The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

A Troubled Economic Paradise

09/15/2010

In 1987, I made my last trip to China. Mao had only been dead 11 years, and Deng was still trying to figure out how to use Soviet-style Five Year Plans to unleash the Chinese economy. To me at that time, it was a large, Second-World nation with an agrarian economy. My principle take-away was military, i.e., that China really could field a ten-million man Army, which is still amazing.

Yesterday, as the Air China 747 left JFK over the Atlantic before making a U-turn for the 14 hour flight across North America and the Pacific Ocean, I was expecting the take-away on this trip would be economic, not military. After all, I routinely study most every economic report China issues. One of my concerns has been that China’s economic statistics are less than unbiased and I hoped to get a better feel for it on this trip.

I was thinking how their economy has been growing 3-4 times faster than ours . . . every year for twenty years. It is no wonder they are now the world’s second largest economy. But, how have they done it? The conventional wisdom is that their government has an industrial policy and can actually govern. Furthermore, Deng visited Singapore frequently to see their combination of capitalism as an economic system with dictatorship as a political system and adopted it for his country.

The Free Enterprise system has capitalism as an economic system and democracy as a political system. That didn’t make sense to Deng, who was justifiably fearful of social unrest. The GINI index measures the gap between upper income Chinese and lower income Chinese. It is bad and getting worse, more like a Latin American Banana Republic. Social unrest is an inevitable result of increasing income inequality.

But, is dictatorship the answer to effective governing? Take a look at India, whose economy is growing almost as rapidly as China’s. Yet, they have a firmly established democracy. They are almost as Free Enterprise as we are. Democracy does not preclude a good industrial policy. However, maybe there are democracies, and there are democracies. While they have many political parties, they “ebb & flow” together to make things happen. Maybe, there is a lesson there for us.

I came to China to think about their economic reports. Maybe, I should be comparing political reports between the U.S. and India, not China.

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