When it comes to China, you can hardly find a neutral stance, especially concerning is economic development. While some see a Chinese model and predict that China will overtake US as the largest economy, others constantly predicts a collapse. To the discredit of the latter group, the crisis never materialized. While I can hardly find any common ground with the reasoning of the latter group, I do reach a similar conclusion--China is unlikely to be a growth star in the future.
1. Economic inclusiveness or extractiveness?
I will discuss many of the problems with Chinese economic development, and some of the problems have largely been overlooked, but I wish to start the analysis with a talk given by James Robinson. James Robinson defined four concepts--economic inclusive policy, economic extractive policy, political inclusive institutions, and political extractive institutions. The claim is only inclusive-inclusive economies will sustain growth. In the talk he ascribed China as politically extractive and economically inclusive. Comparing to the grand predictions given to USSR, he point out that China might well be another disappointment in linear projection. While I certainly felt uncomfortable with the sarcasm he ridiculed such projections, the impotence of linear extrapolation is a real one. However, I fear economic extractiveness rather than political extractiveness is putting China's future in danger.
China's economic system is NOT inclusive. The SOE is the epitome of this extractiveness. The state grants many SOE's monopoly power--eg. in the area of petroleum, telecommunication and banking. With monopoly power in such key area, it is little wonder that those SOE's make gigantic profits--in other words, those SOE extract money from the citizens. I would not object to this system as strongly if either 1)the profits are turned to the state as a substitute of taxation; or 2) the employment within SOE is inclusive. Unfortunately, neither is not true. I will not go into details of the former since it has been extensively critiqued by astute observers. The second problem is more server. Some anecdotes might start this. Some of less-able cousins got jobs in banks. I was not surprised because I have enough aunts and uncles working in banks. I will not disclose the specific numbers, but they can take home quite big bonuses and salary immediately after they "launched" their career. On the other hand, I have some friends who are already working were not fortunate enough to secure that quick money. The difference is my friends graduated from the top high school and colleges in China, while some of my cousins graduated from "never-heard-of-colleges". The static welfare ill-distribution is unattractive, but it is not important. The real problem with stuffing those key areas (like banking and petroleum) with dumb people. Will it be any surprise if China's banking industry collapsed and undergo massive bankruptcy when they have to face foreign competition? No! Quite the contrary, I will be surprised if any bank survive. It is easy to lose competitiveness but it is very very hard, if possible, to regain them. The maintenance of SOE privileges serve as a way for economic and political elites to enrich their impotent kids (of course if their kids were potent, they often choose to adopt more extractive method--an easy example is the son of the current prime minister of China). There has been attempts to curtail those extractiveness by introducing competition, but perhaps too little, too late.
There are many other forms of economic extractiveness in China--financial repression is one of them. But those are more discussed than the employment issue of SOE. Hence I will not repeat the wisdom of those acute observers.
Next time, I will continue to discuss the problem of SOE, though in a very different (almost opposite) flavor.
