Does China Truly Offer an Alternate Economic Model?

Gerald Seib’s December 23, 2008 Wall Street Journal article entitled “U.S. Woes Open Door for China” cites recent articles in Foreign Affairs which postulate that this year’s dramatic meltdown in the U.S. and Western finance system has discredited our economic model and presents the possibility that, going forward, developing nations may look to China’s centrally planned economy as a better example of how to structure an economic system than that of the West’s widely varied form of free-market capitalism. While the momentous problems caused by the bursting of the credit bubble are regrettable and should be completely and thoroughly studied so as to preclude them from ever recurring, does China’s unique economic model provide a legitimate alternative?

While China’s meteoric economic growth over the past few decades has been impressive by any measure, does the nation really offer a replicable model? No other nation on earth has successfully implemented the Chinese model of transitioning from a centrally planned, totalitarian form of communism to a centrally planned, authoritarian form of quasi-capitalism. While many Chinese—particularly on the coast and in the capital of Beijing—have seen a quantum leap forward in their way of life, the vast majority—perhaps some 800 million—have seen virtually no improvement in their agrarian lifestyle. As China’s export-dependent economy comes to a grinding halt in the midst of a worldwide recession, societal fissures are already beginning to develop or intensify which could lead to violence and possibly threaten the regime’s stability. Furthermore, China has never fully benefited from true market forces.

Since Deng Xiaoping began the process of economic reform in China, the communist party - instead of market forces - determined where new infrastructure, industrial plants, etc. would be built. As one would expect in such a situation, mistakes were made and resources improperly allocated. In many cases, local employment concerns (which impact regime stability) and plain, old corruption had much greater control over economic decision-making than did market requirements. While the United States is no doubt awash in excess residential—and possibly commercial—real estate because of serious market distortions brought on by a too-long period of easy money, China also faces excess, in misplaced manufacturing facilities, poorly-conceived infrastructure projects and misallocated capital investment. Over the course of modern history, markets have always proven to be a better determinant of societal resource allocation than central planners. This is not to say that markets are infallible. They are not. However, they do offer the best mechanism for economic decision-making yet conceived by man and, even when they fail, are self-correcting in ways that central planning systems cannot replicate.

One of China’s greatest current strengths is its massive foreign currency reserves and holdings of U.S. debt. Going forward, as the U.S. retrenches from a multi-decade spending binge and the entire nation learns the benefit of living within its means, China will need to redirect its investment focus to building domestic consumption. It will no longer have the wind at its back as global consumer consumption slows and manufacturing competition—both in Asia, and around the world—intensifies. China’s role as the world’s default manufacturer has seen its golden age and—unless domestic demand can pick up the slack—will never return to the boom times of just a couple of years ago.

Let’s not forget where China came from and the degree of authoritarian control that the Chinese state still has over its society. In the 1980s, the Soviet Union and China both recognized the inherent failures of communism and attempted to reform their ailing systems. The Soviet Union, in its program of “perestroika” or restructuring, chose to focus its initial efforts on political reform, while China eschewed political reform in favor of economic liberalization. Putting political reform before economic reform doomed the Soviet Union and its Eastern European empire. The Chinese Communist Party, which crushed an attempt at forced political reform in Tiananmen Square in 1989, had no intention of making the same mistake and maintained its brutally efficient police state throughout the economic awakening that has occurred over the past two decades.

How many nations that in the future might wish to follow the Chinese economic model already possess such an intimidating and conflict-tested degree of control? I would argue very few. Any nation with even a modest democratic history would have a hard time replicating the awesome breadth and depth of civil control brought to bear by an established communist regime. Without such control, replicating a centrally planned economy such as China’s would be virtually impossible. No other system would offer the patience, unity of purpose and stifling of dissent that Beijing enjoys.

Finally, the painful recession we are now experiencing will expose weaknesses in China’s system. Excess capacity in certain industries and geographic regions will stand glaringly alongside a lack thereof elsewhere. More adaptive and nimble competitors such as India, Brazil, or for that matter, the U.S., will be able to respond more quickly to global market demands and Chinese central planners—bedeviled by endemic corruption and with a wary eye on a restive and economically-stratified populace—will be hard-pressed to keep up.

The U.S. and Western economic model has proven to be imperfect and the failures that have brought us to this difficult state should be studied and remedies implemented to prevent it in the future. However, the market is still the best mechanism for shaping economic policy. Indeed, it was well intended, but nonetheless ill-advised tinkering with market forces that triggered much of the turmoil we now face. Those who believe that China’s centrally-planned model offers a better alternative may find that Beijing’s economic system cannot be duplicated and is itself rife with inefficiencies and short-comings.

