China and the Development Myth

May 22, 2008 7:58 AM by D.W. MacKenzie (Archive)

Advocates of government planning often cite China as an example of economic success. China supposedly achieved success by adopting a mixed economy.

According to Joseph Stiglitz, the Chinese government has avoided the deficiencies of capitalism and communism by allowing a limited amount of private competition, while also retaining strong governmental controls over investment. Chinese GDP statistics seem to support the case for government regulation of markets, but there is a problem with this data. The problem with the statistics that the Chinese have reported on GDP is that they are exaggerated. At the end of last year the World Bank published a report on Chinese GDP. World Bank economists used the standard method of Purchasing Power Parity to measure Chinese GDP in terms of US dollars. The result of this study is that Chinese GDP is lower than previously believed. FULL ARTICLE

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Comments (74)

fundamentalist

The statements by Stiglitz and Chomsky demonstrate that education doesn’t necessarily make a person smart. The logic of the China example is very simple and obvious. Under total state control, the people starved. The state loosened its control, allowing a very tiny amount of freedom, and the economy grew; China could feed itself again. Now the logical deduction from this would be that the addition of freedom caused the growth, and if modest freedom produces modest growth, greater freedom would produce greater growth. Somehow, Stiglitz and Chomsky credit state regulation with the growth. How is it that state regulation caused starvation before, but causes growth later? My grandpappy had a sixth grade education but he could figure that one out. He didn’t die wealthy by using logic like Stiglitz and Chomsky. They’re what he called “educated idiots.”

Published: May 22, 2008 8:48 AM
newson

but isn't this whole article a little pointless given the whole construction of gdp? i mean even if china's gdp figures were fudged, so what? their public sector is still very large, and the gdp will reflect this, without giving us any insight into their wealth prospects.

this sort of argumentation just brings home to me the danger for austrians in talking "keynesian" whilst trying to communicate "austrian". i think reisman is right, if keynesianism is wrong, then its measuring tools and constructs must also be constantly discredited.

Published: May 22, 2008 10:25 AM
Fephisto

Newson: my thoughts exactly. I would kind of appreciate some sort of campaign to destroy the GDP measure.

Published: May 22, 2008 11:09 AM
Stephane

Two other factors that could also make the Chinese growth less impressive :
- when a Chinese farmer leaves his farm to work in a factory, his previously non-monetized activities artificially pop up on the GDP radar screen
- a significant share of their exports are turned into dollar reserves of which the Chinese worker does not benefit

Published: May 22, 2008 11:18 AM
JimC

I work with official industrial production data and statisitics from the PRC on a more or less daily basis. The frequent gaps, errors, and arithmetic mistakes in the data are a constant source of frustration in trying to perform empirical analysis. In some cases it's pretty clear that the numbers are just being made up as they go along.

Even if economic calculation were theoretically possible under central planning (as it has been proven not to be by Mises), trying to do so using the erroneous and fictional data available in countries like PRC and the old USSR would be practically impossible.

Published: May 22, 2008 11:22 AM
fundamentalist

Newson, That's a very good point. What we need is a figure for the private sector. We could construct one for the US by subtracting state spending, but I'm not sure the detail for other countries is as good as ours. What do you think, JimC?

Published: May 22, 2008 12:06 PM
matth

When a farmer moves to a factory job, typically his standard of living improves. So, for people interested in calculating human prosperity by GDP, the increase kind of shows that.

That said, I bet you get a better grasp on the increasing prosperity of the Chinese people by wandering around and talking to them at random than by government statistics.

Published: May 22, 2008 12:17 PM
M.D. O'Donnell

Yet another reason why empirical data are unreliable indicators of a complex market structure. Just like the analogy of the 100 blind men, statistics and limited analyses are only as good as the section of the elephant they are touching. Without using deductive logic to elucidate the reasons for certain behaviors in business, economists will be forever mystified by the actions of the market rather than aware of their underlying causes.

Published: May 22, 2008 1:06 PM
Francisco Torres

but isn't this whole article a little pointless given the whole construction of [GDP]?

The point of the article is that, even using such a flawed tool, those that advocate a mixed economy based on the Chinese experience are still wrong in their optimism. If the tool, as it is supposed to work, shows a completely different picture than what the advocates of lesser freedom believe, then their arguments are flawed.

Published: May 22, 2008 1:07 PM
Mr.huh?

I always felt that if China had good measures of wealth and prosperity in the GDP, then it was probably because of Hong Kong (which if I'm not mistaken became a part of China in the 90's and itself is a far freer economy than the U.S. even) which might be included as part of China's GDP, although I could be wrong. Also, another thing that might prop up GDP statistics is their "population control" measures".

Published: May 22, 2008 1:24 PM
Mr.huh?

I always felt that if China had good measures of wealth and prosperity in the GDP, then it was probably because of Hong Kong (which if I'm not mistaken became a part of China in the 90's and itself is a far freer economy than the U.S. even) which might be included as part of China's GDP, although I could be wrong. Also, another thing that might prop up GDP statistics is their "population control" measures.

Published: May 22, 2008 1:24 PM
Mr.huh?

I always felt that if China had good measures of wealth and prosperity in the GDP, then it was probably because of Hong Kong (which if I'm not mistaken became a part of China in the 90's and itself is a far freer economy than the U.S. even) which might be included as part of China's GDP, although I could be wrong. Also, another thing that might prop up GDP statistics is their "population control" measures.

Published: May 22, 2008 1:25 PM
JimC

fundamentalist:

Adjusting for government spending in GDP would be relatively easy, by subtracting out the G from the traditional C+I+G+(X-M)=GDP. However, it would still dramatically overstate the extent of truely productive economic activity (ie that which is directed toward satisfying consumer wants as demonstrated through voluntary market exchange).

Even the most free economies are rife with the distortionary effects of government intervention. Whole industries are directed toward producing goods and services that would not even exist but for the effects of intervention. For example, my own work centers around advising businesses on how to cope with business cycles, a government generated phenomenon.

This would be especially pronounced in a country like China where even the means of production that are in (nominally) private hands are subject to a level of state control and regulation as to make any kind rational economic calculation out of the question. So even if we subtract out the G, most of what we're left with is the result of the economic chaos produced by government and couldn't be taken as meaningful, much less reliable, measure of the productive economy.

Published: May 22, 2008 2:04 PM
fundamentalist

JimC, Good points. I'm not sure what to do about it.

Published: May 22, 2008 2:29 PM
Bob

Excuse me, but how can any measure of GDP ever be meaningful over any period of time? The unit is meaningless. How can 2007 dollars be exchanged for 2008 dollars? How can we possibly determine how the value of GDP has changed, no matter how it is measured? If we index to certain goods, then which ones? In what proportion? And how do we account for entirely new goods and changes in quality? Is a 1908 car equal to 1/10th of a 2008 car? And how about an abacus versus a PC? LOL!!

Published: May 22, 2008 3:52 PM
useless spectator

Not to mention the dire poverty, pollution-induced disease, and human-rights abuses that the Chomskies of the world associate with free-market capitalism and expect bureaucracy to solve. When are the leftists going to realize that big government causes the very problems they shed so many tears about?

I forget who it was who said "the government that governs least, governs best."

Published: May 22, 2008 4:02 PM
newson

"thomas jefferson".

Published: May 22, 2008 6:28 PM
newson

franciscon torres says:
"If the tool, as it is supposed to work, shows a completely different picture than what the advocates of lesser freedom believe, then their arguments are flawed.

so we use a flawed keynesian tool to discredit flawed keynesian policies!

sort of like the marxist who rails against capitalism, wearing a d&g t-shirt and sipping cocacola.

Published: May 22, 2008 6:49 PM
jason4liberty

Living in China for two years doesn't make me an expert, but here is what I have observed.
(Please excuse the use of the phrase "The Chinese people". I have met a lot, but obviously not all.)
The Chinese people understand what it is like to live under a brutal and repressive government, and to experience the results of a lack of freedom. As lately as 1974 millions of Chinese died of starvation.
The Chinese people know how to make a buck, and have very low expectations of entitlement. If they want to improve their situation, most know that they must do it themselves. Most are willing to work their $ss off to make money. The average Chinese will work far harder than the average American, b$tch less, and still act happy. I hope that the West still has an advantage in productivity per worker and the quality of labor, but I think that we are losing that edge.
There is a torrent of foriegn investment flowing into China. This affects every statistic about the Chinese economy. Much of the investment is into the consumer and manufacturing goods industries. The economy is benefiting from lengthening of the production cycle because the capital is moving away from other nations.
I believe that what China currently illustrates is the power of freedom and capitalism. Individual entrepenuers will exploit any opportunity they are provided, and I believe this is one of the primary reasons for the growth in real, observable wealth in the country.
On the whole, Chinese are much more fiscally conservative than Americans. I think that their saving rate is somewhere around 40%. Very high.
My personal fear is that China and America are on the same road (economy, freedom), headed opposite directions.

Published: May 22, 2008 8:51 PM
Bruce Koerber

Measurement of economic advancement is possible in the same way a person can distinguish happiness from sadness. It is real but not empirical.

However, a very good measure is the status of property rights. If property rights are more clearly defined and are more intricately refined then there is economic advancement.

In these dark days the gigantic legal profession is for the most part playing the game set before them by the interventionists. It is a shame that the potential of property rights as the indicator of economic advancement goes unnoticed and unfulfilled. Justice is in need of re-assessment!

Published: May 22, 2008 8:53 PM
Bruce Koerber

Thank you for your very valuable insight Jason4liberty!

Published: May 22, 2008 9:03 PM
Jeremy

What little bit of China I've seen in four years and working with factories, it seems that economic growth has been tremendous.

Sure, this is entirely due to the greater freedoms afforded to the market, in combination with the extraordinarily high savings rates of the average Chinese person. The two main drivers of economic growth (that feed off each other): freedom and savings.

It doesn't seem like US statistics are much more reliable, according to Shadowstats.com's 1980s methodology (using inflation estimates based on 1980 US methodology), we've been in an almost constant recession since the turn of the millennium, that is getting much worse.

Don't knock the freedoms in today's China - they have driven tremendous growth.

And personally I'd guess that a measure of total economic output would show China's economy as larger (on a comparative basis with other country) than gdp measures indicate. It's too bad that Keynsian thought is gaining strength in China's younger generation. (good luck trying to convince the older generations that saving is not important)

Published: May 22, 2008 9:15 PM
newson

bruce koerber:
"If property rights are more clearly defined and are more intricately refined then there is economic advancement."

this is an area which doesn't get enough attention. it's clear the chinese admin. rides roughshod over peasants' property rights in rezoning rural land (we see the riots reported etc.), but to an non-expert like myself, the property rights of urban dwellers, and commercial interests in china remains a mystery. the big end of town can protect itself through political connections, but what about mr everyman? are there legal codes and processes now formalizing what's actually happening on the ground?

like bruce, i think the emphasis should be on feeling where their property rights doctrines are pointing.

Published: May 22, 2008 11:28 PM
Agnostique

As a regular Mises reader, I must say I was totally disappointed by this article. Indeed, with all due respect, this article shows little depth and IMHO is even more unfounded than the statements of the likes of Stiglitz.

I’m a Hong Kong Chinese educated in Europe. I’ve been working as an investment banker on China deals for the past 10 years in Hong Kong.

I don’t want to theorize or argue. I just want to state a few facts to get things straight and hopefully contribute my 2 cents.

The World Bank has been doing PPP based GDP ranking for years. Back in the 90s, the World Bank concluded that China’s GDP was largely under-estimated and that China should have already been ranked the 3rd or 4th economy in the world based on PPP. That was some 15 years ago.

My wild guess is that the World Bank’s rhetoric has something to do with the USA’s position on other countries’ exchange rate. Back then the Rmb was perceived to be overvalued, now the USA wants China to revalue up the Rmb (because of the problems created by the USA’s own monetary policy, which I’m sure any Misesians know better than me).

