The managed economy
CHINA has been hailed as the new motor for the worldwide economic recovery. We had good news on China's economic performance. GDP is bound to grow by 8% this year. Together with the good news coming from other countries in East Asia, especially Korea, Taiwan and Singapore, Asia seems to be one of the main drivers for global recovery. This seems great news -- and it is!
If the before mentioned seems good, think of a different, unrelated, annotation: The Shanghai Market Index has some 1800 listed stocks. Of those companies, only around 50 are private. 50: that is an absolute number, not a percentage. In Korea, of the listed companies, some 80% are private.
What is the point of comparing China's growth and the completely privately owned listed companies? As East Asia thrives, many analysts proclaim the superiority of the "Asian" version of capitalism, state capitalism and managed economy. By doing so, many commentators seem to believe that all economies in Asia work alike; Taiwan and Korea and Japan and Singapore and China. Can this be so?
The comparison made above points to Chinese state-capitalism at work. See this in its historical context. In 2008, state-financed investment contributed around 50% of the Chinese GDP growth; in 2009 it is supposed to climb to almost 55%. Taiwan, at the height of its state-capitalism, had not more than 30% GDP growth dependent on state intervention. Korea began with 50% but reduced the rates steadily and quickly to some 15-20%.
Kenneth Arrow, the Nobel Prize laureate, recently tried to rank the world's best state managed economies and came up with three, China Taiwan and South Korea. And there you have two mistakes; the one concerns the quality of growth the other the countries on that list.
To put them in order: First, China is growing in the middle of the crisis, yes. But it still is state-induced growth, which tends to be focussed on construction and not fond of technology. Therefore, it is not fond of modernisation.
Second, China is a managed economy, yes; but it is not comparable to what Taiwan or South Korea are. Both countries began their rapid ascension with state-capitalistic ventures, but as soon as the private sector began catching up these states decreased their intervention and -- most important -- de-regulated technology bound sectors.
The results are clear. Private business is the most important motor of the economy in Taiwan and South Korea. In both countries, more than two-thirds of the listed companies are held privately, and both countries had the experience of business turnaround with moderate state management in the crisis of 1997.
Even more, both are trying to position themselves as technology-driven innovators in a completely free market: both countries are championing information oriented industry, high-level high-end agriculture, research in societal models with more elderly people. All these incentives arise from the market, with government only standing by but never controlling.
The People's Republic of China lacks these fundamentals. It has been growing for 20 years. How come there is almost no technological development? The reason is that state-capitalism is profoundly in love with infrastructure and suspicious of all other sectors. Infrastructure can be projected, seen and publicly inaugurated, computer-chips cannot.
Indeed, if China is trying to boost its inner demand as a response to the crisis (and it should do so), it is not doing enough to boost it supply of upgradeable goods. The four most heavily regulated areas are the ones, which could champion the further development of the economy -- computer applications, pharmaceuticals, chemistry and telecommunications.
Without innovation and technology, can China enjoy the fruits of modernisation? This is difficult to assess. In recent history, no state managed economy has succeeded in developing and modernising itself without making room for more forward looking branches and techniques.
Many primarily state-managed economies cut back state intervention and freed market forces. This recipe led many East-Asian countries to their wealth and human security. The comparison of China with Korea can only be validly made if China treads on the same path -- as it does not, they cannot be compared.
As everyone was, and is, affected positively by Korean growth and modernisation, it is hoped that Chinese planners will follow suit. Until then, let the good news be good but do not overestimate the differences.
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