Comments

[bert:]

China has implemented the inverse of the welfare state. They subsidize selected industries rather than the poor. It's ironic because it is the opposite of the original Marxist intentions of communism. Going against the original intentions of communism is enough to explain their rise. Drifting steadily towards the original intentions of communism is enough to explain our decline. Market forces work for evolutionary reasons success is selected and failure punished. The Chinese have enhanced the process. The US has encouraged the opposite. Due to their lack of freedom they may fall victim to corruption. I suspect some regions that were subjected to communism have learned some lessons the hard way.

2008 Dec 24 07:48 AM

[User 325316:]

Dear Author,

First, have you ever been to China?

Also, do you believe that we do not have corruption and self-interest problems?

When politicians have to raise hundreds of millions of dollars to win the elections for positions that pay 6 figure income, they (the politicians and their sponsors) will some how recoup their investment.

Let's stop misleading ourselves into believing that "Our system is not perfect but it's the best one out there".

2008 Dec 24 08:51 AM

[waterlily57:]

Let us not forget that the major public enterprises in China are majority owned by the state, hence SOEs. It is only recently that the West have been compelled in some scale to operate this model, ie, having SOEs, eg, AIG, Fortiss...

2008 Dec 24 10:05 AM

[sorno:]

Have you seen any corruption news in china? The amount of money is far more than US. The money raised from the campaign is used for the campaign, not much for personal use, that's a difference. In US, people corrupted to get more money for themselves, in china, people corrupted to get money for themselves and for their whole family of successors, that's another difference. Base on your opinion, which country has the best system now?


On Dec 24 08:51 AM User 325316 wrote:

> Dear Author,
>
> First, have you ever been to China?
>
> Also, do you believe that we do not have corruption and self-interest
> problems?
>
> When politicians have to raise hundreds of millions of dollars to
> win the elections for positions that pay 6 figure income, they (the
> politicians and their sponsors) will some how recoup their investment.
>
>
> Let's stop misleading ourselves into believing that "Our system is
> not perfect but it's the best one out there".

2008 Dec 24 10:18 AM

[msoori:]

As sad this looks, efficiency like this is whats kicking our butt, and what Wall Street is asking of us. Brace for new lows in quality of life failblog.org/2008/12/1...

2008 Dec 24 11:25 AM

[huangthomas:]

There are m0r0n who believe tax payers should pay for corporate private jet, expensive junkets, dividends when the company is bleeding to death, executive bonus when they ground the companies to the verge of bankruptcy. They misunderstand the meaning of "freedom" and accountability. Now, get back to work.


On Dec 24 10:05 AM waterlily57 wrote:

> Let us not forget that the major public enterprises in China are
> majority owned by the state, hence SOEs. It is only recently that
> the West have been compelled in some scale to operate this model,
> ie, having SOEs, eg, AIG, Fortiss...

2008 Dec 24 11:51 AM

[carey_jim:]

First of all, China is a civilization and not just an economy. No other country can imitate it. Many other civilizations have been influenced by China, such as Japan, Korea and Vietnam but none have imitated it.

China has developed a unique way of life based on its three thousand year old literature, art, politics and philosophy which is a mixture of Taoism, Buddhism and Confucianism. The family and the relationships within the family are uniquely important and different from any other country. They form the foundation of Chinese life.

Clearly, China is not monotheist in the Christian/Jewish/Musli... sense, although the peasants still worship various Buddhist and Taoist inspired gods and many are superstitious.

China is, fundamentally, atheistic in the sense that Buddhism, Confucianism and Taoism are atheistic. In fact, China is alternately indifferent and hostile to the Western concept of God.

While communism is a force in China, Marx's (certainly outmoded by now) recipe for socialism was intended for already developed capitalist countries such as 19th century Britain, Germany and The United States and NOT for third world countries such as 19th century Russia and China. He actively discouraged socialist from trying to bring socialism to these basically agrarian economies without a sufficiently developed capitalist base.

Most scholars are agreed that both Russia and China simply used Marxism as a veil to place over totalitarian dictatorships which were state run capitalist economies and not socialism.

The Chinese and Russians themselves admitted that they needed FIRST to form the capitalist infrastructure similar to that of the West and a proletariat which would THEN form the basis for a later socialist society. They used Marx's idea of the dictatorship of the proletariat even though there was only a small proletariat (skilled factory workers.) This future socialist economy never appeared either in Russia or China.

