China’s economic woes look intractable, in large part because they have such diverse roots. China’s most troublesome problem, however, is the one that Beijing will have the hardest time addressing: the country’s planned and centralized approach to economics. More than anything else, the mistakes implicit in this system have led to the country’s present woes and China’s inability to recapture its former growth momentum. This failure should stand out as a warning to any nation tempted to consider national planning or a centralized industrial policy.
The problem with central planning — whether done partially, as in the west and Japan, or whether done comprehensively, as in Beijing — stems from the inescapable fact that no one can see the future. Planners in nations like China can dictate the direction of economic effort. Elsewhere planners might use subsidies, low-cost loans, tax credits and the like to nudge the private economy in their preferred direction. But in no case can they be sure that consumers will want the products they see as important. Nor can they anticipate technological advances that might render obsolete today’s seemingly essential technologies. If, as is likely, their plans miss the mark, the economy will have expended huge amounts of capital and labor in wasteful activities, while the diversion of resources will have precluded alternative endeavors that might otherwise have met future needs and spurred growth. China suffers from a number of these misses, most on a grand scale.
For a long time, Chinese planning seemed to have avoided any of these problems. From the late 1970s, when Deng Xiaoping first opened the country’s economy to the world, until very recently, growth rates were spectacular. According to Beijing’s National Bureau of Statistics, [https://data.stats.gov.cn/english/easyquery.htm?cn=C01] China from 1980 to 2015 enjoyed real growth in its gross domestic product (GDP) of slightly over 10% a year. When in 2010 China’s burgeoning economy surpassed Japan’s, it was easy to extrapolate its pace of expansion and speculate that China’s economy would soon surpass the that of the United States to become the world’s largest. Everything in China seemed to work. Beijing seemed – at least to some – to have developed a system that was superior to the messiness and seeming chaos of the market systems dominant in the west, especially in the United States. But the Chinese picture was always illusory.
China’s success was due less to the inherent superiority of its system than to the fact that country was so horribly poor at the start. China’s undeveloped state gave tremendous leverage to investment flows from the west and Japan that began right after Deng Xiaoping opened China. Underdevelopment also made the job of planning relatively easy. To capture the future, all Beijing’s planners needed to do was look to the developed world. There they could see the need for reliable roads, power lines, rail links, port facilities, and the like. In underdeveloped China, the pursuit of these projects paid huge economic dividends and spurred growth at still faster rates. Things changed, however, as China’s economy began to catch up with the developed world. Beijing’s central planners then lost their model of the future. They were as much in the dark as western and Japanese planners were. The country’s future needs became harder to assess. Mistakes became more common. And because Beijing’s planners have great power to marshal financial, managerial, and labor resources, those mistakes have created great waste.
China’s present difficulty with residential development illustrates. Years ago, the nation had an inadequate housing stock. The planners could see the need and encouraged development through subsidies, by arranging financing through state-owned banks, and by expediting permitting as well as licensing. Developers responded to the incentives and produced vast apartment complexes. Initially the effort paid off well. But even as the country began to meet its housing needs, planners continued the effort. Riding government support, developers became increasingly leveraged and turned to more dubious projects in less likely places. According to research done by Carnegie Endowment for International Peace [https://carnegieendowment.org/chinafinancialmarkets/87751], China so pressed this development that until very recently it absorbed some 25-30% of its economy. (By comparison the U.S. Commerce Department [https://www.commerce.gov] measures residential construction in a strong year at about 5% of U.S. GDP.) China built more housing than its population could absorb and put it in places that Chinese people did not necessarily want to live. These projects failed to pay off, which is why so many Chinese development firms – from the giant Evergrande to Country Garden – have failed.
Residential development is not the only planning failure. The record is replete with roads to nowhere, underused rail links, and misplaced port facilities, as well as chronic electricity shortages. In this China is not alone. All economies at the cutting edge of development lack models and make mistakes about the needs of an unknowable future. America has many examples of wasted effort due to poor planning, usually by business interests. But there is also a big difference from China’s centrally planned system. America’s market-oriented approach keeps the mistakes on a smaller scale than nationally planned systems like China’s. What is more, the diversity of effort in a market-oriented system composed of numerous independent actors is more likely to uncover future needs than the necessarily focused efforts of a centrally planned system.
Market-based economies try to capture future needs through the separate plans of tens of thousands of firms and individuals. To be sure, business managers are no better at seeing the future than government planners. But each mistake is smaller than in the centrally planned approach that can and does marshal huge amounts of the economy to the comparatively narrow range of activities favored by the planners. Also, unlike government efforts, business planners face tighter budgets, are constantly reviewing their efforts, and because they are also closer to their customers, are less likely to pursue a failing project for as long as necessarily distant central planners. Perhaps most significant is how markets draw strength from their very lack of focus and discipline so evident (and often admired) in centrally planned arrangements. The diversity of effort when thousands pursue diverse projects raises the probability that somewhere in the chaotic mélange of activity one of them will uncover one of those elusive future needs, build on it, and contribute to the nation’s prosperity.
Relative debt levels give an idea of the scale of waste caused by centralized planning. Every project, whether promoted by a planning authority or private firms, needs financing and commonly generates debt, whether issued by the central government, local authorities, or private entities. A comparison of relative debt levels between systems can then indicate the scale of projects that have missed the mark and failed to generate an economic payoff. In China, the figures are huge. According to International Monetary Fund (IMF) [https://www.imf.org/en/Data], aggregate debt levels in China grew some 23% a year on average during the ten years ended in 2019, while the economy grew at about an 8% rate. Comparable data for the United States from the Federal Reserve Board (Fed) [www.federalreserve.gov] shows that aggregate debt there grew some 5.6% a year on average during this time, faster to be sure than the about 4% nominal growth in the economy but a much narrower gap than China. As of 2022, the Fed estimates that federal, local, state, and private debt in the United States amounted to some $57 trillion, about 2.2 times the nation’s nominal GDP. IMF estimates show comparable debt measures for China at almost three times the size of China’s nominal GDP, suggesting that the accumulated waste from mistaken projects in China is more than a third again higher than in the United States.
Of course, central planners can get lucky and sometimes do. That may be true of China’s planners. They have targeted advanced computer chips, artificial intelligence, electric vehicles, battery technology and its basic inputs in their plans – exactly what today’s headlines claim for the future. These may become the future, but it is just as likely that a new technology will supersede them. That is exactly what happened in the 1980s when the widespread use of Intel’s microprocessor rendered wasteful Japanese plans to corner the market in simpler chips. Since Washington and other national capitals are targeting similar products, it is not out of the question that the future will see a global glut of semiconductors and the like. Or the buying public – whether in the United States or China or elsewhere – may turn out to have less interest in electric vehicles, for instance, than the planners do. In any of these events, much the effort and resources marshaled by these planners will fail to have the anticipated economic payoff, while in the meantime all that effort will have crowded out alternative projects that otherwise might have hit on a future need.
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