing up your own plumbing, or getting yourself or family killed doing your own electrical wiring, and by using your time and efforts, your comparitive advantage, to make money instead by programming, makes you better off, and it makes your plumber and electrician better off too. This is no different than a China that gets wealthier by using its comparitive advantages, while we get wealthier while using our comparitive advantages.

Ann March 29, 2006 at 5:02 pm

Mr. Econotarian –

I agree with a lot of what you said, and have found hope in the examples of Taiwan and South Korea. After all, it's a middle class that cares most about rule of law. The desperately poor are just trying to survive and the rich can buy special treatment. But in spite of how the Chinese Communist Party has progressed, they still haven't made many of the hard decisions and still believe that they can be rich without losing political control.

You're right that China could go either way – it could evolve peacefully, with a developing middle class gradually demanding reforms, or it could collapse/blow up dramatically. I agree that the first is a strong possibility but am concerned that many don't see the second possibility at all.

Broocks March 29, 2006 at 5:46 pm

I think it might be interesting to note that both South Korea and Taiwan liberalized and experienced a great period of growth under dictatorships which might not have been possible without the one-party rule.

I think it's also possible that China doesn't reform and continues to grow. I think history shows that as a people become richer it becomes more neccesary to evolve into democratic governments, however, I think in China one could be experiencing a different case.

Beyond that, do we really think that China is promoting African development and Latin American liberalization? From my view, it seems that China doesn't care about the countries its helping as long as they have something to give it, and that China demands nothing in return in the way of reform. Whether the Chinese are making friends with Iran, the Sudan or Venezuela, there always seems to be a motivation behind it that doesn't rest on liberalizing the world, it rests on competing for the world's resources.

Patrick March 29, 2006 at 7:45 pm

Ann, In response to your comments about China politically liberalizing, you are absolutely correct: The CCP is a corrupting, tyranical entity bent on getting all the money, military and political power it can by any means possible. And they won't voluntarily relent. So my apologies for being far too naive about the "power of the people". The Chinese have never shown any inclination to rise up and take control of their destiny. They do seem to be content with being led, either by Mao or some long forgotten emperor. In 20 years time, there may be no change. I just hope and pray and use optimism that over a billion people will not seize their opportunity to be free and happy.

Ann March 29, 2006 at 10:29 pm

Patrick –

It sounds like you know the Chinese pretty well. I, too, hope that the Chinese people will demand something better (and the chances might be better if Western companies weren't helping them build the 'great Chinese firewall' to block information on democracy).

It's an interesting culture – they would say that they've tolerated misrule because they value stability above all else. But in my opinion, their willingness to tolerate injustice and inefficiency in the name of 'stability' is the very reason why they never get stability. Instead, they have long periods of stagnation followed by chaos when the unresolved problems become too great.

Broocks -

I don't see why the gains made under dictatorships in Taiwan and South Korea wouldn't have been possible, and perhaps even more effective, in a well-functioning capitalist democracy. It's important to look at the full sample – for every one dictatorship that evolved and prospered, how many dozen have descended into poverty and chaos?

It's possible that China is inventing a unique new way, but they haven't been very innovative for the last millenium or so, and they have a long, long way to go before they pull off a peaceful transition this time. I hope they do it, but surely they'll have to make some hard choices (such as stopping their banks from making new bad loans to stack on top of all the old bad loans) before they finally achieve 'stability'.

What you said about China's relations with Africa and Latin America is interesting. Their friendships with Venezuela, Iran and the Sudan are unlikely to be motivated by concern for dark-skinned foreigners, although we can always hope that trade will liberalize both sides, regardless of their intentions.

Again, I'm not recommending that we stop trade with China or take drastic steps to limit its growth. I just think we need to be realistic and not be dazzled by the lure of 'more than a billion consumers'. This could still go either way. Many Chinese celebrated when they heard about the fall of the World Trade Center towers – restaurants in Beijing were very busy on Sept. 11 with people going to dinner to celebrate our humiliation. We shouldn't take for granted the idea that China's power automatically helps us, or helps the region.

Henri Hein March 29, 2006 at 11:41 pm

99 wrote:
"China's economy is likely to be larger than America's in a short while — perhaps in less than ten years. [...] I'm not sure what that means. And I'm quite sure there's not a thing America can do about it."

There's plenty America can do about it. If the US economy were to get more liberalized, there's no reason why it couldn't grow at an 7-9% rate, like other economies (China, New Zealand, Ireland, Estonia) that's done the same.

I don't know if that rate is sustainable once you run out of things to cut or deregulate, but there's plenty to do domestically. Cutting corporate welfare and the corporate income tax, reforming Social Security and lowering trade barriers would be good items to start with.

Broocks Wilson March 30, 2006 at 5:08 am

Ann,

I think there is a real question in many situations about whether or not a country has the possibility of liberalizing it's economy if there is not a strong central government in place. I am certainly not arguing for the tyranny of China to be adopted throughout the third world in order to promote economic advancement. It does seem though to be a relative argument that countries often need a force that is not open to the whims of the public in order to put through neccesary reforms in order to promote economic growth (see Chile, Spain, Indonesia and even South Korea and Taiwan).

