Pie in the China Sky
One of the benefits of attending LSE is the ability to attend a near infinite amount of guest lectures, speeches, discussion panels and debates. Recently, Tom Ridge of US Dept. of Homeland Security fame came by campus to give a speech. It’s pretty easy to tell when an important government official is around, considering the travelling crew of burly men in suits and black, tinted-window sedans they bring with them. Of course, there are also many more low-key, less security-obsessed academic presentations to help one spend an hour or so feeling smart and informed.
Earlier this evening, I attended just such an event. It was a public lecture entitled “Is China’s Growth Real and Sustainable?” given by Justin Yifu Lin, the director of the Center for China Economic Research (CCER)at Peking University.
In brief, Mr.Lin’s answer is that, yes, China’s economic growth is both real and sustainable. I would classify him as an unabashed, economistic China optimist, which means that I disagreed with a lot of his conclusions. Nevertheless, the lecture was interesting and Mr.Lin did make some interesting, if debatable, points.
The first portion of the lecture dealt with a point that, I think, almost all China pundits can agree on: China’s growth has confounded more than a few economic theorists. He addressed the confusion over how, in the late 1990s, China experienced deflation and a decline in energy consumption while still managing to post significant GDP growth rates. This led certain economists to question the veracity of Chinese economic statistics, especially given the likelihood of political manipulation. In turn, this doubt over the numbers coming out of China led to all sorts of predictions concerning the imminent collapse of the economy, revaluation of the currency and financial crisis (none of which have yet happened).
Mr.Lin explained, in a narrow economistic sense, how China’s growth in the late 90s and early 2000s was indeed real despite the conflicting economic signals of deflation and reduction in energy use. First, the deflation was a result of huge oversupply coming online through massive government investment and foreign investment. Second, the decline in energy use was brought about by the replacement of older, inefficient industry by newer technology brought in by the new round of investment, and not by a reduction in economic activity. I’m no economist, but those explanations make sense to me.
Perhaps Mr.Lin’s strongest point, however, was made when he was addressing why so many pundits and economist theorists around the world constantly get China wrong, their predictions (often of the negative variety) rarely panning out. He attributes this to the fact that too many of the theorists are assuming, consciously or not, that China is something it isn’t: a fully functioning, market economy. When making economic predictions, they are using models that assume certain institutional and market structures (often those of Western market economies) that, quite simply, don’t exist in China (or if they do, they are in mutated form: a bastardized mix of command capitalism with socialist characteristics).
Basically, no one really knows what China’s communist/authoritarian/capitalist/regional/centralized/chaotic economy really is. Given that the very structure itself is in constant transition only makes matters worse. Thus, any predictions of boom or gloom based on Western models are doomed to be wrong: China plays by its own rules, if by any at all. It will continue to confuse, confound and amaze theorists the world over, perhaps even giving rise to new economic theories to explain just what is going on. On this point, I certainly agree with Mr. Lin.
However, he lost me when he confidently predicted that China’s growth would continue at 8-9% a year for the next two or three decades. His reasoning? Basically, that several indicators show that China is now where Japan was back in the 1960s, and where South Korea was in the 1970s. Following the development of these economies through the decades allows us to extrapolate that, by 2030, China will have overtaken the US as the world’s biggest economy. Simple economics, right?
Well, if you ask me, this sort of reasoning has a huge theoretical hole. On the one hand, Mr. Lin argues (and rightly so, in my opinion) that China’s economic structure is so unique that any attempts to understand it through currently accepted economic rationale will fail. And then, on the other hand, he argues that to determine China’s future, we simply have to look at what has happened to other countries (he even mentioned the Industrial Revolution in there somewhere). So if China is a unique, unpredictable economic system, how can we predict its evolution based on the history of other economies?
I got the impression that China’s future is assured because, well, look how Japan and South Korea turned out! This became particularly evident in the question session, when a guest asked Mr.Lin how China planned to deal with its environmental mess. His answer? Growth is the only answer, since as countries get richer they tend to address environmental issues. He used London and Tokyo’s drastic environmental improvements over the past few decades as examples (at this point, the guest raised the very valid point that ‘developed’ countries haven’t so much solved their environment problems as exported them to places like…China! So I guess the question remains where China is going to dump its mess when it gets wealthier. Africa, perhaps?).
…but London and Tokyo aren’t China. If China is such a unique system, then how can we say with any confidence that increased wealth will lead to an improved environment (especially considering the lack of political freedom and a certain distaste for the expression of grievances)? I, for one, can easily imagine a China that gets even more polluted as it gets wealthier, given that a good chunk of wealth generation will likely depend on the continued ability to pollute like there is no tomorrow.
My basic problem with Mr.Lin’s lecture was this: you can’t say that China’s unique economic structure means it won’t fail according to established economic models, and then turn around and say that China’s future as a ‘developed’ country is assured by the historical experience of other ‘developed’ countries. China is either unique or it is not: you can’t have it either way when it suits you.
Perhaps underlying this was the feeling that I was at a China foreign investment sales pitch. Mr.Lin seemed a bit too confident in the Chinese government’s ability to solve the plethora of serious problems facing the country, which might not be too surprising considering his position (what’s that saying about not biting the hand that feeds you?). Environmental degradation, huge income disparities, a mess of a financial system: all of this was to be inevitably sorted out because the Chinese government is “pragmatic” and, well…because other countries have shown this is what happens. I guess I’m just one of those people that doesn’t accept “the government will solve it, don’t worry” as a valid, theoretical argument.
Well, there you go: another intellectually stimulating evening here in London.