China’s official statistics are not reliable. We know that as a fact a long time ago. In Chinese terms, we say it contains “water”, i.e. it is inflated. But still, the creation of wealth in China is real, no matter you measure it by nominal, real or PPP based GDP, in aggregate or per capita, in USD or in Rmb, or by looking at the change in its foreign exchange reserve, or by talking to peasants in the most remote areas or even by a physical count of the amount of any tangible assets whatever it may be. To think otherwise is to be ignorant of the business world. Luxury goods companies in Hong Kong like Louis Vuitton used to have sales staffs fluent in English and Japanese in the past, but now their sales staffs are only fluent in Chinese Mandarin. Shops like the Printemps or Lafayette in Paris have their in-shop broadcast in Chinese Mandarin since recent years.

Accumulation of wealth in China is not limited to the first tier cities like Beijing and Shanghai. Second tier cities are also quite well developed now. The contrast with 20 or 30 years ago is beyond words. The elevation of quality of life in China is progressing fast, and as I see it with my own eyes, I cannot say the same for other developing countries in Asia perceived to be also fast growing, more democratic and less interventionist (I’m talking about India and other SE Asian countries).

If the Chinese want to fudge their numbers, as of now, it is far more likely that they would want to fudge it down rather than up. Overheating is one of the biggest headache of the Chinese Central government and slowing the economy is the one of the key objectives that the Central government gives to the provincial and lower level governments. China is tightening the economy now which is one of the reasons of the drastic drop in the Chinese stock markets compared to the rest of the world. China had been the largest country for Foreign Direct Investment for years which helped China growth, but China has been growing so fast that since late 2006 China had to set a new regulation to literally stop all FDI flowing into China.

Local business circle used to half-jokingly say that China is more capitalist than the West now, which, from my experience over the years I spent in Western Europe, I have to seriously concur.

And by the way, the return of Hong Kong to China sovereignty since 1997 did not have any major material impact to the China GDP because HK is tiny compared to China. The real consensus here in HK is that HK’s economy is at the mercy of China. The starvation in China in the 70s, IMHO, has much, much more to do with Mao’s political struggle campaigns than economic policies back then, but that’s more a debate on history.

To reiterate, China’s growth and wealth creation is very well founded, and the evidence is not in the unreliable GDP figures but in the very real and tangible growth in thickness of the wallets of many, many people, including myself and many, many people I encountered, who are involved in China business.

Make no mistake, China has tons of problems. The gap between the rich and poor is huge (though not so much as e.g. India), corruption is a big problem (though better than e.g. Indonesia), human rights, legal system, pension, public health …. the list is endless. There are so many pressing problems in China, but you guys, like the vast majority of Western media, focus on a trivial one and argue based on incomplete or totally wrong facts, which, I must deduce, reflects only a lack of understanding and a lack of doing “homework” on China.

Again, China’s wealth accumulation is real. You need much better research and evidence to substantiate your claim in the article.

Just my 2 cents.

Published: May 23, 2008 12:09 AM
Jeremy

I completely agree with Agnostique. China is in many ways more capitalist oriented than much of the west these days.

To expand on that a bit, one only has to see the massive expansion of factories, and their rushing up the value chain, that one sees every day doing business in China.

It is simply breathtaking.

As to property rights, China is slowly moving in the direction of more property rights, not less. My girlfriend's mother's church is buying the land underneath the building they bought years ago from a local government. And the previous 80-90 year 'leases' are slowly giving way to 'real' purchases. The amount of taxes levied on a property are a better determiner of ownership than the distinction between a 90 year lease and forever, and they are pretty low.

Published: May 23, 2008 12:49 AM
Björn Lundahl

Different provinces in China are regulated to a different degree. The fast growing provinces are more free market oriented. So I do not think that these general statistics which are measuring how free the market in China is generally tells the whole story. The free market provinces take a large part of the growth rate. I have not studied the statistics but I would not be surprised if the free market provinces stands for the greatest part of China´s growth and economic success.

http://www.fraserinstitute.org/Commerce.Web/product_files/May04ffTianWei.pdf

Published: May 23, 2008 1:44 AM
Björn Lundahl

Different provinces in China are regulated to a different degree. The fast growing provinces are more free market oriented. So I do not think that these general statistics which are measuring how free the market in China is generally tells the whole story. The free market provinces take a large part of the growth rate. I have not studied the statistics but I would not be surprised if the free market provinces stands for the greatest part of China´s growth and economic success.

http://www.fraserinstitute.org/Commerce.Web/product_files/May04ffTianWei.pdf

Published: May 23, 2008 1:47 AM
Eric Verhulst

Agnostique is completely right. I have some experience with China and the progress is much better observed by going back there from time to time than in some statististics. Even the statement that China is still "state" controlled is dubious. It is the only country I know where I observed that the central power has forced liberation from the top down (against the local powers in the provinces). My saying about China is "More capatalistic than the west, less socialist than Europe". I live in Europe (Belgium) and one of the serious issues here is stiffling "socialist" thinking. The statistics are as flawed as the Chinese ones. Just one example. Official unemployment is sometimes around 7%, sometimes around 14%, depending on the definition used (but these subtle differences never make it to the newspapers). In reality about 25 % get a form of unemployment benefits and that's the real figure. Same for the GDP. With a public sector being 50% of the economy, what is the value of "GDP" (50% is an overhead cost). But worse, if one estimates the work done to comply with government regulations and includes some so-called private, but really public sector like public transport, etc. the real figure is about 70% or more. Believe me, we are in Europe more socialist than China in many aspects. One might argue that the wealth is still high, but then I haven't told yet about the debt rate. The implicit debt (public debt + pension obligations) is 3.5 times GDP. This is wealth based on pure credit. No wonder that inflation is now high because central banks are printing money (on behalf of goverments). Who pays the bill: the hard working citizen who pays taxes. Tax Freedom Day is around september-october in Belgium. While China has its problems (and more to come), they are on a positive growth path, we are on a negative one. I am mostly shocked that intellectuals like Stiglitz and Chomsky can make such statements at all. But this is not the first time that we see that academics are sometimes more in the dialectics than in science.

Published: May 23, 2008 2:20 AM
Paul Marks

I agree that G.D.P. is a flawed concept - however Chinese MANUFACTURING strength is real.

But the question is - if the leftists so admire the economic advance in China why do they not want to introduce Chinese levels of taxation? Or Chinese levels of general business regulation (such as in health and safety, or the lack of "anti trust" nonsense) - or Chinese style tort law?

The leftists pick on investment (i.e. the banking system) because it is one of the areas where they can claim that the Chinese government follows leftist ideas. And actually there is a credit money bubble in China - just as there are credit money bubbles in the United States, Britain and the Euro zone. So government practice in the area of the money supply is NOT better in China.

Published: May 23, 2008 7:01 AM
Patrick Doyle

It's easy to look at numbers and pull what you want from them. We want to see results because we come from a frame of reference that we believe and the truth won't change that.

You need foundations to build on and the Chinese are missing one, transperancy and trust; it is one of the most corrupt socities, just go ask the working people.

All the glowing numbers and wishing it was true won't over come that when corruptiopn is the norm on the basis level it goes all the way to the top.

China will have major problems and might collapse on itself down the road and all the false numbers, no matter how smart the people are won't change this.

Excellent article.

Patrick

Published: May 23, 2008 8:42 AM
Jeremy

Patrick,

What you are saying may have been true 10, even 5 years ago, but the way I see things on the ground here points otherwise.

It seems the more corrupt the place, the less development. China is an extremely fractured market - the laws might be nominally the same in different places but the level of corruption and graft is much higher in places without much development than others. Bjorn suggested this above, from personal experience that very much seems to be the way things are proceeding.

You're working with an outdated model of China in your head. Things aren't nearly as corrupt as you make them out to be. However, you're right that the average worker in China gets screwed much more than almost anywhere else... you could say that property rights and trust exist for the middle class and up, but not below, in today's China. Plus the constant confiscation of the people's earnings and savings through expansive monetary policy, when they have so little (comparatively) to begin with.

Not to say China doesn't have massive problems - it's just not as unstable as you make it out to be. Hundreds of millions of Chinese people, from upper lower class and up, have too much at stake to let the nation erupt into chaos.

Published: May 23, 2008 8:54 AM
fundamentalist

Some of you guys missed the point of the article. The author did not intend to say that the Chinese economy hasn’t grown; he acknowledges that it has. He points out that the growth has not been as great as previously thought, and therefore Krugman and Chomsky have no reason to gloat over the “superiority” of China’s mixed model.

The story about China’s GDP is accurate. The Chinese had not provided accurate data on costs in the past. Recently they provided updated cost data and when the GDP figures were deflated with these new figures, the GDP was 40% lower than previously estimated. That’s all very sad because it means more people live in poverty than we previously thought. But it also means that there was no “miracle” in the combination of limited free markets and state control of the economy as Krugman and Chomsky asserted. Modest liberalization produced modest growth, similar to what has happened in India.

It also means that a lot of the growth in China has been caused by monetary inflation, which means vast amounts of waste and a reduction in the wealth that the Chinese could have enjoyed with greater freedom.

Does anyone know the occupancy rate in Shanghai? Back when PJ O’roarke wrote “Eat the Rich” most of the new skyscrapers the state had built were totally unoccupied. Shanghai had more unoccupied office space than New York City had total office space. Has that changed?

As for how socialist China is, it’s easy to calculate the part of the economy that is still state-owned, which is the majority. I don’t think that much industry in the US or Europe is state-owned.

Published: May 23, 2008 9:10 AM
Bruce Koerber

If it is true that: the 'part of the economy that is still state-owned, which is the majority' and I have no reason to doubt what our friend 'fundamentalist' says, then the economy is not advanced in any real sense. Using property rights as a measure confirms this.

What this means is that the statistics floating around and being quoted by the empirical economists are not real but artificial. In the long run or in the economy as a whole these 'indicators' are like vapor in the desert. In the long run whatever advancement that will take place will have to occur after the distortions caused by and causing these malinvestments are flushed out of the system.

Building on sand cannot be the foundation for the future. The 'economists' who are given voice by the ego-driven interventionists (power elite) are all dead in the long run and for self-seeking reasons they do not care that people in the future are not.

Published: May 23, 2008 11:39 AM
LukeM

I would like to state a different line of argument that also suggests Krugman and Chomsky "have no reason to gloat:"

Even if growth has been As Great as Krugman says, this does not mean that government control is the reason for the growth.

The Chinese are growing their economy by adopting business techniques developed in the Western world. (Capitalism made it happen)

But any country, and said country's businessmen, could benefit from seeing a vastly superior example and following it. --If there is sufficient freedom in the country to allow some change, the degree of change will correspond to both the amount of change allowed (freedom) and the knowledge used. Thus, if a country gets to borrow knowledge from another source, it can grow at a faster pace than a country that must create its own knowledge, for a given level of freedom.

The west has a lot of knowledge on offer. It could be that this knowledge gain to the Chinese is currently of greater growth benefit (in magnitude) to China than the magnitude of the slowing effect due to government intervention.

It makes sense, then, that the Chinese could use the west as an example, and using that example, they could, at least partially, begin to catch up with the west at a faster rate than the west grew in the first place.

Again, as stated above, China can catch up faster than we grew when we were at their level of development because western capitalism has done the hard work for them.

Note that I am not saying that they could completely reach our level of development at the same time that we are at that level. (Do not make the mistake of thinking that the west is at some stationary level as time continues along) As long as their government is "worse" than ours, they will remain behind. Perhaps the Chinese growth pattern will first involve quick catching up, then slower growth as they close in on the west, and must innovate for themselves because there is less to gain from copying. Of course, if governments change, the pattern would be expected to change as well.