Both China and Russia have a very, very long history of totalitarian governments and that has never changed. They both remain totalitarian and when strong government fails, they become anarchic.

Totalitarianism is not, obviously, a good model for the West. In fact, the history of the West since the Reformation has been a long evolution away from the totalitarian feudalism of Royalty and Church.

Our long struggle with our totalitarian past should be a model for both China and Russia and not the other way around.

2008 Dec 24 01:13 PM

[Duude:]

First of all most of any corruption news in China isn't reported in China but in the U.S.
Second, its incredible naivete to believe that the U.S. system is so transparent that what is reported here is anything more than a snowflake on an iceberg? Corruption comes in many forms whether its cronyism, cheating on taxes, cheating on billing, making phony expense reports, or out and out bribery, and that's just the political system. Of course, it exists though out our economy.
I am still utterly amazed how easy it is to buy a U.S. election by anyone or any country that has an interest. If he desired, Osama Bin Laden could have easily bought 250,000 Visa or Mastercard Cash cards at $200 a whack, hired and trained a team of computer data input Jihadists to donate $200--- 250,0000 times to the candidate of their choice under every name in the New York telephone book. That's $50,000,000, but go pick your figure. The world will provide an infinite amount of help.

As to campaign money used for campaign purposes and not self? So, I guess we can expect no preferential treatment for any family or relatives through advice, positions, or anything else? What was it Hugh Rodham made as a plaintiff tobacco attorney even though he had never before been involved in civil law? What did Hillary turn $100 into in the futures markets? $100,000? How did the Clintons get out of that losing Whitewater investment without a loss? And this is only what we know. Not to pick on the Clintons anymore than anyone else, they're just more blatant like Bloggy.


On Dec 24 10:18 AM sorno wrote:

> Have you seen any corruption news in china? The amount of money is
> far more than US. The money raised from the campaign is used for
> the campaign, not much for personal use, that's a difference. In
> US, people corrupted to get more money for themselves, in china,
> people corrupted to get money for themselves and for their whole
> family of successors, that's another difference. Base on your opinion,
> which country has the best system now?

2008 Dec 24 03:08 PM

[Steven Hansen:]

there is no light switch to shift a countries social and economic model. american's love to push out their model as "the one" - but "the one" does not fit all. i tried to explain this to the state department when they forced russia on its path in the early 90's.

china and russia need to use models which reflect their social values. sorry, western style democracy will not work there in this generation, and may never work there. that does not make their model wrong, only different.

2008 Dec 24 08:23 PM

[frank0510:]

First of all, China's economy has not come to a "grinding halt." It's predicted that China will continue to grow at somewhere between 5 and 7.5% next year--more than any other major economy in the world.

Secondly, please stop trying to put forward the American economic model as the "best" for all nations. China has a history of strong government control, an enormous population, and a very different culture than Western nations.

Finally, if any of you have actually been to China, you will find that far more people there support the Chinese government than we Americans support our bureacracy. Yes, there are dissenters, but this, compared to China's enormous population, is almost insignificant. If you talk to almost anyone living in China, you will find that he/she is very supportive of the current government and thinks it is much stronger than the U.S. model (which I believe it is).

2008 Dec 25 02:28 AM

[TPA:]

For Christ sake... We had the Governor of Illinois trying to sell the President-elect's Senate seat less than two months after the election!

The West needs to step down from the moral high ground and stop deceiving ourselves. "We the People" is great, but there are also many problems within our borders. There are good and bad apples everywhere, in every country, and in every culture; and people in power will always have the option of misusing it.

The answer to the author's question of which economy is better... "neither". The free market economy has its excesses (very apparent during economic busts), but also its advantages (very apparent during booms). A good example is America's free-thinking ability to innovate at the drop of a dime.

Advances in a centrally controlled economy can make the nation look like an economic miracle because of the shear speed at which decisions can be made (8+ subway lines being constructed in Shanghai over the past 4-5 years); but a mistake can also cause disaster (eg Mao's Cultural Revolution, the Great Leap Forward, etc). Singapore (definitely a success story) is also a centrally controlled economy (at least single party government) as was Taiwan in the 80/90's; but the sheer scale of China places it in the forefront of most discussions.

In the case of China during this worldwide downturn, the nation's government has simply had the foresight to be more finanically conservative and more patient than say Eastern Europe. I'd opine that the government was exceptionally smart (though self serving) over the past 10 years.


