Statist policies in China

From Scot Sumner.

"I frequently read commentary on the Chinese economy. Often we are informed that the Chinese growth "miracle" was produced by a wise policy of rejecting laissez-faire and having the government direct much of the economy. The logic seems to run roughly as follows: 

1. China has been growing very fast.
2. The Chinese government plays a large role in the economy.
3. Therefore Chinese growth is explained by statist policies.

I would hope I don't need to explain what's wrong with that logic, but just in case let's look at the Economist magazine list of the 10 fastest growing economies for 2015:



OK, so how should we test the effect of statist policies on an economy? One method would be to compare the economic performance of highly statist economies like Greece with more laissez-faire economies like Switzerland. The problem here is that economic performance can vary for many reasons, such as cultural differences, natural resource endowments, etc. To the greatest extent possible, you'd like to compare different economic systems in culturally similar regions. Here are three possibilities:

1. Different countries with Chinese culture.
2. Different time periods within China.
3. Different regions within China (especially "Han" China.)

It's pretty well known that the other three ethnic Chinese economies (Hong Kong, Singapore and Taiwan) are all far less statist than Mainland China, and far richer.

It's pretty well known that China began growing fast after it started moving away from communism, and that further growth spurts followed the liberalization around 1992, and the liberalization around the time China joined the WTO in the early 2000s.

But what about regional differences? Once again the Economist, this time describing the most statist part of the Chinese economy:

The wrong mix Those efforts have borne fruit: state-owned firms produced more than two-thirds of the region's GDP in the early 2000s. That has fallen to about 50%, still above the national average of 30%, but progress nonetheless. The structure of the north-east's economy, however, has worsened in a more important respect. It has become ever more reliant on investment and manufacturing, both geared to the now-slowing property market. State companies and private firms alike have poured into mining, heavy-equipment factories and construction. Even the car industry, in which the north-east has been a national leader, is closely linked to property, as buyers of new homes also tend to buy cars. In any case, home-grown car brands such as Hongqi and Jinbei are falling further and further behind foreign rivals in popularity. 

Whereas the rest of China's economy has become better balanced, with services now accounting for more of GDP than manufacturing, the north-east has gone in the other direction. Manufacturing's share of the regional GDP rose to 50% in 2013 from 47% a decade earlier, and the contribution of services declined--the opposite of what the original revitalisation plan called for. Even more striking, investment accounted for 65% of the north-east's GDP in 2013, roughly double its contribution a decade earlier. The national average is a shade under 50%, which is already high by international standards.
An hour's drive east of Shenyang to the new town of Shenfu offers a glimpse of how much spending has been misallocated. There, rising 150 metres into the air, is a giant upright steel circle--the "ring of life" (pictured on previous page), which was built as a landmark for the town even before anyone moved in. It is flanked by half-finished buildings and faded billboards advertising dream homes.

Shenfu was designed as a dormitory town, roughly equidistant between the cities of Shenyang and Fushun, to which it is well connected by multi-lane highways. But with heavy industry in the area struggling, and Shenyang and Fushun already weighed down by their own gluts of empty homes, Shenfu has not taken off. "Guys used to walk through the door and buy two or three homes at a go," says a saleswoman at Deshang International Garden, a large housing complex. Its occupancy rate is now about 50%, which, she says, makes it one of the most successful developments in town.

Over-capacity in heavy industry is also pervasive. The north-eastern provinces took the extraordinary step of ordering some 100 cement-production lines to close for four months this winter, in part to alleviate a supply glut. It is estimated that as much as half their capacity is unneeded. Cement production by itself is a tiny part of the north-eastern economy, but as a crucial input for construction, which accounts for 6% of regional GDP, it is symptomatic of the broader excess in heavy industry.

Poor investment decisions mean less money for spending on social services. In late November as many as 20,000 teachers went on strike over low pay and miserly pensions in towns near Harbin, the capital of Heilongjiang, the slowest-growing of the north-eastern provinces.

Old command-economy habits run deep. After the mass bankruptcies of state firms in the late 1990s, some cities decided they needed cash from officials in Beijing to fund yet more state companies. Liang Qidong of the Liaoning Academy of Social Sciences, a government research institution, even argues that the north-east is the world's best example of a Soviet-style economy, because its central-planning mentality has persisted for so long. "A lot of people still don't truly understand or believe in the role of the market," he says.

Of course if we looked at the least statist regions in China (Shenzhen, Zhejiang, etc.) we'd see exactly the opposite, dynamic growth and great flexibility.

Perhaps statist policies contributed to the economic "miracles" in New Guinea, Turkmenistan, Congo and Laos. But among the Han Chinese people, both across regions and over time, growth is inversely correlated with statist policies.

That's not to say that the Chinese government doesn't do anything well. They build infrastructure more efficiently than many other countries. I've enjoyed using their airports, subways and high-speed rail. But those projects only became affordable after the Chinese government unleashed the power of markets, and created an economic boom that provided the wealth necessary to build the infrastructure.
And to be honest, that infrastructure was also made possible by the exploitation of low-wage workers from the countryside, a legacy of Mao's policies. The workers were not free to move to the cities, and hence were essentially equivalent to our undocumented workers. Fortunately, wages and living standards are rising fast. I know a woman who lives in Beijing and pays her maid $4/hour, 10 times the wage of a few decades ago. The maid has a smart phone, and took the high-speed rail home to see her family 800 miles away. Even 5 years ago the US media was full of reports that the high-speed rail system would be a "white elephant", as the poor in China could never afford to travel that way.

Of course there are also lots of examples of infrastructure that is poorly designed and/or bad for the environment, notably the road system in urban areas and many water projects. And the SOEs are especially bad for the environment, as was the case in the old Soviet bloc. If the Chinese government were to give the Chinese people property rights over land and a say in local governance, it would greatly improve environmental conditions."