Published: May 23, 2008 12:25 PM
fundamentalist

From what I've read, China has a unique model. Expatriot Chines in SE Asia are responsible for most of the economic growth in Thailand, Philippines, and Indonesia. Of course, there is Taiwan and Hong Kong. All of these Chinese have enormous business skills and wealth. In addition, they have family and contacts inside China. When China opened its economy a tiny amount, huge volumes of investment from ethnic Chinese poured into the country. Without the rule of law, those investments were in danger. But the ethnic Chinese investors knew the system, or had friends and relatives who knew the system of whom (which officials) to bribe, when and for how much in order to protect their investments. Westerners haven't been able to duplicate this insider knowledge.

Published: May 23, 2008 3:14 PM
fundamentalist

From what I've read, China has a unique model. Expatriot Chines in SE Asia are responsible for most of the economic growth in Thailand, Philippines, and Indonesia. Of course, there is Taiwan and Hong Kong. All of these Chinese have enormous business skills and wealth. In addition, they have family and contacts inside China. When China opened its economy a tiny amount, huge volumes of investment from ethnic Chinese poured into the country. Without the rule of law, those investments were in danger. But the ethnic Chinese investors knew the system, or had friends and relatives who knew the system of whom (which officials) to bribe, when and for how much in order to protect their investments. That's why Chinese commerce has worked without the rule of law. Westerners haven't been able to duplicate this insider knowledge.

Published: May 23, 2008 3:15 PM
cpc

China's GDP growth is overestimated. Even if its GDP growth is 10%, it is too small because undeveloped countries must grow fast because they are just "catching up" and does not need to invest in new technology.

Because of its is $5,000, 10% GDP growth of China is equivalent to the US growing its GDP 1.1%.

Proof:
$5000 with 10% GDP growth is $500 extra yearly.

but in the US
$45000 with 1.1% GDP growth is $500 extra yearly.

So the U.S. GDP is growing ten times the GDP of China!

Also, GDP is an inaccurate measure because it tends to measure malinvestment created from inflation.

Published: May 23, 2008 4:18 PM
cpc

Also see :http://www.financialsense.com/editorials/petrov/2004/0902.html

So in fact China's growth is highly dependent on its mass inflation. Its consumer price index even inflation 10% every year.

Published: May 23, 2008 4:23 PM
Jeremy

It's funny the emphasis on how much of China's growth is dependent on expansionary monetary policy - in fact this is just a drag on real long term growth thanks to malinvestment.

What's even more (not so) funny is that any claims that China is pursuing an inflationary policy are implicitly saying that the US is pursuing an even more inflationary policy, after all the RMB continues to rise versus the dollar...

It's not a mixed economy that is fueling China's growth. It is the sections of the economy (and places) that are free, in combination with massive savings. Saving is the only way to fuel long term growth through capital formation - why are the stories on China so focused on the economic model / degree of freedom (very important, of course) but ignore the other major driver of real growth (savings)?

Published: May 23, 2008 11:11 PM
anonymous coward

For those interested in Chinese economics, this seems to be a useful torrent tracker.

http://www.chinadocumentaries.com/index.php?page=torrents&search=&category=17&active=1

Published: May 23, 2008 11:18 PM
LukeM

@ Fundementalist

1st, I am in agreement with what I think you have said before your last comments. I meant to draw another, complimentary line of reasoning as to why Paul K. and others were wrong.

If your last comments are a reply to mine (I think they are becuase of the reference to Westerners), then I'm afraid some misscommunication has occured. We are talking about two different things.

If I understand you correctly, your last comment is about the Chinese business model specifically. I was attempting to talk about something more general. I am talking about the way knowledge about the physical world, gained by one party through first hand experience, thinking, trial and error, etc.. can be used second hand by another party to speed the learning process and increase the growth rate of that group's society above what it would otherwise be. Accordingly, some of the GDP growth rate (malinvestment or otherwise) in China may be attributed to an influx of knowledge from the west.

------I was remiss not to add that "It" works the same with other forms of capital as well. --------

"They" could not grow as fast as they are growing without investment from without.

For a given system of government, country "X" will grow (some related amount) faster than another country "Y" if country "X" has the benefit other sources of knowledge and capital (excuse my redundancy if you find it annoying) that are not availible to contry "Y" at the time of its growth.

Then country "Y", being the first country to grow (of the two), could be expected to grow at a slower rate, C.P. than later countries, who benefit from the increased capital stock of the first. (whether through direct investment, or knowledge flow, etc.)

How much faster, c.p.? Who knows? The point is that this is another reason that faster growth can be expected in China, and it has nothing to do with any efficient state planning, but more to do with the (hopefully) growing capital stock of the world.

---In the last paragraph, by "faster" I mean faster growth in China relative to growth in China without the additional knowledge and capital of the rest of the world. I can make no claim as to whether China should be growing faster than the United States is today for example.

To make sure one thing is clear: I have no mechanism whereby to judge the absolute magnitudes of growth due to exogonous capital stock or the drag due to government coercion. I am only pointing out the direction of the "push," and its ramifications against the logic of Krugman, et. al.

Published: May 24, 2008 2:32 AM
Bruce Koerber

It probably goes without saying that capital is property even if we are talking about human capital (knowledge), and all real economic advancement ultimately ties back to the protection and refinement of property rights.

Part of the refinement process that needs to happen is the appreciation of property rights as a measurable quality. As this measurement improves the ability to determine economic advancement improves.

Published: May 24, 2008 3:36 PM
fundamentalist

LukeM: "If your last comments are a reply to mine..."

Actually, they weren't. I agree with what you have written. I was just making some general comments in case people wondered how the Chinese economy could develop with almost no security for private property. While investment from expatriot Chinese has been helpful, a great deal of China's growth has been due to credit expansion, most of which goes to state-owned industries. Of course, they have the advantage of Western technology and management methods, which gives them a big hand upward.

The main reason for China and India's high rates of growth is that they are starting from such a low base. Economies as advanced as our can possibly grow at the same rate. Growth rates tend to be log functions with poor countries experiencing rapid growth from a low base and that growth rate levelling off as they become wealthier.

Published: May 24, 2008 6:58 PM
CC

The author of this article has clearly never visited China. I'd like to point out a few things.

1. Hayek, Mises, Coase, Alchian, Friedman--these figures are more influential and respected in China than in any other country in the world.

2. If you ask a typical businessman in Hong Kong (the official #1 free economy in the world) which economy is more free, the answer is probably China.

3. A survey in Hong Kong on which city has the brightest future shows that the majority chose Shanghai. By the way, Shanghai has more skyscrappers than New York already.

4. A Chinese bookstore I visited had the greatest variety of books I've ever seen, about 3 times the size of Blackwell's in Oxford: just a few titles from memory, Gunter Grass, Leo Strauss, Hayek, catcher in the Rye, Saramago, translations of all major western textbooks in the sciences.

5. Most people don't actually pay much tax. unemployment figures are completely unreliable, because the government doesn't even know who's working and where. For this reason GDP figures are actually underestimating. The studies cited by the author are a total joke--done by people w/ no knowledge of China whatsoever.

6. Many many problems remain, but I'd say that China has by far the most impressive growth in the history of mankind. It is probably the best evidence for the soundness of Austrian economics!

7. Of course Chomsky and Stigler are wrong, but only because they didn't know that China has become Socialism's greatest traitor. Meaning before the reform it was more socialist than any other country (even the USSR), but now probably the most adventurous lab for capitalism.

8. Most members of the Chinese communist party are more pro-market than American presidential candidates.

9. The major source of leftist thought in China is from the West, especially from American professors teaching in the top universities.

Published: May 25, 2008 1:15 AM
Jeremy

It's funny that those of us espousing a 'China is one of if not the most capitalist oriented nations in the world' don't have statistics to back it up despite (questionable) growth rates and savings rates. Instead, we have gut feeling and personal experience in the country.

China is about the most capitalist country there is in today's world, even in spite of recent moves (the new labor law and tightening up on business visas being, in my mind, steps toward decidedly less freedom)

@Fundamentalist - You have this to say:

"The main reason for China and India's high rates of growth is that they are starting from such a low base."

I'd have to call bullshit on this one. Granted, a poorer country can and will grow more quickly thanks to ability to adopt already discovered technologies and processes - but why then isn't every other poor country experiencing tremendous amounts of growth? The answer, of course, is there is a lack of (economic) freedom & saving.

Saving just means forgoing present consumption for future consumption - freeing up of resources and labor for processes further up the production process. All things being equal, the more a nation saves, the more it will grow.

And China saves more than any other nation out there.

Published: May 25, 2008 1:58 AM
Agnostique

Again, just want to voice out some wild thoughts.

No matter if China’s GDP figures are 100% overstated or not, China’s growth in the last 30 years has been nothing less than spectacular that the West can only dream of in the same timeframe. To deny it is to detach from reality.

The problem with this article is that the premise is not well founded so the conclusion cannot hold; anything else is a waste of time. Full stop.

Call China a miracle or not, it’s really pointless. Before China, the economic growth of the 4 little dragons in Asia (Hong Kong, Singapore, Taiwan and South Korea) was regarded by many people as a miracle. Before the 4 little dragons, the economic growth of Japan was regarded as a miracle. What makes China different is, among others, its sheer size and sustainability. Whether it could have done better with or without interventionism can never be proven. It might be more fruitful if you research the relationship between growth and, say, exchange rate, rather than the degree of interventionism.

Capitalist or not; interventionist or not; again I don’t know if some statements here are meant to be taken seriously. China has close to zero social security protection and takes much less away from a company’s income or an individual’s paycheck compared to the industrialized West (think of the Scandinavians). China has an anti-trust law that is literally void compared with Europe and the USA. Does it make it more capitalist? On the contrary, the USA Senate used its political power to block the voluntary sale of a US listed oil company to a top Chinese oil company just a few years ago. Does it make the USA more interventionist? To measure, you have to quantify. Without quantification of the criteria, it is of little use to talk about the degree and extent of being interventionist or capitalist. As said before, that China is more capitalist than the West is only a non-quantified half-joke, albeit always half-seriously taken.

BTW, currently India’s growth is nothing but modest as some claimed. It is HOT and EXPLOSIVE, you would have been happy had you invested in India some 5 or 10 years ago. Yet if you had been to Bombay (now Mumbai) some 10 years ago and compare it now and then to Shanghai, you would see what China’s growth story was about.

There are many, many theories about China’s growth. The Chinese diaspora theory has been around some 10-20 years ago. It might have been true back then but it is totally outdated now. Take the French hypermarket Carrefour, the world’s 2nd largest retailer behind Walmart, as an example, it has totally dominated its sector in China, and China has become its largest market outside of Europe. Its success in China is just one of the many examples (although there are also many failure stories, from overseas Chinese as well).

Foreign Direct Investment in the form of capital and technology inflow into China had been the key to China’s growth some 10-20 years ago. Not any more now. Currently China has too much liquidity and has totally blocked FDI into China.

Monetary expansion is true, but it is imported, i.e. the USA made it and transferred it to China … Misesians should know it better than anyone else. The malinvestment bubble worry was already there some 10 years ago, but it did not materialize in China. The malinvestment might have occurred in the USA instead which exchanged its hard currency for China’s exports, allowing China to become the World’s highest foreign reserve country with the headache of managing the fall in the USD now…

(You might notice from the above that China is moving up the value chain now; the focus is shifting from exports to internal consumption since a few years ago; people who still have in mind a picture of China composing of communist tyrants and poor peasants might need to adjust their mindset.)

Real estate occupancy rate in Shanghai and Beijing and the implicit bubble were also a concern some 10 years ago. Did not materialize either. Local Chinese have been, and are still buying real estate like crazy (despite government measures to cool down the real estate market); same for smart money buyers (western funds and professional buyers), who see no problems with property rights in China.

