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June 14, 2005

How to Explain China's Success?

Brad Setser sees:

Brad Setser's Web Log: How to explain China's success?: four potential explanations for China's growth.

1) State intervention in the economy (or certain forms of state intervention at certain stages in the development process) is less of an impediment that is often argued.... Joe Stiglitz argues that China's success demonstrates the limits of 'Washington Consensus' politics.... Foreign businessmen operating in China generally don't object to massive government intervention to keep the RMB from rising.... I don't hear real estate developers here in the US complaining about the intervention by foreign governments in US credit markets... that is contributing to low interest rates and the real estate boom.... In China, state intervention often seems to help at least certain types of business at the expense of Chinese labor, and other interests inside China.

2) China's markets are far more flexible than they seem. Internal migration is controlled in theory but not in practice, so China has its own 'undocumented' internal migrants, migrants who cannot generally work in the state sector and thus are available for private employment. In addition to the formal banking system, informal networks help growing private firms obtain credit.

3) High savings rates and high investment rates can overcome a multitude of other sins.... China is defined above all by very high rates of domestic savings and domestic investment (something it shares with other Asian 'tiger' economies)....

4) High savings, high investment rates and undervalued exchange rate can overcome other sins. The undervalued exchange rate creates an incentive for domestic firms to test themselves in foreign markets... foreign firms to use the country as a base for production to serve their home markets. In the process they bring access to key distribution networks, and needed technology and know-how. An undervalued exchange rate that keeps local labor 'cheap' on a global scale is in effect the bribe the country pays to attract foreign expertise.

Personally, I suspect high savings rates and high investment rates are the most important factors. Avoiding major currency overvaluations is also important -- though I am not sure China's current undervaluation (explanation 4) is as necessary as many argue.... [Is] China's current model is sustainable. My strong sense is that the answer is no. 30% y/y export growth implies that China's exports would more than double every three years.... China now has become big enough that it needs to contribute to global (consumption) demand, not just global supply. How and when that transition will come, however, remains a huge question.

Posted by DeLong at June 14, 2005 10:22 AM