Beyond that, I think that although the CCP is not the model of flexibility, that the CCP is good at noticing potential downfalls of power. For example, the CCP is extremely aware of the possibility of economic overheating, the shortage of education, and the huge income disparities, and is working hard to overcome them. It is possible that if the CCP can make it look to the Chinese people that it is looking out for their best interests, that it can stay in it's position of power.

At this point also, I don't think it's the dazzle of a billion conusmers that attracts the west to China, it's what Mr. Roberts mentioned, it is the fact that China has a billion people who will work for absurdly cheap amounts of money. As Mr. Roberts points out, a Chinese made iPod or shirt is cheaper than a European or American made iPod or shirt and so therefore Americans have even more capital to make and invest in other things (and essentially make us richer).

In relation to Mr. Hain, the United States is perhaps the most econoically liberal country in the world. The United States has far less government intervention in the market than any of the countries you mentioned (except possibly Estonia), and is far more deregulated than any of the markets which you mention. Beyond that a rate of 7-9% growth would be unsustainable for the American economy, it's impressive enough that since about 1982, the United States has only had two very small economic declines, and has grown at an astounding rate and seems to be able to continue to do so because of our ability for technological innovation and the ease of entrepeneurship and new idea's to enter into our economy.

I'm not saying that the United States doesn't have areas to improve upon, it most certainly does, but I don't think that a drastic cut of public spending and deregulation is the exact answer.

Ann March 30, 2006 at 10:00 am

Broocks –

It's certainly possible for a country to do better economically under a dictator. The Philippines might have been better off, at least for the first decade or two, if Ramos had pulled a coup to prevent Estrada from undoing all his reforms.

But, even though it's possible to get a very smart, honest, capable, well-meaning dictator, putting a country in the hands of an extremely 'strong central government' is a very risky strategy and the odds against it working well are high. Again, think of all the many, many authoritarian regimes there are, and how few of those have followed good policies.

Also consider the downside to extreme power – what Mao did to China, what Mugabe is doing to Zimbabwe, what the Kims have done to North Korea, etc. The worst possible outcome is generally less horrendous under democracy, even if the people settle for corrupt populist boobs like Estrada in the Philippines (to be fair, I'm not sure Estrada personally was corrupt, although his buddies clearly were).

And even if we believe that a dictatorship is worth the risk, on the hopes that we'll get a good dictator that stays good, the Chinese Communist Party is on a different and far more dangerous level (and I'm not saying that only because of their truly horrendous past).

The reason that communism is generally far more repressive than facism is because the aim is to control even more. Facists want total political power, but communists want to control literally every last detail of a person's life. Communism aims for total domination politically, economically and socially, and to micro-manage economic as well as political life requires even more brutal repression.

Yes, the CCP has recently been trying to do a good job managing the economy, and they've had some sucess. But they're still trying to micro-manage the economy, and they've made some amazingly bad choices. Most of their success has come from getting out of the way of the enterprising Chinese people, and the CCP so far hasn't been willing to step too far out of their way.

The US economy has prospered largely because of a general focus (relative to other countries) on setting the rules of the game and then allowing competition, rather than picking winners and losers. The CCP hasn't generally been willing to let the market decide who wins and loses – they prefer rigged systems. They've been growing so far in spite of this, but it's risky to only aim for second or third best, especially with extremely poor quality, corrupt bureaucrats managing the second-best system.

I'm spending so much time on this issue because I think that this idea – that true growth and development requires a dictator (or a group of them) – is dangerous. It's very attractive to the worst sorts of rulers. Would you gamble the lives of your children on the hope that the person who forces his way to power will happen to be an enlightened, caring individual who will resist corruption for decade after decade, always making the economically sound decisions regardless of how they might affect himself? Again I say – look at the overall track record, not just at a few examples of success.

Broocks Wilson March 30, 2006 at 1:02 pm

Ann,

I think it is a completely valid argument that a country needs a strong central government that is not affected by popular opinion in order to create the liberalism neccesary to create rapid economic growth. You ask us to look at all the failures, and I agree that there are far more failures than successes. That is something though, that American policy itself could possibly change.

I do not think that a strong central government must neccesarily mean a totalitarian autocratic regime. It does seem to me though, that in countries that are relatively poor and new to democracy that reactionism seems to be a much more popular concept than stability, and for that reason there does not exist a strong central government that can operate sometimes opposite of public opinion. Again you ask to look at all the failures of dictatorships, but I ask us to look at many of the failures of democracy. In Latin America you have countries that have strong central governemnts but are completely open to the whims of a very reactionary populace (Argentina, Venezuela) and so often hinder themselves. If you look at the two most politically and economically stable countries in Latin America, Uruguay and Chile have come from dictatorships which were able to establish economic prowess before handing over the country to democracy. Beyond that if you have a politically split country with a new and relatively weak democracy with no money, the country will often degenerate into civil war and dictatorship.

