January 8, 2016


China Heightens the Contradictions (Michael Schuman, 1/08/16, Bloomberg View)

The government's model encouraged private enterprise, foreign investment and international trade while keeping the "commanding heights" of the economy -- the financial sector, critical industries -- firmly in state hands. The system may have run counter to classical economics, but it was effective, transforming China from an impoverished basket case to the world's second-largest economy, and earning Beijing's policy makers a reputation for sagacity and infallibility.

The problem is that this tension between state and market becomes more dangerous as an economy advances. We know this is true from the experiences of Japan and South Korea, which both used systems similar to China's, produced similar results and then suffered similar problems. China's current woes of high debt, excess capacity and a strained financial sector are all creations of the state-market conundrum. The only way to solve it is for the state to allow the market to hold more and more sway over the economy. That allows resources to be allocated more wisely, productivity to improve and entrepreneurship to flourish. Yet it also requires the party to relinquish control.

Posted by at January 8, 2016 5:51 PM