Too much industrial policy? The case of China


China has reached a stage in its development where it needs to reform its growth model and rebalance its economy. But it is finding it hard to do so. Its policy framework remains too focused on expanding industrial capacity and insufficiently on rebalancing domestic demand away from excessive investment and towards consumption. In this sense China has ‘too much’ industrial policy. Sufficient incentives for progressive reform in China and other ‘imbalanced’ economies may ultimately require a new kind of global trade and financial system.

Many heterodox economists with an interest in development have made the case for industrial policy. Part of the reason for this is that all of today’s advanced economies have used it in various forms in order to accelerate growth and structural transformation. So-called late industrialisers, such as South Korea and Taiwan, have used it as part of their strategy to catch up with the richest countries. There have undoubtedly been industrial policy failures, with policies used to support fledgling industrial sectors becoming entrenched and firms failing to ‘grow up’ and become internationally competitive. However, these cases should not lead us to reject such policies wholesale. Rather we should learn from both the success stories and the failures in order to do the policies better and get state intervention right. Continue reading

Institutions, Economic Development, and China’s Development Policy for Escaping Poverty – Developing Economics

This interesting post by Professor Ting Xu from the Developing Economics blog reflects on the realities of development as a process of Schumpeterian creative destruction, and the institutions which can promote this process, with an emphasis on the relationship between the market and the developmental state. Historically, successful developmental institutions have tended to be different to those considered in mainstream economics discussions. The post also discusses how these ideas apply to the experience of China and its policy aim of escaping poverty.

Michael Pettis on Evergrande and China’s debt problem

Another video of an interesting discussion with Peking University Finance Professor Michael Pettis where he explores the issue of China’s property sector and its current dynamics, but also the bigger picture of the Chinese economy’s debt problem. He outlines five possible options for the future evolution of the economy and foresees a significant slowdown in growth akin to Japan in the 1990s, which ushered in many years of stagnation amid its economic rebalancing. This rebalancing is essential for China but also the rest of the world, and will ultimately be good for the latter, albeit with the costs and benefits unevenly distributed between different countries and sectors.

Michael Pettis on China’s latest economic prospects and the difficulty of reform

For some years now I have found Professor Michael Pettis’ analysis of the Chinese economy and its relationship to the rest of the world to be original and compelling. Here is a short interview with him on China’s growth prospects for this year, and the difficulty for policymakers in rebalancing the economy away from investment and towards household consumption. He has long argued that a substantial redistribution of income and wealth from businesses and the state towards ordinary households is vital to this end, for the good of China and the world. He also argues that this still remains largely undone.

Capitalism, socialism and innovation – the role of soft budget constraints

DSC00236Since I was a student, industrial policy and its key historical role in promoting prosperity under capitalism have been among my main interests in economics. An article by Max Jerneck in the December issue of the journal Industrial and Corporate Change explores the role of so-called soft and hard budget constraints (SBCs and HBCs), how they differ under capitalism and socialism, how they promote or hinder innovation, and their role in successful industrial policy.

Jerneck refers to the work of Janos Kornai, who developed the ideas of SBCs and HBCs in relation to different economic systems and policies. The budget constraint is part of the external environment faced by firms. Under SBCs, which for Kornai are typical under socialism, the state will support producing firms however they perform, which hinders innovation, as firms lack the incentive to improve products, processes and efficiency in response to market pressures. Organisations “can avoid making internal adjustments to changing conditions” which is “an expression of market power”. External financial support is sustained, leading to general expectations among all firms that this is the norm. This goes beyond the occasional bailouts and rescues that occur under capitalism. Under socialism, “the survival and growth of an organisation is not decided by market forces but by bureaucratic coordination and bargaining”. Continue reading

The Chinese economy: development, finance and reform

800px-Chinese_draakEven before the Covid-19 outbreak, the Chinese economy was slowing, after more than three decades of rapid economic expansion. Thirty years of recorded growth at around ten per cent per annum is unprecedented in human history. This has enabled hundreds of millions of people to be lifted out of poverty, and the material transformation of a poor country to one that is classified by the World Bank as upper-middle-income.

Despite all this, there is a broad consensus, including among Chinese government officials, that the country’s development model needs to change if it is to continue its transformation and become a rich country. Many economists argue that this will involve a rebalancing of the economy, in order to continue to grow and develop in a way that is more sustainable both for China itself, and for the rest of the world, given that as the world’s second largest economy behind the US, internal changes now have a major impact globally. Continue reading

China’s ‘unbalanced economy’ needs greater state control for growth

In this very brief interview, Michael Pettis argues that in order to sustain growth in the wake of the global pandemic, the Chinese government will need to ramp up public spending. The response to Covid-19, both in and out of China, has hit private consumption, investment and exports hard. Increased government spending is the only element of aggregate demand remaining.

He also repeats what he has said for some years, that the ‘underlying’ growth rate of the economy is much lower than the headline rate and the government’s targets due to massive investment in unproductive sectors and projects. This means that eventually even the headline growth rate will have to fall towards the underlying rate, possibly leading to a ‘lost decade’ for China.