Why China’s Internal Economic Arguments Matter, For Everyone

The desirable role for government in the economy is a perennial, if not entirely evergreen, debate. Each country has its own traditions, and each offers its own version of the right balance between free markets and state intervention. It is accepted, for example, that France has traditionally preserved a strategic role for government, and that in the U.S., the state’s role is more limited. It is also universally understood that in China, things are different.

Surprisingly, however, if recent reports are true, there is a high-level version of this debate currently taking place in China. Apparently concern is growing about the effects of industrial policy at a local level, with some arguing over the consequences of state-led efforts to protect certain sectors.

This would echo very long standing arguments in the West about how state investment and protection leads to sub-optimal investment decisions, but would also cut across decades of Chinese policy consensus that the state is central to the direction of the economy.

Why Now?

My own view of the Chinese economy tends to align with the pessimists who contend that it is experiencing considerable difficulties in its stated efforts to move from an export/investment model to a domestic demand led model. Those who share this position usually accept, at some level, that the state-led model–while very well equipped to drive ‘catch-up’ economic development–is not ideally suited to responding to the needs of consumers. Indeed, it would be argued by those immersed in these debates for decades in the West, that the state cannot respond adequately to the emerging trends of consumer demand.

If, for example, the state is able to adequately determine what consumer demand should look like, then all would be well. But if the problem is moving away from an export/investment model towards generating and responding to consumer demand, then the free market has no equal at setting prices, ensuring capital is efficiently allocated etc.

Appeared on Forbes

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