BTW, you get land use rights for a certain number of years when you buy land in China, which upon expiry is renewable at a symbolic charge. That is exactly the same way how Hong Kong (aka one of the World’s most free economies with the best available legal protection) and many other countries work. Some people seem to mistake private ownership and private property rights as an overwhelming issue and do not seem to notice and understand the investing acts of the foreign investors, the local entrepreneurs and the entire private sector in China. What you see on TV about the clash between peasants and real estate developers is true, but a lot of them are more related to disputes over claims on such rights and its valuation rather than protection of transaction based rights.

Of the many theories on China growth, I found the “catch-up” theory appealing. That a country with so much resources, land, human capital etc. should remain poor and underdeveloped does not make sense. Imperialism and Communism had kept China weak and poor over the last 200 years. If it does the right things, it is only normal that it grows and catches up. The obvious challenge is to evaluate what things it does are right or wrong and measure their relative impacts. (As Jeremy rightly pointed out, starting from a low base is not sufficient.)

High saving rate is an obvious factor (which is totally in line with the thoughts of the Austrian School and other schools too). High saving and being hard working etc. are deeply rooted from the Confucian + Taoist + Buddhist culture, which are shared by many Asian countries. If you accept that these traits are significant factors, then you should also accept that your analysis and models etc. might not necessarily apply because after all the Chinese are different and so are their thoughts and behavior.

For anyone interested in China, I would highly recommend the works of Steven N.S. Cheung (aka ZHANG Wu Chang), who’s from the Chicago School, and is currently the most renowned economist in China/HK.

Published: May 26, 2008 5:03 AM
fundamentalist

Agnostique: "China’s growth in the last 30 years has been nothing less than spectacular that the West can only dream of in the same timeframe. To deny it is to detach from reality."

No one is denying that China has grown rapidly. However, it's rate of growth is no more than what informed people would expect from a country starting its growth from such a high level of poverty. When a country is as poor and backwards as China in the 1980's, the gains from small reforms are tremendous. The West has already implemented the reforms that produce the greatest gains, which is why our growth rates are lower. It's sort of like farming the best land first; the worse land just doesn't provide the boost in output. For much of the 1990's, just the growth in the US economy was greater than the entire Chinese economy.

Agnostique: "Before China, the economic growth of the 4 little dragons in Asia (Hong Kong, Singapore, Taiwan and South Korea) was regarded by many people as a miracle. Before the 4 little dragons, the economic growth of Japan was regarded as a miracle."

They're only miracles if you don't know anything about economics. The mainstream explanation for such events is "shocks", which is their technical word for miracles. Austrian econ has a well-grounded explanation that doesn't involve miracles, which are acts of God.

Agnostique: "Whether it could have done better with or without interventionism can never be proven."

You're right, if you're talking about mainstream econ. But Austrians have proven it.

Agnostique:"Currently China has too much liquidity and has totally blocked FDI into China."

I don't think you'll find that to be true if you look at IMF data. Last year, the US took in the most FDI in the world, followed by China.

Agnostique: "Monetary expansion is true, but it is imported, i.e. the USA made it and transferred it to China … "

Do you honestly think that so many US$ would have gone to China had China not pegged its currency to the US$ as a ridiculously low level? Besides, all of the US$ are held by the state. The Chinese use the remnimbi (spelling?). The state has to issue the remnimbi. Inflation in China is very high. It follows then that the state is expanding its money supply very, very rapidly. The main point of the article is that inflation in China has been much higher than the state had reported. When the state released more accurate figures, it forced a re-evaluation of the real growth rate to a lower level.

Agnostique: "Some people seem to mistake private ownership and private property rights as an overwhelming issue and do not seem to notice and understand the investing acts of the foreign investors, the local entrepreneurs and the entire private sector in China."

The Chinese people are complaining more than anyone about the lack of property rights.

Agnostique: "Of the many theories on China growth, I found the “catch-up” theory appealing. That a country with so much resources, land, human capital etc. should remain poor and underdeveloped does not make sense. Imperialism and Communism had kept China weak and poor over the last 200 years. If it does the right things, it is only normal that it grows and catches up. The obvious challenge is to evaluate what things it does are right or wrong and measure their relative impacts."

That should have been your post with the rest left out.

Agnostique: "(As Jeremy rightly pointed out, starting from a low base is not sufficient.)"

Jeremy completely misunderstood my point. Of course you have to make the right reforms, but growth rates like thos of the Asian Tigers, India and China are only possible when you start from a level of high poverty and backwardness. When you achieve the level of wealth that the West has, you have already used all of the reforms and technology that produces rapid growth so the gains are mucher harder to achieve. Besides, the Far East is benefitting from our past experience and technology, which it should.

Agnostique: "High saving and being hard working etc. are deeply rooted from the Confucian + Taoist + Buddhist culture, which are shared by many Asian countries. If you accept that these traits are significant factors, then you should also accept that your analysis and models etc. might not necessarily apply because after all the Chinese are different and so are their thoughts and behavior."

Which is it? Are the similar to westerners or not? You've already admitted that they followed the same path to growth as did the West, so what makes them different? And, are you a polylogist? In other words, do you think there is one set of truths for the West and a completely different one for the East? I think you'll find that Chinese and Indian development follow Austrian economics very closely. There is no mystery, shock, or miracle to it.

Published: May 26, 2008 8:51 AM
olmedo

i think that there is out there a lo t of confusion about china and that that confusion derives form applying western standards about the rule of law to a society that though superficially westernize culturally is still tribal.

the issue is this:

here in the west we a system of "universal" laws that form the "modus operandi" of a nation. we laws recognazing private property therefore, private property is allow and shall be protected.

not the same for the chinese that , from what i know, hasn't even bothered , until late , to change the old communist regime laws they just simple, let it go "laissez faire, laissez passe"

in a way , in a country like china with strong tribal customs of loyalties and such there is no need for that change in laws except to calm the fears of some confused westen investors.

you don't have to go to china to know this, just go to your local chinese restaurant where you the faces of many young chinese workers who barely speak the local language. have you realized that many of those chinese faces serving you are, modern day slaves?? at least in a western sense, of selling thier freedom , an theirs family, in order to pay for their trip to the west.

those contracts are actually "illegal" in those westerns countries where they work however, none of them complain and it just keeps happening." i made a promise to come here and i am going to keep that promise in order to remain here"

the same happens in china, there is no need to change the "law" in order for private property to occur it is good enough to just, "let it happen" and thats it.

in the west we can call something like this "illegal or corrupt" in china it is only the way people understand each other.

jim rogers, the investors, has called china the most capitalist country in the world and i totally agree with him completely. it is the most capitalist not because of government laws , it is the most capitalist because things just happen and are allow to.

olmedomiro@yahoo.com

Published: May 26, 2008 10:43 AM
Jeremy

@olmedo - uh... you need to learn more about China. Assuming that all of China is tribal from your experience with (usually family run and owned, even if extended family, not 'slave' operated) Chinese fast food restaurants is a bit strange. But you're right in that some of what makes China so capitalist today is being able to operate semi-legally.

@fundamentalist:

"Jeremy completely misunderstood my point. Of course you have to make the right reforms, but growth rates like thos of the Asian Tigers, India and China are only possible when you start from a level of high poverty and backwardness. When you achieve the level of wealth that the West has, you have already used all of the reforms and technology that produces rapid growth so the gains are mucher harder to achieve. Besides, the Far East is benefitting from our past experience and technology, which it should."

You are right that technology and reforms (processes, really) allow much faster growth than otherwise - however I'm pretty sure that if there was a 35% savings rate in America and a much lower effective tax rate (I say effective because official tax rates in China are not what many people pay) that we would have very significant real growth.

You are downplaying the importance of savings in development without an adequate counter-example (a developed country with a very high savings rate and a degree of effective freedom equal to today's China).

I completely understand your point that adopting technology and other efficient processes allows much faster growth as said country 'converges / catches up' (and studied this concept in a macro class years ago) - do you understand my point that if the US had as high savings and as low effective taxes as China does that it would likely be growing in the mid to maybe even high single digits in real terms? I still think the _primary_ driver is savings and freedom, not adoption of previously existing technologies and processes.

Published: May 26, 2008 9:20 PM
Agnostique

fundamentalist said: “it's rate of growth is no more than what informed people would expect from a country starting its growth from such a high level of poverty”.

I’m afraid that is a gross understatement of China’s growth, particularly in terms of absolute size and sustainability. I don’t want to enter into the details but you have to consider (critically, and then adjust) the USD exchange rate when you think about growth and absolute size of an economy if your data are quoted in USD. (You might also want to note that, if you believe in the World Bank’s analysis, the very same World Bank was trying to say that China was not that poor back then, as I said before.)

I saw someone used the world “miracle” here, which irritated me, and which is why I mentioned the word and said it is pointless. Certainly my English is not good and my writing not clear enough for people to understand.

China is blocking FDI inflow. I’m saying this for the 3rd time here. Why would anyone want me to look at the IMF data? As I already said before, China had been the no.1 FDI country for years but not any more now; it might have slipped to perhaps no. 2, so what? Should we be more concerned with stock rather than change, which I’m sure you know the difference? Since October 2006, China implemented a new regulation which, among others (which I don’t bother to enter into the details), blocks FDI inflow, meaning that if you want to get your USD or any other foreign currency into China for setting up a factory or any other investing purposes, you will need to get approvals from several difficult Ministries to convert your foreign currency into Rmb but literally they will not grant you their approvals (as opposed to previous policies which welcomed FDI). Why? Excessive liquidity (and for other reasons to be precise but no need to enter into the details). It is all public info (and it is a BIG deal in the local finance community). Why do I have to say it for the 3rd time? Why can’t people do a little research to verify a claim if they doubt it, even if someone else tell them the facts squarely in the face?

And why would anyone believe China intentionally pegged its currency to the USD at a ridiculously low level? I can’t believe I read such a statement in an Austrian econ blog.

First a bit of history. If my memory serves me right, China’s current peg to the USD was revised and set in the early 90s. NEVER had China said it adopted a free floating forex system, and for close to 20 years China’s exchange rate have remained STABLE (ok to be really precise, recently it went up a bit due to US pressure but you can still safely say it is stable compared to virtually any other currencies which all significantly appreciated against the USD). A stable and foreseeable forex rate!!! Is it not what entrepreneurs and businessmen want? Does it not take away from the economic calculation of entrepreneurs and businessmen a major uncertainty/risk? Does it not make it simpler for entrepreneurs and businessmen to manage expectations of the interventionist forex/monetary policy of one side rather than 2 sides? Why is it bad for entrepreneurs and businessmen? China’s forex stability is only bad for the one side that depreciated its currency, i.e. the interventionist counterpart country aka USA.

Economics 101 textbooks used to have a name for the strategy adopted by countries that allow their currency to depreciate against the currencies of their trading partners. It is called “impoverishing thy neighbors”. Isn’t the forex trade, ceteris paribus and in itself, a zero sum game?

History again. Anyone who is old enough should still remember that in the 80s when Japan’s economy was in its height, the US was filled with craps like the Japanese were going to take over, the Japanese way was the superior way etc. even US business schools adjusted their syllabus. Well then in the late 80s to early 90s, after a G7 meeting, the US arm twisted Japan to raise the Yen exchange rate. So ended the Japan export story and decades of Japanese growth, almost instantly. Malinvestment and the bubble bursting that naturally followed contracted the Japanese economy. Japan pulled its investments from the SE Asia which indirectly led to the Asian Financial Turmoil in 1997, starting with the depreciation of the Thai Baht and then spreading to literally all countries in SE and North Asia. For close to 20 years, Japan’s economy has been in a slump, even with close to zero interest rates (which led to the likes of Krugman to talk about the Liquidity Trap theory etc).

So tell me, in view of such a recent, close and vivid example of a neighbor, based on principles of human actions, why would any rational decision makers of a country accept the US propaganda and let their country be impoverished? Japan is not to be blamed for saying yes, but China is not to be blamed for saying no either.

