Monday, July 22, 2013

One of those things that are easy to miss

Paul Krugman has an op-ed today on the slowdown in China's economy, Hitting China's Wall New York Times 07/18/2013.

Ever since President Nixon's "ping-pong diplomacy" started improving US relations with China, China's general image in the US has been a fairly bizarre one in some ways. It became a sort of "honorary capitalist" country, as it started relying more on private businesses and the profit motive and a de facto ally of the US against the Soviet Union during the Cold War.

But China is also a developing country and a successful one. And it used tools that other developing countries has used successfully, including capital controls and a considerable degree of central economic planning. And, of course, its government is one-party Communist Party control

The thing Krugman says that's so easy to miss is, "It's all very peculiar by our standards, but it worked for several decades." (my emphasis)

Between Cold War truisms and American Exceptionalism, an economy run by the Communist Party is not supposed to "work." A developing economy relying on capital controls, state-owned as well as private businesses, and central planning shaping major investment decisions is not supposed to "work."

Krugman makes clear he is talking about China from the developmental perspective:

The story [about China's economy] that makes the most sense to me, however, rests on an old insight by the economist W. Arthur Lewis, who argued that countries in the early stages of economic development typically have a small modern sector alongside a large traditional sector containing huge amounts of "surplus labor" — underemployed peasants making at best a marginal contribution to overall economic output.

The existence of this surplus labor, in turn, has two effects. First, for a while such countries can invest heavily in new factories, construction, and so on without running into diminishing returns, because they can keep drawing in new labor from the countryside. Second, competition from this reserve army of surplus labor keeps wages low even as the economy grows richer. Indeed, the main thing holding down Chinese consumption seems to be that Chinese families never see much of the income being generated by the country’s economic growth. Some of that income flows to a politically connected elite; but much of it simply stays bottled up in businesses, many of them state-owned enterprises.
And he follows the comment that "it worked for several decades" his observation about how it might not be working so well in the immediate future: "Now, however, China has hit the "Lewis point" — to put it crudely, it’s running out of surplus peasants."

Now, Krugman is telling a Big Story in a short column here. And he notes at the start of his column that evaluating the available economic data from China is especially tricky.

But as China becomes more of a foreign policy issue for the US, it's worth being mindful of the scripts and slogans that various groups come up with about China. Taiwan no longer enjoys the special status it did during the early years of the Cold War with Americans. But there is still a group of hardcore Republicans who see "Communist China" as a abominable menace that must be eliminated some way. We tend to think of the neoconservatives as being particularly focused on issues relating to Israel and the Middle East, and that's because they are. But the infamous PNAC program that was a rallying point for the neocons prior to the 9/11 attacks looked forward to the day that China would become the Main Enemy for the US.

So, yes, China after Mao Zedong's death in 1976 took what Mao would likely have called "the capitalist road." But that does not mean it became a "free enterprise" success story. Yes, China has enjoyed remarkable growth, but that does not mean that it will be able to continue such rapid growth in the foreseeable future. Yes, this growth took place under a Communist government but that does not mean that internal pressures for democratization will disappear. And it does not mean that the same governmental form China uses is necessary for a similarly healthy economic development for developing countries.

China and other countries have been successful with development models that differ in major ways from the stock prescriptions of neoliberalism, the approach long known as the Washington Consensus, the model being applied by German Chancellor Angela Merkel to the economies of Cyprus, Greece, Ireland, Italy, Portugal and Spain. Whether the notion of a "Beijing Consensus" suggested by José Pablo Feinmann will catch on, I don't know. (Cuadro de situación Página/12 03.06.2012

Krugman also deals with the Chinese growth issue in his blog post, How Much Should We Worry About A China Shock? 07/20/2013. He observes that a slump in China could particularly affect oil and gas exporting nations, which I assume is the main concern when he talks about commodities here:

China is a major consumer of raw materials — for example, about 11 percent of world oil consumption. And because the supply and demand of commodities tend to be relatively unresponsive to prices in the short run, a sharp drop in Chinese demand could lead to sharp falls in commodity prices.
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