International Law

The Great Recession and Part II of the China Model Debate

By Stan

You remember back when China’s economy was humming along at 10+% growth, year after year, and a favorite story in the politico-economic press was the success of the “China model”? This was the manufactured debate between the “Communist” system in China and the “Capitalist” system in the U.S. (we were all supposed to think that each nation had adopted a pure economic model). Here’s a taste of this from an IHT article in 2005:

Countries are like people - they also like to try out the latest get-rich-quick scheme. The flavor of the moment is the “China model,” whereby a controlling government carefully injects capitalism into its economy to spur exports and foreign investment.

Well, this was actually a debate about government and politics instead of economics. What pundits and columnists really wanted to talk about was whether it made sense for a government to be authoritarian in this day and age, and if such a political system was more efficient in some ways than a democracy.

Yawn. I enjoyed those kinds of discussions when I was a freshman in college, it was 3:00am, I had a pizza and a bottle of whisky at my side, and I was trying to impress a girl with pseudo-intellectual talking points. Serves me right for going to a liberal arts college.

OK, fast forward a couple of years. Now the economy is in the tank, and we are reevaluating systems again. Now everyone would like to know whether capitalism is a dead concept. I’m not sure what the alternative is (the pundits never seem to get around to a discussion of alternatives).

As usual, the real debate is still about government, specifically government regulation and government response to financial catastrophe. And it’s not really about capitalism versus socialism (in the U.S., this discussion involves the magnitude of government) but the way that government interacts with the economy.This is slightly more interesting because it is less about ideology and more about concepts like federalism and the ability for governments to adequately respond to crises. The current hue and cry in the West over “socialism” is a diversionary tactic by politicians on the Right.

By the way, I’ve always found that the topic of federalism and general government structure is under-appreciated and not visited nearly enough among China experts. Everywhere you look (history, economics, business, law, politics), federalism is of paramount importance. It’s probably a slight exaggeration (but only a slight one) to say that what separates a casual China observer from a learned one is in-depth knowledge of how the federal system works here — for example, no IP lawyer worth a damn goes along with the China-as-totalitarian-monolith meme. For the record, although I don’t consider myself a learned China pundit, I do have some talent in spotting bullshitters.

What got me thinking along these lines on a Monday? No, not a hangover. It was a Paul Krugman column in the New York Times about the EU’s response to what more and more folks are calling the Great Recession — great name, by the way, although I’m also partial to “catastrofuck“.

Krugman was comparing the EU response to that of the U.S. and made the following conclusion:

But there?s a deeper problem: Europe?s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe?s many nations are almost as tightly linked as the economies of America?s many states ? and most of Europe shares a common currency. But unlike America, Europe doesn?t have the kind of continentwide institutions needed to deal with a continentwide crisis.

This is a major reason for the lack of fiscal action: there?s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.

There has been a great deal of scrutiny of countries’ fiscal stimulus packages, and none have come under more study than the U.S., the EU and China. Of the three, the EU has come under a lot of fire, while the U.S. has experienced moderate criticism, and China has received fairly decent marks for its spending package. Note that this is a separate issue from the response to the credit crisis.

If Krugman finds the EU’s political structure at fault, what would he say about the U.S. political system? As a devoted reader of his stuff, I think it’s safe to say that he has been a vocal critic of the U.S. spending plan, believing it to be too limited. Arguably those limits have been imposed by the pressures put on the Obama administration by conservative Democrats and all of the Republicans in Congress. Not exactly a federalism or structural problem though, even if it is undeniably a government problem.

What about China? Perhaps China can be seen as similar to the EU, at least for the purposes of this discussion. Federalist structure with a great deal of freedom/power at the local level in some ways, but an undeniable amount of power at the central government level. However, whereas China’s central government power includes monetary and macroeconomic policy, Brussels and the ECB can only look on with envy. (That isn’t to say that China’s central government institutions always have sufficient de facto power to shape the economy, even though their de jure power to do so is undeniable.)

Commentators over the past few weeks seem very happy indeed that China’s government can make decisions quickly and without too much (outward) political fuss. This is a realist’s wet dream — even some rabid anti-China politicians in the West who make a living bashing China are probably more than willing to overlook their traditional problems with the government here as long as China starts spending money, and lots of it.

When Wen Jiabao says that spending is a priority for his government and that additional resources will be put into play if necessary, I don’t hear any critics. But when Obama administration officials are asked about a second stimulus package, they are forced to duck the question for fear of political reprisals.

So when the economy was good, the “China model” of capitalism was something to be emulated. Now that the house is burning down, the China government model has some advantages when it comes to rapid policy response. As Yakov Smirnoff used to say about the USSR, “What a country!”

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Full post as published by China Hearsay on March 16, 2009 (boomark / email).