And BTW, in the midst of the Asian Financial Turmoil, Japan depreciated its Yen thus playing the “impoverishing thy neighbors” game (again, who can blame Japan?). China throughout the entire turmoil did not move its exchange rate AT ALL. The SE Asian countries were publicly thankful to China for not adding to their pains. In one way, China shouldered part of the pain for its Asian neighbors. So tell me, why is China to be blamed for maintaining a stable Rmb for close to 20 years?

The world’s monetary excess was originated, initiated and created by the USA, particularly by Greenspan, and exported into China by exchange of real, tangible Chinese exported goods which sustained the otherwise unsustainable standard of living in the US. Yes China is interventionist in many, many ways but you cannot blame China for the monetary excess which it has been battling by whatever means it can think of including classical means like raising interest rates and raising banks reserves etc… The continual money printing is on the other side of the ocean that keeps coming into China. I thought these are all self explanatory and didn’t expect to see US propagandas here, especially in an Austrian eco blog. I was wrong. (Still I believe explaining and criticizing the US monetary policy is one of key strengths of the Austrian School.)

And BTW when did I admit anything? I can’t believe people put words into other people’s mouth here. High saving is only one of the examples that Asians act differently from Westerners. I’m no scholar and am in no position to tell you as to whether or not and how and why Asians are different in their thoughts and behaviors and human actions, but you might want to pay more attention to the direction of economic research here in Asia if you really want to find out more about this topic.

fundamentalist said : “The Chinese people are complaining more than anyone about the lack of property rights.”

Now this one is classic. I’m totally speechless…. Why would anyone who do not even know how to spell Rmb correctly and do not even bother to research it even if it only takes just a few seconds be bold enough to represent the Chinese people and tell me what the Chinese people are thinking and doing, in one simple sentence? It was at this point that I realized I was totally wasting my time…

Rmb is Renminbi, aka Yuan, aka CNY in the old days.

Published: May 27, 2008 4:20 AM
fundamentalist

Jeremy: “do you understand my point that if the US had as high savings and as low effective taxes as China does that it would likely be growing in the mid to maybe even high single digits in real terms?”

Yes, and I agree.

Agnostique: “China is blocking FDI inflow. I’m saying this for the 3rd time here.”
When did China start blocking FDI? Last year China was second behind the US in FDI flows, not stock, according to the IMF. So if China is currently blocking FDI, it must have been a recent decision or it must be limited.
Agnostique: “Why would anyone want me to look at the IMF data?”
If you have a better source of data I would be glad to look at it.
Agnostique: “And why would anyone believe China intentionally pegged its currency to the USD at a ridiculously low level?”
That has been a very common practice around the world for decades. By pegging the currency at a low level, the country encourages exports and discourages imports. Most states in the world still think like mercantilists where exports are good and imports are bad. Also, it causes an inflow of hard currency that enables the state to buy necessary imports, such as oil, when the home currency isn’t traded on the world market.
Agnostique: “Economics 101 textbooks used to have a name for the strategy adopted by countries that allow their currency to depreciate against the currencies of their trading partners. It is called “impoverishing thy neighbors”.
I don’t think that’s econ 101. The only reason a country’s currency will depreciate is if the state prints too much of it, that is, more than the people want to hold as cash, so they sell it to other nations via imports. No “impoverishing thy neighbor” takes place. In fact, the impoverishing happens on the side of the state doing the excessive printing of money. A lower exchange rate can only impoverish neighbors in the minds of mercantilists.
Agnostique: “Well then in the late 80s to early 90s, after a G7 meeting, the US arm twisted Japan to raise the Yen exchange rate. So ended the Japan export story and decades of Japanese growth…”
Then Yen floated on the market; it was not fixed by the state. The Japanese economy collapsed in the early 90’s because the Bank of Japan raised interest rates to stop price inflation caused by earlier excessive money creation. The Japanese economy stagnated because the state refused to allow bankrupt businesses to go out of business. Japan’s is still a major exporter; it just exports different things from what it used to export.
Agnostique: “The world’s monetary excess was originated, initiated and created by the USA, particularly by Greenspan, and exported into China by exchange of real, tangible Chinese exported goods which sustained the otherwise unsustainable standard of living in the US.”
The first part is definitely correct! The second part is popular Keynesian econ. However, if China’s currency were allowed to float on the market, its value would probably rise substantially. Then China wouldn’t have to impose restrictions on FDI; the market would do it for them. Exchange rates adjust to the changing monetary policies of the home countries. If they change more than people like, it’s the fault of the central banks.
Agnostique: “The continual money printing is on the other side of the ocean that keeps coming into China.”
So how does the state keep the many state-owned industries afloat even though they are losing money? I don’t want to diminish the role the US plays in causing inflation; it is significant. But the Chinese government isn’t blameless.
Agnostique: “you might want to pay more attention to the direction of economic research here in Asia if you really want to find out more about this topic.”
I’m open to suggestions.
Agnostique: “Why would anyone …be bold enough to represent the Chinese people and tell me what the Chinese people are thinking and doing.”
We get a lot of news from China. I’ve been listening to NPR do a series on China for the past three weeks. Maybe you haven’t heard the stories about Chinese fighting for stronger property rights. I’ve read and heard a lot of them.
An interesting anecdote: My niece just returned from spending two years in China teaching English. She was there when the Tibet demonstrations started and she knew about them because of the access to the internet that she had. She tried to tell her Chinese friends about the protests, but they wouldn’t believe her because they had seen nothing on the TV news about it. Then, about a week later, army troops showed up in the city and the TV news began to provide limited info about the protests. Her Chinese friends were stunned that the state-owned media would keep such news from them.
Keep in mind that no one at this web site wants China to fail in its development, as far as I know. China’s growth is exciting! It’s good for the US and for the world. And it vindicates Austrian econ. Our main fight is with socialists, especially Keynesians, who try to use China as an example of the virtues of state intervention.

Published: May 27, 2008 8:54 AM
olmedo

jeremy,

when i discribed chinese society as "tribal" i never meant for it to be "backward" i only meant that "arrangements" there are more based on relationships and custom than "abstract law" as in the west.

in many ways chinese civilization is more advance than western civilization however, its organizing principles lacks the universality of western canon law. therefore, as china expands its economic influence around the world the most adapt to it or there will be trouble.

thats is why a chinese has very little trouble adapting to the west and westerners have big trouble adapting and understanding china.

the system of universal, abstract law is probably western civilization greatest contribution to the world.

if you want to expand on the subject please read this great book,

law and revolution by harold j. berman.

Published: May 27, 2008 9:50 AM
fundamentalist

Agnostique, Another way to look at the US/Chinese exchange rate is that is subsidizes US imports of Chinese products. By keeping the Rmb fixed at a low rate to the US$, imports to the US from China don't cost Americans as much as they would if the Rmb floated to a higher level, as it probably would. So China is paying Americans to buy its products. It only hurts the Chinese.

Published: May 27, 2008 1:11 PM
c.p.c.

"Jeremy: “do you understand my point that if the US had as high savings and as low effective taxes as China does that it would likely be growing in the mid to maybe even high single digits in real terms?”

Yes, and I agree."

Developing countries SHOULD have a high savings rate, because people in developing countries are motivated to invest in education and factories correlating with GDP growth. America is already developed, so people would not have the incentive to save money to undertake large projects like factories.

I don't think the high savings rate has to do anything with culture. I think that your claim that "culture" has an influence on high savings rate is just prejudice and a stereotype. You should first think about what they are saving their money for, instead of speculating that they just want to save and do nothing with their money.

In order for America to have a very fast growth rate of single digits, their investments must be in the development of technology (or else their investments would turn to malinvestments and it may also turn into overinvestment because of underconsumption from the high savings rate).

Published: May 27, 2008 8:38 PM
c.p.c

If the United States invest on factories more, then it would overproduce factories without enough people demanding the products from the factories. Additionally, people even have less of an interest in purchasing factory products because all their money is invested and saved. Therefore, if the United States has an investment *rate* like China, it would fuel overinvestment.

"You are right that technology and reforms (processes, really) allow much faster growth than otherwise - however I'm pretty sure that if there was a 35% savings rate in America and a much lower effective tax rate (I say effective because official tax rates in China are not what many people pay) that we would have very significant real growth."

As demonstrated, Americans would not have the economic incentive to have a 35% savings rate because it would lead to overinvestment. (unless all their 35% of their savings is from technology, which is highly unlikely). Also Americans would NOT have the incentive to invest their money in banks because interest rates would become much lower if people invest more.

If the per capita GDP of China is $5,000 and the savings rate is 40%, they would save $2,000 annually.

The United States per capita GDP is $45,000. If the United States savings rate is only 10%, they would save $4,500 annually, which is still $2,500 than China!

Therefore, more developed countries should have a *rate* lower than undeveloped countries because they do not need proportional amount of money. They just need some few thousand dollars on education, healthcare and stuff. These things cost similar in many countries. That is why undeveloped countries has to spend unproportionally amount of their income on these services.

"it is the most capitalist because things just happen and are allow to."

A lot of people got confused with capitalism and corporatism. The corruption of China and the barriers to entry for new businesses is very hard for start-ups to enter the market.

The unprotection of private property rights is not a problem. They problem is eminent domain and corruption destroying property rights. It is actually beneficial that intellectual "property" rights are not protected in China because intellectual property rights restrains innovation and undermines economic growth. Other land rights can just be protected by putting a fence around some land or hiring some private defense agencies.

Published: May 27, 2008 9:06 PM
c.p.c.

There are three misconceptions that you all seem to belief:

1. The assumption that 10% economic growth is "high" for a country with $5,000 per capita GDP.
2. The assumption that a 40% savings rate is "high" for a poor and developing country.
3. The assumption that China is capitalist. In fact, China's economic freedom is much lower than the United States.

I would not waste my time to argue.

Published: May 27, 2008 9:59 PM
Jeremy

@fundamentalist - Thank you for the clarifications, that's some thoughtful analysis.

@olmedo - "when i discribed chinese society as "tribal" i never meant for it to be "backward" i only meant that "arrangements" there are more based on relationships and custom than "abstract law" as in the west."

Totally agree. This is a big problem that people going into China without experience run into, believing the contract means much or what you hear is what you get... ha

@c.p.c.:

"As demonstrated, Americans would not have the economic incentive to have a 35% savings rate because it would lead to overinvestment. (unless all their 35% of their savings is from technology, which is highly unlikely). Also Americans would NOT have the incentive to invest their money in banks because interest rates would become much lower if people invest more."

Any given amount of savings is optimal. A 35% savings rate would not lead to overinvestment if it is what Americans really wanted to save. It would lead to phenomenal growth.

Overinvestment only occurs when there is a disconnect between investment and what people are actually saving. This is almost always due to artificial manipulation of the interest rate, ie expansion of the money supply and a money supply that is controlled and manipulated.

Savings set by the free market do not lead to overinvestment - no matter what that savings rate may be.

Your assumption is that there is some optimal rate for developed countries to save at. This just isn't true at all. The optimal rate is what the free market sets it at.

The problem is, we have anything but a free market in money. People have little incentive to save when they know the value of their savings will decline more than the interest they are paid to hold it. In a truly free market, the value of money tends to increase over time, providing strong incentive to save.

Contrast this with the current system where there is much less incentive to save, and you see that savings rates in America and any country with a central bank are artificially low.

"Therefore, more developed countries should have a *rate* lower than undeveloped countries because they do not need proportional amount of money. They just need some few thousand dollars on education, healthcare and stuff. These things cost similar in many countries. That is why undeveloped countries has to spend unproportionally amount of their income on these services."

Developed countries do have a savings rate lower than undeveloped countries for reasons you the state, and also because as income goes up people 'tend' to spend less time working and more in leisure, but this doesn't mean that the current savings rate is what the free market would set.

