Peter Nolan on China's Development and relation with the West

A bit old, from 2016, but not too old, and very apropos given the recent heightened trade disputes between the United States and China.

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).

Is China Buying the World?

That's the name of the excellent book by Peter Nolan. Part of what he suggests is behind the Chinese success is that the "government has refused to privatize the commanding heights of its economy" (p. 13). In fact, the large role played by the State, in particular State-Owned Enterprises, is clear in the data. According to this report on Chinascope:

"Of the top 500 companies in China, 316 are State-Owned Enterprises (SOEs). They account for 82.82 percent of the total revenue, 90.40% of the total assets, and 81.88% of the total profit of these 500 companies. The top 10 most profitable companies are all SOEs, including three oil companies and five banks."

Mind you, Nolan's point is that in crucial industries, for example aircraft (see also James Fallows' China Airborne), US based firms that control sensitive technology (in aircraft there is a symbiotic relation between military spending and civilian innovation) are deeply interconnected with the catch up process in China (remember this?).

It's not so much that China is buying the world, as much as developed (mostly, but not uniquely, US based) country's firms that are using Chinese markets to expand its worldwide domination. Think of Apple/Foxconn as an exemplary case. Chinese development is a combination of State-led growth with a heavy dose of foreign participation in the development of the more technologically advanced sectors, and an increasing role for the domestic market (and yes they slowed down to some 7.8% growth now, it seems).

That is why it's also important not to be swayed by the view that China is becoming a developed country contesting US hegemony. Even if the performance of China is impressive, China is still a country doing the transition to an urban-manufacturing society, and is an earlier stage of the process of development when compared to the most advanced Latin American economies (see here).*

PS: As I noted in the comments to the post in the link above, in current dollars, Chinese GDP per capita is around 6000, while Argentine and Brazilian GDP per capita are closer to 12,000.