One of the best articles on the Chinese economy I’ve seen in a long time.
A few notes.
The high savings rate is made possible by the fact that people in China are moving from low productivity agriculture to relatively high productivity industry. One of the blind spots of people in management is that they complain about how inefficient Chinese companies are. They are correct that Chinese companies are massively inefficient, but they miss the fact that even an inefficient, unproductive industrial company can generate more wealth than peasant agriculture, and moving people from agriculture to industry will generate a one-time increase in wealth, as it did in the Soviet Union in the 1950’s. The socialist economies of Eastern Europe didn’t run into problems until the 1960’s and 1970’s when they had become more industrialized, and the economies of Japan and East Asia didn’t run into those problems until the 1980’s and 1990’s. This is one reason I don’t think that “the Communist Party is going to collapse tomorrow” predictions are accurate. China has reached an stage of economic development, where is it possible to have a wildly dysfunctional and inefficient system, and still have reasonable amounts of growth. Something that people miss is that during the 1970’s, economic growth actually helped to *strengthen* authoritarian regimes in South Korea and Taiwan, and the same is likely to happen in Mainland China over the next decade or two.
It is possible that once China becomes industrialized that it will have problems. But that’s still two decades away, and that is long enough to do things to deal with the problem. One thing that is the case in China is that total factors productivity has steadily been increasing, and that bodes well for continued economic growth once China starts reaching the limits of the industrial transition.
Having said that there *are* some important characteristics of economic growth….
1) stable institutions – you simply cannot have economic growth in the middle of political chaos
2) low inflation – you cannot have savings and economic growth if people do not have a store of value. In China, people literally put cash in coffee cans and matresses. This would be unthinkable in Latin American or Russia where the currency has been destroyed several times.
The article mentions India as a rising economic force. I’d add one more surprising nation to the list. Russia. I think Russia has hit bottom and is starting to recover from the horrible economic policies of the early 1990’s.
All of this has a huge amount of relevance for Iraq. For Iraq to be a success, it has to start generating economic growth, and I fear that people are making the *EXACT SAME MISTAKE* that they made in 2003, which is not to look at things long term. Suppose everything goes as planned, and in two years, the bombs are no longer going off, and Iraq has a reasonable central government. What then?