"A lot of people got confused with capitalism and corporatism. The corruption of China and the barriers to entry for new businesses is very hard for start-ups to enter the market."

This is becoming more and more the case - however there are lots of little businesses in China that operate under the law - to the extent that they are able to, this is capitalist.

"The unprotection of private property rights is not a problem. They problem is eminent domain and corruption destroying property rights. It is actually beneficial that intellectual "property" rights are not protected in China because intellectual property rights restrains innovation and undermines economic growth. Other land rights can just be protected by putting a fence around some land or hiring some private defense agencies."

Agree to an extent about the lack of protection of intellectual property rights contributes greatly to China's growth - however I haven't read enough (or a convincing enough argument) to decide whether intellectual property is a valid form of property or not.

You do nothing to address the fact that taxation is far, far lower in China than America when claiming that economic freedom is much lower in China than America. The lower the taxes of a nation, the more capitalist it is, period. A purely socialist system is one that taxes 100% of the income of everyone and redistributes it perfectly equally. Which is America closer to, and which is China closer to?

Published: May 27, 2008 11:50 PM
Agnostique

Maybe I should not have said China is blocking FDI. “Blocking” is too strong, I should have used “slowing down”. But still, what is the meaning of being the world’s no.2 FDI country, considering that it has been the world’s no.1 FDI country for so many years? It is the rate of change that shows the direction that China is heading, and I reckons that it will only show with a time lag in backward statistics.

I’ve already said the new regulation was issued in October 2006, and I’ve already stated the name of the local economist who IMHO is the best. Public info is readily available. Even Chinese government and Ministries web sites have English version. What else could I say? Why won’t people do their homework instead of asking to be fed?

And the term should be “beggar thy neighbor” instead of “impoverishing thy neighbor”. My fault. And I’m afraid I did read it in quite a few Economics 101 textbooks, and I bet some countries still believe in it, especially those which keep asking other countries to revalue up their currencies. Also I’m afraid how forex works in the real world is more complex than what fundamentalist described, and it’s a long story. And I’d also like to point out that Japan’s raising interest rate back then was an integral part of the Yen appreciation game, and that, be it Keynesian or not, the price level at Walmart would not have been sustainable had it not been exports from China (and other emerging countries).

Currently some of the largest companies by market cap worldwide are profitable Chinese state owned enterprises. China has been dealing with its money losing state owned sector for years by all sorts of measures, one example is grouping money losing inefficient assets under the so called “asset management” companies and let them go bankrupt, be restructured, be merged or acquired. Today many sectors in China are dominated by restructured or merged state owned oligopolies. That they could have been even more profitable or the wealth so created should have been more evenly distributed are valid issues, but the simplistic picture of China bankrupt by huge money losing state owned companies is outdated. Make no mistake, I see all sorts of shortcomings in China each and every day and I do have an opinion as to where and what areas China should be blamed, but I also think many Westerners just miss the point.

And when it comes to wishful thinking regarding where China should be ideally heading to attain economic freedom, it seems some areas could make interesting research topic (forgive me if already done) for economic essays (and I mean serious and thorough research with hard evidence): the role of forex in Japan’s collapse, critique of the Liquidity Trap theory, the role of protectionism in the rise of South Korea and to a lesser extent Japan both as a nation and for their leading domestic companies, evaluation of the effectiveness of Malaysia’s close door forex policy during the Asian Financial Turmoil as compared to the alternative standard remedies recommended by the IMF, a measure of the adjustment in volume of trade and the overall impact on the aggregate wealth creation if the price of Rmb (exchange rate) had freely floated in the last 20 years, and a quantification of the magnitude of pain (ideally approximated by the number of people that need to jump out of the window and the number of generations that would be sacrificed) if China were to adopt a totally free and democratic system by shock therapy.

And please don’t talk about Tibet. I’m flooded with China news and data everyday and I can’t afford to read all of them as I have to travel and meet and talk with people and do all sorts of other stuffs. I may be wrong, but hearsay from a limited circle and main stream Western media are simply not good enough for me.

Just on a side note. What happened in Tibet is much closer to a violent riot than a peaceful demonstration. If it took place in the West, say, if you replace Tibetans by another tribe who claimed to be suppressed by the West and claimed to be fighting for their people and nation, it would very probably be labeled as terrorism straightaway, and armed forces would have moved in much faster than the Chinese did, and the poor girls who were burnt to death in flames set by the rioters would have made headlines instead of sympathy with the rioters and China bashing. I’m curious as to whether educated Western readers notice the double standard of mainstream Western media and I’m curious as to how western educated readers justify it if they are conscious of it at all.

Another side note. It just so happened that a reporter from the London based The Economist magazine was in Tibet a few days before the riot for unrelated research and interviews. His presence went unnoticed by the government, or noticed but no one bothered him (indeed the Chinese government did absolutely nothing until the end of the riot, which arguably is not fair to the victims). He had a total free hand to do whatever he wanted. As he described in his own words, he went wherever he wanted, talked to whoever he wanted, shot whatever pictures he wanted, for more than 2 weeks til after the end of the riot. He published his works, wrote his findings in a negative tone against China (I presume otherwise western readers won’t believe him), but still you get a glimpse of what happened, and I bet it was not what some Western governments was waiting to see. His works seemed to go largely unnoticed in the mainstream. Why? Can people honestly and critically think about it? (Look at some of the German media; they reported outright lies, which they had to publicly apologize after being found out.) I’m not even asking western readers to read the story from both sides. I’m just curious as to whether educated readers ever doubt that western media is as biased, and whether the portion of readers who care to do more research to form a full picture view is substantial, and whether western readers believe Western media without critically asking themselves if lies are being sold to them because it proves to sell and because it is what they want you to believe.

c.p.c. You might want to compare Africa to Japan and rethink your savings and education theories. You might also want to consider aggregate numbers and the USD exchange rate as well and not merely nominal per capita numbers. You might greatly benefit from traveling and seeing with your own eyes. Meeting and talking with more Asians will also help you take a more informed position as to why they save and whether or not and how it is related to their tradition and culture. I have to agree with the comments of the others on your other points. Yet your property rights theory, though certainly outrageous for the lawyers, matches with what I see from my personal experience. I would love to see someone write a thoroughly researched essay on it.

Published: May 28, 2008 4:05 AM
fundamentalist

c.p.c. “If the United States invest on factories more, then it would overproduce factories without enough people demanding the products from the factories. Additionally, people even have less of an interest in purchasing factory products because all their money is invested and saved.”

Jeremy has already dealt with this very well, but I want to add my two bits because it’s such an important issue. What you have stated is very popular thinking on economics, but it’s just not true. If people invest their savings, either in a bank, mutual fund, stock makret or other interesting paying institution then that money goes to expand businesses and hire more people or raise wages. As a result, workers earn enough to buy the new products produced. As the great economist Say used to say, production creates its own consumption. What you describe will only happen if people hoard money, that is, put it in a hole in the ground or under their beds. But people only hoard money during crises such as the Great Depression when they have lost confidence in insitutions like banks.

The US should save more than it does. We rely on Chinese savings, and savings from other parts of the world for creating new businesses and to help finance our government budget deficits. We don’t save more partly because of high taxes on savings and partly because of social security and other welfare benefits. Inflation is hard on savings, too.
c.p.c.: “The unprotection of private property rights is not a problem. They problem is eminent domain and corruption destroying property rights.”
Actually, corruption and eminent domain are part of the problem of the lack of protection for private property.

Agnostique: “Even Chinese government and Ministries web sites have English version.”

What are you saying, that we should only pay attention to Chinese state statistics and Chinese economists? Believe me, we are very aware of the biases of the Western media. The reason that Western media criticize China more today than in the past is because China abandoned pure communism and introduced small amounts of capitalism. The socialist Western media will never forgive China for that betrayal of their ideals.
For statistical data, we have found that few state statistics are totally honest, but we have developed ways to squeeze the truth out them no matter how hard the state tries to hide the truth. In that regard, we don’t find Chinese state statistics any more reliable than Western data. For an example, see Robert Murphy’s article on this site “The Government’s Statistical Whopper of the Year.”

Agnostique: “And the term should be “beggar thy neighbor” instead of “impoverishing thy neighbor”. My fault. And I’m afraid I did read it in quite a few Economics 101 textbooks, and I bet some countries still believe in it, especially those which keep asking other countries to revalue up their currencies.”

“Beggar thy neighbor” and “impoverishing they neighbor” are the same. It doesn’t matter. You’re probably right that some text books teach mercantilism. And you’re completely right that most nations believe it’s true. Even most people in the US, especially politicians and the media, believe it’s true. That doesn’t make it true. Imports do not harm a nation and exports don’t benefit a nation. Free trade is the only beneficial system. Good economists have known that for over 300 years. It takes other people a while to catch up.

You hear a lot of people in the US calling for China to let the Rmb float freely because they believe imports from China hurt the US economy. I apologize for their stupidity. We have tried to eduate them, but it doesn’t seem to take. Austrians couldn’t care less whether China retains a fixed exchange rate. The only reason I mentioned it was because you blamed the US for inflation in China. I responded that if the Chinese didn’t like that inflation, all they had to do was to raise the fixed exchange rate, or let it float freely on the open market.

Agnostique: “Also I’m afraid how forex works in the real world is more complex than what fundamentalist described…”

No, it’s really not. Check out Mises’s explanation in Human Action. That’s what I gave you in a nutshell.
Agnostique: “And I’d also like to point out that Japan’s raising interest rate back then was an integral part of the Yen appreciation game, and that, be it Keynesian or not, the price level at Walmart would not have been sustainable had it not been exports from China (and other emerging countries).”

The BOJ may have been pressured by the US to raise interest rates in order to reduce Japanese exports to the US, but again, I can only apologize for the economic ignorance of our politicians. Japanese imports to the US increased our standard of living dramatically and we should have been grateful for them. If nothing else, their cars forced US car makers to improve their quality dramatically. But the BOJ had plenty of reason to raise interest rates in order to stop high inflation in Japan which the BOJ had caused.

As for the price levels at Wal-Mart, you’re completely correct. And we thank you, especially for China subsidizing our purchases of Chinese products with your low, fixed exchange rate with the US$.

Agnostique: “… it seems some areas could make interesting research topic … for economic essays (and I mean serious and thorough research with hard evidence):”

You present some interesting areas for research, but if you approach history (especially historical data) without an sound theory of economics, you’re sure to reach the wrong conclusions. History is so vast that any theory, no matter how stupid, can find supporting evidence in it. You should become very familiar with Austrian econ if you want to understand the past.

Published: May 28, 2008 9:12 AM
c.p.c.

@Jeremy:

"Any given amount of savings is optimal. A 35% savings rate would not lead to overinvestment if it is what Americans really wanted to save. It would lead to phenomenal growth.

Overinvestment only occurs when there is a disconnect between investment and what people are actually saving. This is almost always due to artificial manipulation of the interest rate, ie expansion of the money supply and a money supply that is controlled and manipulated. "

That is not my point. My point is that if you force all Americans to have a 35% savings rate, Americans are going to malinvest because not all of them know how to productively spend their 35% of their savings. Therefore, they would spend them on nonproductive and duplicate projects, which creates an increased artificial investment.

"Your assumption is that there is some optimal rate for developed countries to save at. This just isn't true at all. The optimal rate is what the free market sets it at."

My point is that it is not possible for an already developed country to have a large investment *rate* than undeveloped countries. My point, as a general rule, is that both savings and investment are natually a large percentage for developing countries. Once the country has become fully developed, the natural free market rate of investment would drop. If the savings rate is artificially high in an already developed country, then it would become malinvestment. The investment rate for developing countries should be *comparatively* higher in developing countries than developed ones. So you claim that country-X has a "high" interest rate cannot be verified. If it cannot be verified, then why do you said that? It is up to individuals to subjectively determine.

"This is becoming more and more the case - however there are lots of little businesses in China that operate under the law - to the extent that they are able to, this is capitalist."

