"We seldom get into trouble when we speak softly. It is only when we raise our voices that the sparks fly and tiny molehills become great mountains of contention."
I recently listened
to a series of lectures about why some countries’ economies
thrive and why some economies always stay third world at best. In
the lectures, the subject of China’s recent economic expansion
was discussed.
For centuries, the
Chinese economy was the largest in the world. The reduction of the
Chinese economy to what we all remember growing up is a recent
historical event. The Chinese had land, labor, and learning to
create a successful economy. It was only through corruption in the
Emperor’s government and then the policies of Mao and his
successors that the Chinese economy regressed.
During the 1980’s
and 1990’s, the Chinese central government began to relax some
of the communist policies and allow for more private property rights.
The new Chinese entrepreneurs were able to enter the very lucrative
American market and their economy was off to the races. A 10% growth
in their economy was expected during this period of dramatic growth.
The course I
listened to, and I think economists in general, expect the Chinese
economy to become larger than the United States at some point in the
future. The great advantage they have in population would suggest
that it is inevitable. This can be disconcerting to Americans. If
the Chinese economy matches or is larger than the US they could
command a military that matches or is larger than the US military.
Should we be
concerned?
First, the Chinese
economy is only a third the size of the US so it will take a few
decades for them to catch up even at a very fast growth rates of 5 –
10%.
Second, there are
some problems in the fundamentals of China that they would have to
overcome before they reach parity with the US. The biggest one is
corruption. Despite their recent advances, corruption is still
prevalent in China. Nothing constricts expansion of an economy like
corruption and China has a very long history of corruption in the
government. China has picked the low-hanging fruit for economic
expansion. Now it is going to get much tougher to expand. When
bribes are a major mechanism that is used to allocate scarce
resources it is hard understand how China will compete with the US
economy.
Third, the Chinese
government is never going to let their people have enough freedom.
For China to surpass the US there are a lot of Chinese that have to
become wealthier. That means a solid middle class. People in the
middle class will demand more freedom. I do not think that China
will allow this to happen. This lack of freedom will constrict their
economic growth. If China does allow more freedom and mellows in
their foreign ambitions, we may not care how big their economy grows.
Fourth, China
resource allocation is just inefficient. It is not only the bribes
but the central planners. They do not allocate resources well. As
we have seen in America, when the government pulls money out of the
private sector and spends the money unwisely, it restricts the growth
potential for the private sector.
And last, China will
not open their borders to trade. They will export lots of goods but
import little. They are stuck in the mercantilism ideology from the
middle ages. This will keep efficiencies from being forced on their
economy and they will settle for something much less than what is
possible. Japan still suffers from this thinking.
Should we be
concerned?
Probably not from
what China is going to be able to do because of their fundamentals.
The only way for them to catch up is if the US economy shrinks. Look
at those fundamentals that are going to restrict China’s
growth. Which way is the US headed in each of them. Our concern
should not be on China, but what we are doing to our own economy.
Adam Smith is obviously not the actual name of the author of this column. The real author has
worked for two Fortune 500 companies, one privately held company, and a public accounting
firm. His undergraduate degree was in accounting, and he earned an MBA for his graduate
degree. He also has completed coursework for a PhD. in finance. He continues to be employed
by one of the Fortune 500 companies.
The author grew up in the Washington D.C. area but also lived for several years in Arizona. He
currently resides with his family on the East Coast.
The author has held various callings in The Church of Jesus Christ of Latter-day Saints.