On Dec 24 10:18 AM sorno wrote:

> Have you seen any corruption news in china? The amount of money is
> far more than US. The money raised from the campaign is used for
> the campaign, not much for personal use, that's a difference. In
> US, people corrupted to get more money for themselves, in china,
> people corrupted to get money for themselves and for their whole
> family of successors, that's another difference. Base on your opinion,
> which country has the best system now?

2008 Dec 25 10:19 PM

[Gem Hudson:]

What blasted way off yonder only to come crash landing down right where they blasted off from all over again is to get burnt in the process.

2008 Dec 26 09:28 AM

[mysaug:]

Biggest problem for rest of world is China's model does not lend itself to fair trade, China is not living up to its WTO commitments. China continues to protect markets where they are non-competitive , and only gives market access if companies build a plant in China or worse have to partner with a local company . This domesitc content is not allowed under WTO and new adminstration needs to hammer China over these policies. They tey to justify it based on need for jobs for stability; however, that is problem for all countries now and abiding by WTO committments come first. Growing unemployment in China is not our problem.

2008 Dec 26 10:19 AM

[shure46:]

Very simply put , China EARNS money in the global economy , and WE PRINT money ........... If our monetary printing presses were not running at full capacity 24 / 7 , we would be completely broke !!!!!! We MUST get our manufacturing and exports UP to par , or we are going to be printing our way into total economic collapse ........ China is wiping their butts with American greenbacks .......... China simply has an economic climate that allows them to manufacture at a very competetive rate .......... The ONLY solution , is for Americans to suffer a little NOW , or LOT LATER ....... The days of 60 days paid vacations , free health benefits , 20 year retirement pensions , and getting paid to sit on your ass and play on the computer are coming to an end ........ and I might add , CEO's being paid rediculous 100's of millions of dollars is numero uno on the chopping block !!!! We can pull out of this EASILY , if we try ........ ....... The U.S. government needs to implement a massive TRICKLE UP economic stimulus that actually creates jobs ( we do not need 300 dollar stimulus welfare checks that do nothing ) .... Americans need to WORK and BUILD things ....... we should start massive building projects , Nuclear , Natural Gas , Power Plants , Roads , Bridges , Hospitals ........ Auto manufacturers need to build quality , fuel efficient , gasoline , diesel , or natural gas autos ....... Forget electric cars , hell the batteries cost 5,000 dollars , and where the hell does electricity come from ????? POWER PLANTS that mostly burn COAL now ........ we are a good ten years out from electric cars being feasible , and we will need massive increase in power plants to generate the necessary kilowatts for our cars .......... The government needs to shore up social security and create a single pool for health care , where we pay a reasonable premium for decent health care , PRIVATELY RUN , but government subsidized and government oversight ........ simply put , AFFORDABLE , DECENT , health care ........... American workers should be paid a decent wage , but be responsible for their own health care and retirement , with social security as an insurance policy against complete poverty ........ but if you do not NEED it , you don't GET it ......... social security is an insurance policy , NOT an entitlement ...... and set the limit high ( 200,000 bucks annual income , an no SS for you !!!!! ) You get it IF you NEED it ..... I know we all pay in , but it is INSURANCE , NOT ENTITLEMENT ..... we all pay a monthly insurance premium on our homes but do not use it unless we NEED it .............. and we need to undo all the non-sense red tape in America .............. I personally do not need airbags in my car for 3,000 dollars extra , hell gimme a seatbelt , I'm good ......... ABS brakes ??? Ditto ..... they don't work all that great anyway , and probably add 1,000 bucks to the price of the car ........... enough said for now

2008 Dec 28 02:42 PM

[shure46:]

I might add , this country needs to return to the honor and integrity it once had ......... In the great depression , millions of people suffered , but they refused to steal ......... If we have a modern day great depression you will see looting and chaos on a grand scale ......... Already shoplifting and crime is rising , simply because of a recession !!!!! We need some damn honor , ethics , honesty , loyalty , and patriotism in this country ....... government money is NOT the solution if we continue to be greedy , self absorbed , small minded people that create this dog eat dog world from the top to bottom ....... and crooked politicians should be publicly hanged .......... with much power , comes much responsibility , and those in power need to answer for their actions ........ I am sick and tired of seeing powerful people getting away with crap that would put you or me in prison for life !!!!!

2008 Dec 28 02:52 PM