Twofish's Blog

October 8, 2007

Difficult decisions postponed — Good

Filed under: china, economics, history, politics — twofish @ 10:54 pm

http://piaohaoreport.sampasite.com/blog/Difficult-decisions-postponed.htm

First of all, I don’t think that who is or is not in the Politburo will make a huge amount of difference as far as economic policy goes. The driving factors for PRC decision making are mostly institutional rather than personal.

Second, when dealing with complex systems like economies, I think it is almost always a bad idea to implement decisive political changes without a lot of discussion and consensus. The reason for this is that arguing about an issue gives you some broader perspective and also makes more much more subtle and sophisticated policy. The need to preserve employment is a valid policy goal, and I’ve found that in arguing about an issue that you often end up with creative solutions. The thing that makes policy tricky is that you never will know what happened if you didn’t undertake a policy. Yes, maybe by boosting unemployment, you end up avoiding the disaster. Then again maybe not. it’s possible that one’s economic principles were wrong in the first place, and by boosting unemployment you just made the problem worse.

Something that is important is that Chinese decision making leaves under the shadow of the Great Leap Forward and the Cultural Revolution. Saying that some massive pain is necessary in order to avoid disaster insure a great future is something people heard before, and are really skeptical of now. Sure your theory says that we might do X to avoid disaster Y, but maybe your theory is wrong.

Finally, in a situation where you have real economic growth, it makes sense to delay difficult decisions until later, because the longer you delay the decision, the more economic growth you have, and the more economic growth you have, and the more options you have for fixing the problem. Also making a difficult decision generally leads to new problems and new difficult decisions.

The entire history of Chinese economic reform since 1978 has been the history of political compromises and delaying difficult decisions for as long as possible. In hindsight, I think that this has been a wise move since there are things we now know about the Chinese economy that we simply did not and could now have known in the past. For one to argue that this time “bold decisive action” is necessary, one has to explain how “this time is different.” And since 1978, there has been no shortage of people arguing that “this time things are different.” I don’t think they are, and the key thing that makes things the same is that we don’t know what is going on.

Reading back since 1978 there have been a whole slew of papers that have argued “China is doomed unless they give this incremental approach to reform, and take bold action now” and in hindsight these papers have been wrong and the course of action suggested by these papers would have been sub-optimal for reasons that were unknown at the time the papers were written. One thing that is humbling is to go back in time, and read papers that describe policy suggestions at a point in time pretending that you know only what people knew them. It’s amazing what people just got wrong, and there is no reason to think that we are going to be less incorrect with our own predictions of the future.

If you go and ask most people in the Chinese bureaucracy what the key to Chinese success has been, I think that the answer is not in particular decisions, but rather in a philosophy and a mode of decision making.

“Seek truth from fact” (which by the way was a phrase used first not by Deng Xiaoping but rather a 17th century Chinese philosopher) means “don’t seek truth from theory” whether the theory was written by Karl Marx, John Maynard Keynes, or Milton Friedman.

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