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Subsidize It, It Will Grow …. and Grow, and Grow…

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Today’s New York Times reports [2] on the current state of litchi production in China. It’s way, way up – and prices for this fruit are way, way down. (Good to encounter such clear evidence of the validity of supply-and-demand analysis.)

Indeed, current prices for litchis probably are truly too low. The reason is explained in this excerpt from the Times’s report:

The plight of the litchi industry shows both the promise and the pitfalls of China’s remarkable economic growth and its shift to an awkward but dynamic mix of capitalism and state socialism in recent years. As in many industries, from television sets to washing machines and now to cars, early success by a few producers led to a flood of investment, overproduction and the evaporation of profits.

While business success often draws new competitors in Western countries, the effect is outsize in China.

Each state-owned bank branch tends to funnel huge loans at very low interest rates to investors in any industry that seems profitable, almost regardless of whether other lenders are doing the same, bankers said. And with a long tradition of news media censorship and a distrust of official pronouncements, business executives and peasants alike tend to barrel ahead, leery of believing admonitions against over-investment – until prices plunge.

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