No, you seem to not have any knowledge of how corrupt and corporatist China is. These laws are very corrupt and they tend to monopolize a small group rather than competition. Most of these corrupt laws are useless and it creates barriers to entry that makes it harder for businesses to enter and compete.

If more and more laws were enacted, the more corrupt and corporatist the state would become.

"I haven't read enough (or a convincing enough argument) to decide whether intellectual property is a valid form of property or not."

IMO, those who support intellectual "property" do not really support the free market.

"You do nothing to address the fact that taxation is far, far lower in China than America when claiming that economic freedom is much lower in China than America."

While its *absolute* taxes collected is lower because of its low GDP, its tax rate or per capita share of tax is not much lower. The top tax bracket for personal income is 45%. Its overly complicated value added tax, resource tax, etc. are corrupt and high. And don't forget about the "inflation tax" that destroys the wealth of people. I don't know where you got that information. Probably because foreigners pay less taxes than citizens and some foreigners are exempt. (Jeremy was a foreigner in China).

Also, don't forget the things that are much more destructive laws than taxes: corruption, regulations, etc. They are actually much more damaging to economic growth than taxes.

Taxation is only a tiny variable in determining "economic freedom". Others are much more significant in suppressing economic growth.

@Agnostique:

"That they could have been even more profitable or the wealth so created should have been more evenly distributed are valid issues, but the simplistic picture of China bankrupt by huge money losing state owned companies is outdated."

State-owned enterprises are are hugely corrupt and inefficient. Just do a search on Google on how these high inefficient parasites drag down on China's economic growth:
http://www.mtholyoke.edu/courses/sgabriel/soe.htm
http://www.sjsu.edu/faculty/watkins/chinasoes.htm

"Just on a side note. What happened in Tibet is much closer to a violent riot than a peaceful demonstration."

The Western media uses propaganda to exaggerate violence there, just to make money. But I do not advocate any military intervention.

"You might want to compare Africa to Japan and rethink your savings and education theories."

You are comparing apples and oranges. Africa is competely socialist and incredibly corrupt. Their high tarrifs, lack of economic freedom to invest hinders investment.

@fundamentalist

"What you have stated is very popular thinking on economics, but it’s just not true"

I meant that people in developed countries would naturally invest less (such as creating less factories). If there is too many factories and production in a developed country, the costs of production exceeds the demand for the products, so Americans would not have to invest their money in factories.

But in developing countries, the demand for these products are constantly expanding because of per capita GDP growth, so people has to invest in more and more correlating with GDP growth. Once the maximum level of factories are made, then adding extraneous factories would make the cost of production more expensive than the demand of products produced by the factory. So I am just suggesting that Westerners do not have the economic incentive to save and invest in extraneous factories.

"As the great economist Say used to say, production creates its own consumption."

I know how Say's law works, and it is unrelated with the above example of factories.

"If people invest their savings, either in a bank, mutual fund, stock makret or other interesting paying institution then that money goes to expand businesses and hire more people or raise wages."

I mentioned above that investing in innovation and technology are an exception. The stock market (because some stock markets are innovative) and the businesses that depends on innovation would excel in developing countries. But the investment rate depends on the amount of innovation. If innovation is high, then the savings rate must be high. But America, currently, has low innovation so it does not increase investment much.

The original point that I made my comments to Jeremy that this is not the belief I am advocating is that I am criticising Jeremy's belief. I was simply saying that developing countries naturally invest more in factories because its economy is expanding. I was criticising Jeremy's video about Westerners building less factories: http://youtube.com/watch?v=1VHP94jGQrk

In Jeremy's video, he presumes that Westerners, as a whole, "stunts" the economy because more of them do not save at same rate than Chinese people. People in all developing countries have lower time preferences so they would invest more, NOT because of some cultural explanation. Their savings rate would eventually decline as they get richer. Westerners already invest much more than Chinese, as a whole, and Jeremy's video is presuming that Westerners invest less.

Jeremy's comments suggest that he is advocating compulsory savings rate on Westerners (although he is not). However, the economy would be better in the free market because it would correlate with people's time preferences. If he is not advocating this, then why would he say it?

Published: May 28, 2008 3:35 PM
fundmentalist

cpc: "Jeremy's comments suggest that he is advocating compulsory savings rate on Westerners (although he is not). However, the economy would be better in the free market because it would correlate with people's time preferences."

I could be wrong, but I think Jeremy is saying that the market in the US is not free, and that's why Americans don't save. State intervention discourages savings because most politicians are follow Keynesian econ and Keynes thought saving was evil. You're right that people in advanced economies will have a tendency to save at a lower rate, but there is a lot of state intervention that also punishes savings.

Published: May 28, 2008 4:07 PM
Jeremy

CPC - Thank you for the thoughtful responses.

That video is meant to be a lighthearted treatment of China's growth vis-a-vis the US as opposed to a 'this is the way things are, period' kind of video.

I completely agree that developed countries will tend to have a lower savings rate (percentage) than developing ones with similar economic freedoms. However, I don't agree with this statement:

"That is not my point. My point is that if you force all Americans to have a 35% savings rate, Americans are going to malinvest because not all of them know how to productively spend their 35% of their savings. Therefore, they would spend them on nonproductive and duplicate projects, which creates an increased artificial investment."

If the savings preferences in America were higher (and I do think they would be higher, though not 35%, in a truly free market for money) and the money supply was stable or relatively stable, I do not believe that Americans would make malinvestments. They would not chose to invest most money in factories, you're right, - it would be spent wherever the profit potential was greatest.

Malinvestments on a broad scale occur precisely because of manipulation of the money supply & interest rate. What I'm saying is that any savings rate, if it was set by preferences of the savers in a free market, would be optimal. And yes, I think if America had a truly free monetary system that savings rates would be considerably higher.

"While its *absolute* taxes collected is lower because of its low GDP, its tax rate or per capita share of tax is not much lower. The top tax bracket for personal income is 45%. Its overly complicated value added tax, resource tax, etc. are corrupt and high. And don't forget about the "inflation tax" that destroys the wealth of people. I don't know where you got that information. Probably because foreigners pay less taxes than citizens and some foreigners are exempt. (Jeremy was a foreigner in China).

Also, don't forget the things that are much more destructive laws than taxes: corruption, regulations, etc. They are actually much more damaging to economic growth than taxes."

Sorry but you obviously don't know much about how much people in China tend to pay in taxes. Tax evasion is enormous... way higher than you would guess based on official law.

Teachers, businessmen, restaurants, shop-owners and small manufacturers of all kinds, nearly everyone is in on this game... and it applies to both income and the VAT.

It is decidedly not like the US where you are very likely to get caught (or at least seemingly so) for avoiding taxes.

The portion of corruption that is seen by those not paying taxes, helps push China's development, fair or not to those who do pay taxes.

There are of course lots of regulation and other forms of corruption that inhibits freedom and long term growth in today's China.

Published: May 28, 2008 10:04 PM
abc

I agree w/ Jeremy on the tax evasion. CPC clearly doesn't have close knowledge of how things work in China. Most Chinese people, especially those in the private sector, do not pay as much tax as they should. The system is much more lax in China. Not only that--most Chinese people living in America don't pay a lot of taxes. The main problem I see is the high tariff on luxury goods, which is thought to be a deliberate effort to boost the economy of Hong Kong, since a huge chunk of the Hong Kong economy is from the shopping trips of mainlanders. W/ the same tarriff on imported goods as Hong Kong, there will not be a city in Asia (or in the world for that matter) that can compete w/ the major Chinese cities for shopping.

Published: May 28, 2008 11:00 PM
Agnostique

Fundamentalist: “What are you saying, that we should only pay attention to Chinese state statistics and Chinese economists?”

Did I say that? I guess I’d better go back to school to study English rather than Economics.

No need to apologize for anything. I don’t represent China, and am not trying to be nationalist or anything. I just want to contribute my 2 cents.

Some of the research topics I mentioned were already covered by various people, which all have insights, but not totally conclusive or convincing IMHO, which is why I’m interested to see how the Austrian School would look at these topics. And I believe that without a conclusive view and explanation on these topics, discussions on where China should be heading is groundless.

As to the currently hot topic of whether China should revalue its currency peg, I am irritated to see Austrian School supporters describing the peg as “low”. As I explained before, maintaining a stable peg should be in line with Austrian School and I’m actually surprised that the Austrian School did not advocate for it. Describing it as “low” seems to be based on common misconception in America and counter Austrian School logic.

Taking it as a subsidy from the Chinese to the Americans is one way to look at the fact. But if anyone would want to imply that it hurts the Chinese so the peg should be revalued, then I’m afraid the logic is not sufficient, not until it can be proved that, with the volume adjustment pursuant to a higher price (of Rmb), the overall impact is positive. (And non quantitative positive effects of the peg should also be considered, e.g. at a stable peg and with the USA’s continual money printing, China accumulated the USD created by the USA and became the World largest holder of USD assets, with theoretically the power to turn USA economy into chaos, which is an effective and peaceful way to counter the dominance of the World’s single military super power.) I have yet to see coherent thoughts based on Austrian School logic in support of appreciation of the Rmb.

c.p.c.: “State-owned enterprises are hugely corrupt and inefficient. Just do a search on Google on how these high inefficient parasites drag down on China's economic growth: http://www.mtholyoke.edu/courses/sgabriel/soe.htm http://www.sjsu.edu/faculty/watkins/chinasoes.htm”

Well I did click into the 2 web sites you suggested. The first one is dated May 1998, and the second one talks about China in 2000 and quoted Chinese official statistics of 1996… Honestly I’m again speechless… Are the links wrong? Are you serious? Are you aware of what happened in the last 10 years? Do you not want to find out and verify things for your own sake after reading what I said about the SOEs? Or are you just trying to be sarcastic, or humorous? Am I supposed to laugh?

c.p.c.: “But I do not advocate any military intervention.”

Fine. But don’t tell that to the victims’ families.

c.p.c.: “You are comparing apples and oranges. Africa is completely socialist and incredibly corrupt.”

Ok. Then why is it ok to compare China to the USA? Did you not say that China is not capitalist, corrupt and has much lower economic freedom than the USA? What is the threshold to render a country comparable to the USA in your mind? How about comparing Singapore, Hong Kong and Japan to the USA or to Western Europe? Check their savings and education investment etc. and tell me again what you think. With all due respect, I don’t believe not even for a second in this talk about developed countries should have lower savings.

And am I right to understand that your basic assumption is that with more savings at their disposal, Americans will malinvest? Is it fair to assume that people in developed countries, with supposedly the best education and technologies a country can afford, and with freedom in the market and freedom to act, are still not smart enough to channel their money into positive yielding opportunities the world not just their own country has to offer, even if opening an account and buying emerging market stocks is just a few clicks away and takes only minutes? The monetary excess created in the USA found its way into emerging countries and yielded superior return. Swap the fiat money printed with real savings. Is it fair to assume now that these real savings will be used to build factories in the USA?

Published: May 29, 2008 5:24 AM
fundamentalist

Agnostique: "As to the currently hot topic of whether China should revalue its currency peg, I am irritated to see Austrian School supporters describing the peg as “low”.

You implied that the Rmb is low when you describe price inflation in China as being caused by the US. It's true that the US is inflating its currency. But China could neutralize the effects of US monetary inflation simply by raising the exchange rate. The inflow of US$ into China is causing monetary and price inflation. That would suggest that the Rmb is too low.

Published: May 29, 2008 7:55 AM
cpc

@Jeremy

"That video is meant to be a lighthearted treatment of China's growth vis-a-vis the US as opposed to a 'this is the way things are, period' kind of video."

I am sorry that I misinterpreted your video which made my lengthy responses and rebuttals.