To say that the CCP is a Communist country I think is a bit absurd. The Chinese Communist Party is Communist only in name, they are totalitarian. I also think it is important to consider that China's move towards economic liberalism is not one that is going to happen overnight (that would most certainly cause overheating) and that they are moving slowly for many right reasons, because they want to make sure they are doing this right and that it doesn't turn into a free-for-all like we saw after the fall of the Soviet Union in many Eastern European nations and Russia. Although China has made some bad decisions, China has also made some very good decisions.

Ann March 30, 2006 at 1:29 pm

Broocks -

I certainly agree that democracy is no magic cure but still argue that a) it's more likely to produce good results; and b) the downside risk is less severe. Plus I'm concerned that the leaders most drawn to your approach are those least likely to act in the best interests of the people, even if they understand those best interests.

China's not just totalitarian, they're micro-managing totalitarians, thanks to their communist traditions. Much of the economic growth in China has been due to the central government being too corrupt and weak to stop various developments around the country. Their 'plan' on many major problems, such as the bad loans of the banking system or the burden of state-owned enterprises, has been to simply look the other way and hope that they can grow their way out.

What are some of the good decisions that the Chinese government has made? Clinging to power, using the Soviet breakup as an excuse, doesn't count, and neither does back-door privatization by allowing Party members to loot state-owned enterprises. What really difficult problems have they tackled and genuinely tried to solve?

Broocks Wilson March 30, 2006 at 3:18 pm

Ann-

I think we are going to have to agree to disagree about how well a democracy can function to build economic wealth.

I also think that although Communism has the aspect of personal micro-management that personal micro-management is also something that is related more to totalitarian states (which Communist countries tend to be a large part of). Beyond that, much of the economic growth that has taken place was helped by Chinese corruption, but was also helped along by the Communist Party's commitment to creating a market economy and to the ability of the Communist Party to although sometimes irritate Western companies, do a much better job of attracting investors than countries that are democratic like those of India and Russia. In fact the fact that Chinese growth has outstripped Indian growth can be seen by the fact that China has been much friendlier to foreign investment than India has. Beyond that, China does seem to take on the real issues of income distribution and economic overheating by creating policies in order to make agricultral groups richer and to make sure that the country has the resources avalible to continue growth. Also, perhaps using the Soviet break up is an excuse, but it does not negate the fact that it is and should be a real fear. It is hard for a country to revert to capitalism and maintain the standard of living the people have come to expect. If China were to revert to capitalism, the social welfare systems would work in a much less dynamic way and the income inequalities would still exist, causing an even more drastic feeling of remorse.

Charlie March 30, 2006 at 11:47 pm

"So here's a mental experiment… What if you woke up one more morning and discovered … the Chinese had mismeasured their national income information and it turned out that the Chinese, in fact, had a per capita income many times that of the United States."

Since this is a mental experiment, I won't pull out the calculator, but don't you imagine there would be some negative repercussions if an economy with 1 billion more people than ours had per capita incomes — and presumably, consumption — at a multiple of the US?

Could we imagine oil, steel, concrete and forest product supplies feeling stress? Air and water would only get better with all that income, right?, because people with higher incomes would insist upon it.

No, probably nothing to worry about…

Henri Hein March 31, 2006 at 2:42 am

"the United States is perhaps the most econoically liberal country in the world"

By the FreeTheWorld index, the US is #5. By the Heritage index, the US is #11. Worse, the US is creeping down: it used to be higher on both lists.

What's your measure?

"a rate of 7-9% growth would be unsustainable for the American economy"

Why? If developed economies like New Zealand and Ireland can grow at that rate, why not America's?

Broocks Wilson March 31, 2006 at 3:42 am

Well Mr. Hain,

According to the Economic Freedom of the World, the United States ranks 3rd behind Singapore and Hong Kong. In the Global Competitivness Report the United States ranks 2nd behind Finland.

I also do believe that the Index of Economic Freedom punishes the United States for not allowing foreign acquisitions from certain countries, having certain regulations that give peopl these things called rights and for having a high tax rate. That doesn't change the fact that the United States still has the most flexible labor market in the world, that I think it is still easier to start a company in the United States than anywhere in the world, and that research and development investment is still the highest in the world. Also, I believe the US government operates far less in the market than most other governments do.

Ireland and New Zealand were moving from highly protectionist economies in which the state was extremely interventionist to a place where it is still extremely liberal. The United States doesn't have as much to cut. For example, in Ireland and New Zealand telecommunications companies, transportation companies, natural resources companies, all sorts of companies you can imagine had to privatized and the economy had to be made more flexible. The United States wouldn't benefit from making itself more flexible in such a drastic way because of how flexible it is.

someguy April 8, 2006 at 9:52 pm

"Their 'plan' on many major problems, such as the bad loans of the banking system or the burden of state-owned enterprises, has been to simply look the other way and hope that they can grow their way out."

Sound like any western countries?

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