Thursday, March 28, 2013

Michael Pettis on the Chinese Growth Model

I have been slow to respond some of the comments in previous posts, and have not been able to post on some topics I wanted. One topic that I left out, but is worth mentioning, is about an interesting post on the Chinese Growth Model that Michael Pettis had a while ago. He compares the Chinese model to the Hamiltonean American System. He suggests that the three keys to the 'model' are: protection, domestic investment (public?) and national finance.

Note that this suggests an active role for the State, which is often not recognized in conventional accounts of US development. Nate Cline has dealt with some of those issues in his PhD dissertation (first and second essays in particular). He says: "that the developmental orientation of the state emerges as fundamental in U.S. history. Most importantly, the federal government’s role in shaping and establishing financial markets and a common money of account allowed the U.S. to escape external constraints on growth related to the capital account." Note that this is more a post-bellum phenomenon than one might think, even if industrialization in the North was already firm in the ante-bellum period.

Pettis limits his argument on Trade to infant industry protection. I have a preference for a discussion of managed trade, rather than 'free' trade (see here). Also, he seems relatively critical of Chinese public investment, suggesting that there is significant misallocation of resources. He also seems to think that financial markets are not efficient. And that's why he tends to be skeptical about the sustainability of the process of growth in China.

I tend to be less concerned with strength of the financial sector, which is fundamentally based on debt in domestic currency, and, hence, relatively free from default risk. I also think that public investment and the expansion of wages (in domestic currency; they are low by international standards) are central for domestic demand expansion, and have been behind the absorption of rural surplus labor into the industrial/services sectors in the urban areas. As a result, a certain amount of 'inefficiency' is more than tolerable. My concerns are much more related to the role of foreign capital, as noted by Peter Nolan (see here).

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