Chinese Economic Policy, Part IV: The Private Sector Needs More Breathing Room

For the final installment in this series (the first three parts can be viewed here, here, and here), let’s start with a video from Prager University.

I like the video for the selfish reason that it matches my 2019 analysis.

At the risk of over-simplification, China’s post-WWII economic history can be summed up in three sentences.

1. The country suffered enormously under Mao’s strict communism.
2. China then enjoyed better performance following some economic liberalization.
3. But China won’t become rich unless the private sector is given more breathing room.

For all intents and purposes, China needs another wave of pro-market reform, but it looks like the opposite is happening, with government becoming an even bigger burden.

This chart (featuring data from the IMF, World Bank, United Nations, and Maddison) illustrates the challenges for China’s leadership. The country has grown enough to end Mao-era subsistence poverty, but it has not grown nearly enough to become a rich nation.

Given these grim numbers, I was paying close attention to last week’s high-level “third plenum” meetings. Indeed, my fingers were crossed that President Xi and others would announce a shift toward market-friendly policy.

But my hopes were not fulfilled. Here’s some analysis on what happened, starting with some excerpts from a column in the Wall Street Journal by John Lee.

…the Chinese political economy is too flawed… The problem is that there is no escaping the iron laws of economics. …applying this state-led approach to an ever-expanding list of advanced and green sectors will only worsen the problems of overcapacity, indebtedness and inefficiency that Mr. Xi is seeking to alleviate. …If Mr. Xi really wanted to supercharge growth in productivity, wages and household income, he could do it through the systematic transfer of economic access and opportunity away from state-owned firms and nominated national champions toward the much more efficient and innovative private sector. But this would foster a powerful independent business class and undermine Beijing’s greater goal of further centralizing power… But Mr. Xi’s tightening grip on the economy is making China brittler. Rather than overcoming flaws in the Chinese political economy, Mr. Xi is exacerbating them.

To augment this less-than-encouraging analysis, here’s some of what the Economist wrote.

The Chinese Communist Party has just finished its “third plenum”, a big meeting held roughly twice a decade devoted to long-term reform. …A brave reformer would certainly be welcome in today’s China. The economy is suffering… But judging by the official communiqué released on July 18th, the just-concluded plenum…stressed continuity rather than a course correction. …there was a promise to “purposefully give more prominence to reform” and to “better leverage the role of the market”. Those sentiments are laudable. The problem is that China’s rulers have often mouthed similar economic pieties in the past, then cracked down clumsily on any industry that falls out of their favour. …private enterprise does not feel emboldened. Instead, the party has come to play a more decisive role in China’s economy.

The bottom line is that China’s private sector needs more oxygen, yet Beijing’s policies are akin to pinching the breathing tubes.

No wonder successful citizens want to emigrate.

P.S. It is quite disturbing that some American politicians want to copy China’s mistakes.

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Image credit: Foreign and Commonwealth Office | CC BY 2.0.