A funny thing happened on the way to China’s inevitable global dominance — the country’s economic tumult rocked markets around the world.
China long ago replaced Japan as the Asian boogeyman whose superior economic model is going to sweep all before it. This is such a readily accepted article of faith that it is held, in its various forms, across the spectrum from self-consciously cosmopolitan elites like Thomas Friedman to bombastic populists like Donald Trump.
Friedman, the New York Times columnist, has written, “I cannot help but feel a tinge of jealousy at China’s ability to be serious about its problems and actually do things that are tough and require taking things away from people” (including, it must be said, their freedom). Such is his regard for China’s governance that he confessed in one column to impure thoughts: “Forgive me, Heavenly Father, for I have cast an envious eye on the authoritarian Chinese political system, where leaders can, and do, just order that problems be solved.”
Trump routinely rues how much smarter China’s leaders are than ours, and in his announcement speech noted, with regret, how China “has bridges that make the George Washington Bridge look like small potatoes.”
It is manifestly true that a closed, low-income economy that adopts some market reforms can grow quickly; that a dictatorial government can manipulate the economy to serve its ends; and that government-directed investment can build lots of bridges. None of this, though, makes for a sustainable, First World economy, let alone a juggernaut that should be feared and envied by the United States.
China might have bright, shiny airports and gauzy GDP numbers, but that is window dressing on a badly distorted economic system that is being managed about as well as you’d expect by a group of corrupt, self-interested statists, which is to say not well at all.
Some perspective is in order with regard to China’s economic position vis-a-vis the United States. As Derek Scissors of the American Enterprise Institute points out, “American national wealth is almost twice that of China and Japan combined,” and “the average American makes 12 times as much annually as the average Chinese.”
China’s double-digit growth numbers might be impressive, but even assuming that they can believed, they aren’t as telling as they seem. “Remember,” Paul Dibb and John Lee write in a report for the Australian-based Kokoda Foundation think tank, “that the Soviet Union officially tripled in size from 1950 to 1973, yet its economic model was fundamentally flawed as we realized in hindsight. GDP is essentially an accountant’s tool used to document final economic activity within a country in any given year. But GDP does not measure whether economic activity is productive, profitable or even commercially irrational.”
In China, in many cases, the economic activity is none of the above. Politically connected state-owned enterprises are favored over every other business. China has larded on the debt since 2007 — it has quadrupled and hit 282 percent of GDP, according to a McKinsey report last year — and it has been plowed into fixed investment that is often senseless. A country famous for its “ghost cities,” massive unoccupied developments, obviously has a huge malinvestment problem.
The Chinese government has talked up reforms as it seeks to put the economy on a sounder long-term footing. The list of necessary changes is incredibly long. For a truly modern economy, China needs a commercial banking system, less powerful state-owned enterprises, free capital flows, greater labor mobility and a proper retirement system, not to mention the rule of law, property rights and an independent judiciary, among other things. Yet progress has been halting and slow.
China has been able to forge such astonishing economic progress for so long because it started from a very low point. That is not something to be envied, nor are its challenges as it strives not to dominate the world, but to avoid hitting a wall.
Rich Lowry can be reached via e-mail: email@example.com.