Not sure if this should go here exactly. This forum would really benefit from a geopolitics/economics section, especially given the dynamics of the China-US confrontation.
The role of markets in “Made in China 2025”
Western observers often charge that China has backslid on market reforms; invariably, these “reforms” are never clearly defined. One gleans the impression that the only reform worthy of the name is the wholesale dismantling of the Chinese public sector, with its assets preferably pawned to Western investors at fire-sale prices. Ever present is the quasi-religious conviction that only private entrepreneurs have the divinely-gifted insight to receive and act on market incentives. Let us put aside the immediately obvious fact that a lot of the work done by the public sector is to provide public utilities, with profitability a secondary concern – public utilities without which our blessed entrepreneurs could not make a profit – and examine the question of ownership.
It is taken as axiomatic that only private enterprises are capable of acting in a market-rational manner, and as with all axioms its purveyors present it without evidence and expect it to be accepted without question. Yet we must raise the question here: why should this be accepted? Believers would say that private companies are under competitive pressure and state-owned enterprises are not. The facts put the lie to this assertion: certainly several examples of private monopolies and oligopolies immediately spring to the reader’s mind. Another claim is that SOEs, being arms of the government, are coddled by their government owners through tax incentives, subsidies, and preferable loan agreements. But private monopolies also invariably enjoy these very benefits!
The truth of the matter is that the ownership structure of a company has almost no bearing on its behaviour. The explanatory variable is size, not ownership. The typical Western prescription that ownership reform leads to prosperity is fatally flawed by a (perhaps deliberate) misunderstanding of a crucial property of markets:
markets entrench technological advantage.
Consider two countries A and B. Country A has an advanced industrial and technologically innovative economy, while country B has a backward, agrarian and labour-intensive economy. Orthodox economic doctrines teach us that country A should export to B what it needs in technology, while B should export textiles, raw materials, and other goods of this sort to A. The conventional analysis usually ends there, but we shall look deeper. What is country A spending its income on? Unfailingly, on improving its technology. B? Without question, a healthy chunk of it is siphoned by a corrupt elite more interested in the luxuries A produces than in the well-being of their fellow citizens, but the truth is that the vast majority of it is spent doing what B does best: extracting more raw materials and making more low-value goods for consumption by A. None of it is spent developing B’s technology because B has no technology of its own to develop. With every transaction, A’s technological lead grows wider and wider fuelled by B’s wealth. This is the secret of the middle-income trap: one falls into it by making the “rational” economic decisions!
Whether by accident or design, the West – specifically the Anglo-American cohort – has fashioned a remarkable ideological bludgeon in the doctrine of “comparative advantage”. Even the theory’s canonical example: British cotton (actually, cotton produced by African slaves and Indian coolies) and Portuguese wine serves also as its perfect refutation. Cotton lies on the path to industrialization, wine does not – which is why you’re reading this in English, not Portuguese.
This is not to be read as an indictment of markets, but a call to understand and harness them appropriately. The examples discussed should impress upon the reader the crucial role technology and productivity play in markets. To succeed in the task of developing China the government must pursue two broad goals:
- Incentivize investment and activity in productivity-enhancing sectors (those outlined in the “Made in China 2025” plan and others that are not) and disincentivize money flows into non-productive, indeed parasitic sectors like e-commerce that compete for the limited highly-skilled talent pool. This should be done by manipulating pricing structure through appropriate taxes and subsidies.
Given the broad scope for action available to the Chinese government, it should also marshal its considerable capabilities for administrative and legal action. The recent introduction of an “unreliable entities list” could provide a basis for taxing Chinese companies that source from said entities, and the invalidation of whatever IP rights these entities enjoy in China. This latter could prove a notable boon to Chinese research efforts.
Furthermore, China can simply instruct – if not compel – notable Chinese investors and corporations to invest in critical fields.
- While the previous actions can ensure that the national treasure is spent efficiently in pursuing development, the most important task is augmenting that treasure. China must improve the level of urbanization and education of its population so that it can have an ever-expanding pool of talent to draw upon. Secondarily, it should look to easing restrictions on immigration by skilled foreigners so their talents can be put in China’s service.
These are very exciting times. The policies advocated above would verge on the impossible if these were ordinary times, when “pro-market reformers” held sway and blindly led China on a road to perdition. It is time for the pro-market reformers to go gentle into that good night and make way for the pro-China reformers.