"Sorry but you obviously don't know much about how much people in China tend to pay in taxes. Tax evasion is enormous... way higher than you would guess based on official law. "

If lots of people evade taxes, then the government must print the equivalent amound of money out of thin air to fund itself, which would accelerate inflation and malinvestment. Tax evasion without cutting government spending is much more harmful than actually paying the full tax.

@Agnostique

"Are you aware of what happened in the last 10 years?"

I know that the GDP and living quality growed many times over the last 10 years, but that grow is predominately contributed by the private sector.

But you cannot compare what the growth rate of China if these state-owned enterprises are abolished. Its growth rate may be even greater. Without private sector growth, the state-owned enterprises would not have the resources to expand and steal from the market.

But its impoverished past and low initial GDP with its economic reforms are the predominant reasons of why the growth rate is considered "high" for some.

Empirical GDP statistics over the past years are inaccurate and could represent inflation led growth, at least as a factor.

"Do you not want to find out and verify things for your own sake after reading what I said about the SOEs?"

I interpreted your last sentence as that you actually think that these SOEs does not present any serious harm: "but the simplistic picture of China bankrupt by huge money losing state owned companies is outdated". So I replied to you about the ineffiency of them. It is almost impossible to estimate how much damage the SOEs have done, as growth could be much faster. Sorry that if I misinterpreted your statement.

"I don’t believe not even for a second in this talk about developed countries should have lower savings."

Sorry if I didn't represent my thoughts clear enough. What I said was a general theory on savings rate between developed and developing countries, corruption has a large impact, and I did not deny that some countries would have some variations.

In the general theory, I did not say about the absolute savings, but the savings rate. (as a rebuttal to Jeremy's claim) I actually gave an example above that America has a higher absolute savings rate than China.

But my point of my savings arguments is that government interference and corruption has a much greater impact on savings rate than culture.

"Check their savings and education investment etc. and tell me again what you think."

My point is that it is predominately the government damaging investment. It is impossible to estimate the natural rate of investment.

I will criticize some other arguments by you:

America actually has one of the lowest education levels in the world. It's partly due to illegal immigrants and bureaucracy. The public education system in America, China and Japan would not motivate them to save as much on education.

I accept the fact that some high-IQ countries like Northeast Asians tend to invest more on innovation and education than low-IQ countries in Africa (most of them are illiterate). But not all Northeast Asians share a common culture. Most people in the PRC is non-religious, but many of them have Confucian and Taoist beliefs, which would motivate the parents to invest more in education on their children. It only applies in education, not intrinsically in business and "working hard," as you said: "being hard working etc. are deeply rooted from the Confucian." Do you think that Confucians are very radical religious people and they just work hard for the sake of it? No. People would work harder to make more money so they can spend it, not because that their religion told them to work hard for the sake of it. Also, "working hard" is different than "working smart."

@fundamentalist

"But China could neutralize the effects of US monetary inflation simply by raising the exchange rate."

I don't think that they can sustain neutralize inflation.

Exchange rate is different than money supply, and does not represent inflation. It is equivalant to the fact that the consumer price index is not an accurate measure of inflation. According to the Austrian theory of the business cycle, different goods cost different, such as the claim that capital goods would cost much more than consumer goods. Exchange rate also depends on the rate of investment and demand for money, so exchange rate is not an accurate measure of inflation comparisons between the two countries.

Additionally, Jeremy has mentioned that a lot of Chinese people evade tax, so the printing of the money may not be as fast enough to sustain their government. Therefore China may have to print extra and its actions may inflate China's currency more than United States.

Published: May 29, 2008 7:26 PM
Jeremy

Hi CPC,

"Exchange rate also depends on the rate of investment and demand for money, so exchange rate is not an accurate measure of inflation comparisons between the two countries."

I think in the short run you are right, but in the long run the exchange rate is a very close approximation of how much two given countries inflate their currencies. I can't give a coherent argument as to why - but I believe this as an economic principle.

Given this, and the RMB's long term relationship to the dollar, one could make the claim that the Chinese banking system is inflating less than America's.

This would make sense in a practical sense, as too much inflation could literally cause a revolution in China today. Better to steal the wealth of 2/3 of your countrymen, who are still mostly piss poor (2/3 of China's population are still farmers), a little bit at a time instead of all at once.

Since we are defining taxation as both the direct and indirect kind (taxes + inflation), I would not hesitate to say that direct effective taxation (what is actually collected) is much lower in China, and would guess that indirect taxation is slightly lower in China than America as mentioned above.

Then again, consumer price inflation is high in China, and it may be the case that China's current inflation of the money supply is higher, in percentage terms (which are the only terms I'm using), than America's.

But I still think the overall tax burden (direct plus the hidden taxation we speak of) is much lower in China than America, and that this is a major contributor to its very fast growth rate.

You're absolutely right that completely doing away with China's state owned enterprises would cause China to grow much faster - but I don't think anyone here has disputed this. In China, the fear is that this would cause massive unemployment. In truth, what is causing such unemployment (besides wages above what the market - although SOEs are in no way a market institution - will bear) is the lack of profits to invest in new, profitable enterprises.

By the way, thanks for the interesting discussion.

Published: May 29, 2008 9:12 PM
Agnostique

fundamentalist: “You implied that the Rmb is low when you describe price inflation in China as being caused by the US.”

Now that’s a big jump into conclusion and I’m afraid that reflects more about your beliefs. My view remains that per Austrian School logic a stable forex rate is better than an interventionist forex rate manipulation in response to the counterpart country’s interventionist monetary policy. People who think otherwise consciously or subconsciously perceive the peg as high or low, and that IMHO is counter Austrian School logic. Seeing that coming from Austrian School supporters is what irritated me.

As regarding whether China or USA is more inflationary, note that China has been raising interest rates, raising bank reserve requirements, and restricting investments since recent time and the USA has been doing the exact opposite. I guess it is clear as to which side is currently more inflationary and expansionary in terms of policies. Inflation in the USA is perhaps lower than China as the monetary excess created in the USA flow into China while cheap Chinese goods so produced flow back to the USA to keep prices down.

And as regarding exchange rates in the long run, I guess no one would disagree on how things should work. I agree with cpc that forex rate manipulation is unlikely to be able to solve problems created by monetary policies, though not totally for the same reasons but then again forex in real life is a long story.

As to SOEs in China, simply put, they are far from being good, but they have come a long way and they are not as bad as many thought they were. Improvements that were achieved, and the policies and actions that led to those improvements, should not be neglected or understated. BTW, many of the SOEs are publicly listed and the biggest of them are listed in Hong Kong with International Financial Reporting Standards and western styled transparency, and info on them can easily be found as they are public. They are known as Red Chips and H Shares, and they are profitable. And BTW generally Foreign Invested Enterprises have always paid higher wages than SOEs in China for local talents.

cpc: “Jeremy has mentioned that a lot of Chinese people evade tax, so the printing of the money may not be as fast enough to sustain their government. Therefore China may have to print extra and its actions may inflate China's currency more than United States.”

First, as I said, the current monetary policy in China is contractionary instead of expansionary, and second, just for the sake of logic, has it ever occurred to you that, with the sheer trade volume and economic growth, a lower than official tax rate would have been sufficient to fund the government without the need to decrease its spending, such that the government might have already taken tax evasion into account when adjusting the tax rate, so that the government despite its enormous power chose not to implement severe measures to more effectively catch on a grand scale the numerous people and enterprises that evade tax?

And thank you for clarifying your position. I reckon it is right to maintain the view that the correlation between the degree of development of a country and its low saving rate does not hold, there being much more counter examples than supporting evidence in real life.

cpc: “I accept the fact that some high-IQ countries like Northeast Asians tend to invest more on innovation and education than low-IQ countries in Africa (most of them are illiterate). But not all Northeast Asians share a common culture.”

African countries might have lower education levels but I do not believe Africans have lower IQ than Northeast Asians. And Northeast Asians do share a lot of common elements in their cultures although their cultures are not the same.

cpc: “Most people in the PRC is non-religious, but many of them have Confucian and Taoist beliefs, which would motivate the parents to invest more in education on their children.”

Am I to understand that you are now embracing the culture theory? i.e. tradition and culture and belief affect people’s psychology and value and habits leading to differences in their human actions and investments and economic behavior?

cpc: “It only applies in education, not intrinsically in business and "working hard," as you said: "being hard working etc. are deeply rooted from the Confucian."

I’m curious as to what makes you think so. What do you think about their views on other important issues in life apart from education of the kids, like retirement, ageing, family liens, pride, self worth, peers recognition, life and death...…? Would their culture affect their views on these issues and subsequently their human actions, and their decision in relation to investment and their economic behavior? And these are not businesses?

Not hard working? Not in business? Let me tell a joke. A real one in business circle here. Back quite a few years ago, some European countries implemented laws to restrict the maximum working hour to 39 per week. A European businessman told a South Korean businessman: we have the 39 hours limit in Europe now (there are other versions that replace the South Korean with Chinese or Japanese). The South Korean was totally stunned. He said, “You westerners are awesome. How did you achieve that? There are only 24 hours a day!” That is the kind of mindset in Asian business circle.

cpc: “Do you think that Confucians are very radical religious people and they just work hard for the sake of it?”

You probably know the answer yourself. Confucian teachings are not radical and it is not even a religion, and neither is Taoism, and arguably, Buddhism can be practiced as a philosophy rather than a religion. You seem to have assumed that people have to be religious to make it work. Does that stem from the importance of Catholicism as a foundation of western culture? IMHO some Asian culture is imprinted in Asians in thousands of years of belief and habit and is manifested in what they do and how they behave consciously or subconsciously day by day rather than dictated by an authoritative religion as a Westerner might have thought. All in all, does that not support the culture theory?

Published: May 30, 2008 5:26 AM
newson

agnostique says:
"My view remains that per Austrian School logic a stable forex rate is better than an interventionist forex rate manipulation in response to the counterpart country’s interventionist monetary policy.

austrian theory says nothing of the sort. what fundamentalist has been saying is correct - to the extent that the pbc inflates its currency (don't just look at the most recent braking, look at the very fast chinese money growth over several years), it can counter upward pressure on the rmb. had the rmb not invested such vast sums in us treasuries, the us dollar would look even sicker than it currently does. so the chinese government already intervenes heavily; the fact that the americans pursue disastrous monetary follies doesn't at all oblige the chinese to do likewise.

anyway, the austrians would recommend that the freer the policy, the better the outcome (whilst still condemning the fiat money system for creating the imbalances in the first place.)

this tactic is a national wealth-destroyer, but makes sense if the chinese political agenda is to reward favoured industries in the export sector. mercantilism isn't a chinese invention, but they're as guilty of it as the us.

Published: May 31, 2008 8:50 AM
Andira

China has the potential and confidence to maintain this rapid growth in the foreseeable future. So the goal of doubling GDP that was set out in China’s eleventh Five-Year Plan is within reach. Its faced with a number of important social and economic challenges, including various economic imbalances, China also has to increase government expenditure on social services, like health and education, as well as basic pensions, thus possibly reducing the need for precautionary saving and raising consumption.

Published: June 13, 2008 1:21 AM
fundamentalist

Andira: "China has the potential and confidence to maintain this rapid growth in the foreseeable future."

And we wish them the best. I just wish they would liberalize more so that they could grow even faster. What's happening in China is very exciting.

Published: June 13, 2008 9:45 AM
Lance

Before you speculate that it is a "cultural" explanation of the high savings rate, please see Japan's low saving's rate of 3.1%. http://search.japantimes.co.jp/cgi-bin/nb20070113a3.html

Published: August 22, 2008 1:32 PM
Lance

Before you speculate that it is a "cultural" explanation of the high savings rate, please see Japan's low saving's rate of 3.1%. http://search.japantimes.co.jp/cgi-bin/nb20070113a3.html

Published: August 22, 2008 1:34 PM
Lance

It's the One-Child Policy that makes China a big saver.

Published: August 22, 2008 1:40 PM

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