Wednesday, April 19, 2006

Stiglitz demeans the Nobel Prize

Stiglitz has demonstrated without a doubt that it is possible to be a very successful academic with the intelligence of a massively overweight domesticated cat. His article on China for Comment is Free is one of the most poorly argued and substantiated pieces I have ever read.

He notes that China has seen massive growth in recent years. He then notes that China has often upset the West and Washington in particular. He connects the two to establish that China's success has come from its plucky rejection of the Washington Consensus. Apparently the reason for its success in raising GDP is that it hasn't focussed on GDP but instead on the environment.

Of course this is complete rubbish. The Chinese state is massively concerned with GDP with internal fears that if growth slips below 7% there will be serious social unrest as discussed in this Deloitte report (PDF). By contrast all they have done to justify Stiglitz's optimistic account of their environmental policy is make sure that the "new plan places great emphasis on the environment". Taking statements of benign intent from a Communist state as gospel is surely a mistake the Left should have left behind some years ago after the Soviet growth miracle turned out to be fool's gold. The actual picture, as chronicled by Jasper Becker in The Chinese, is that the Chinese environment is one of the most heavily damaged in the world with collosal pollution problems in the cities and water shortages in vast swathes of the country thanks to Mao's grand schemes gone wrong. It's plans on global warming will not make much of a dent in the amount put out by the hundreds of new coal power plants it is planning.

Equally he is incredibly sanguine about the prospects for the new Chinese plan for education. Again the reality can be seen in this report by Becker for the South China Morning Post: The Kuomintang in 1936, in war time, spent 3.6% of GDP on education. This had fallen by 1992, in peace time, to around 2% of GDP. Becker notes that Tony Benn and J. K. Galbraith were making the same mistakes as Stiglitz back in the seventies and trusting the absurd story put out by the Communist party of superb new education schemes. Of course things are improving with rising incomes but the reality is that Chinese education is paid for by fees at school and university level. Chinese public services generally have far less state support than those in the West and certainly look nothing like Stiglitz's visible hand guiding the market.

That the Chinese state is a great force fighting inequality is palpably absurd. It's officials enrich themselves by taxing the poor to the point of rioting and, as reported recently on Sky News, confiscating their homes without compensation. A massively corrupt state means that property rights cannot protect those who have fallen prey to bureacrats on the take. By contrast government officials in expensive cars with tinted windows roaring around Chinese cities symbolise the wealth of the civil service elite. The grand plans that impress Stiglitz so much should come second to the state ending its role as an active promoter of inequality.

Finally the idea that the state is responsible for rapid growth and maintaining economic stability is absurd. As reported by Allen, Qian and Qian, the growth rate of the formal (mostly state led) sector has been around a quarter of growth in the informal (private) sector despite the huge advantages in financing and legal protection secured by state power. Equally, the potential for instability comes from the massive bad debts contained in the state led financial system and from intervention in its currency encouraging unprofitable industry rather than from unmanaged capitalism.

Fortunately, the Chinese don't take people like Stiglitz seriously. Marginal Revolution reports that the Chinese were the most likely of several countries surveyed to agree with the statement that the best system is the "free-market economy" (more so than the Americans). While the statement is likely to mean different things to the different groups interviewed support for it among the Chinese does suggest they have seen the difference between the socialist and capitalist parts of their nation and know which they prefer. Anyone who has been to Beijing's Silk Market or wandered the streets of any of the bustling cities will see that the Chinese can make superb capitalists if their state gives them the opportunity.


Anonymous said...

I agree that Stiglitz, whilst being a brilliant theoretical economist, is much less good in a real-world environment. I also agree that much that he says about state control in the Chinese case is rubbish.

However, you'd have to agree that the Chinese leadership did reject the Washington Consensus of liberalising all markets simultaneously and early.

Growth has been largely based on tinkling with rural production incentives (the dual-track pricing mechanism) and clever use of the carrot of a massive internal market to ramp up technology transfer linked with FDI. This isn't state control, but it's not the Washington Consensus either.

The comparable situation in Russia, who did follow nearly all the prescriptions of the WC and went rapidly downhill to a gangster kakistocracy, is indicative.

Anonymous said...

I think what those who hold China up as a paradigm of either mixed economy/reformed communist/gradual reform/non WC policies economics ignore is that given real Chinese GDP is 15% of US GDP we would be expected 11-12% growth rates at least rather than the 8-9% growth rates produced using (very dodgy) internal statistics.

Under liberal economics snd with a similar position China grew at 13-14% in the 1930s. It is therefore plausible that the end of communism and state planning produced high growth but the semi-reformed nature of the Chinese economy has meant that the PRC is growing at around half its potential relative to its growth rate.

So its possible that China could (for a short while) keep its high growth rates while pursuing some poor policies (such as environmentalism & partial state ownership) --> thus creating an illusory link between the two policies.

Matthew Sinclair said...

Russia's problems aren't in economic policy; they are in its government's failure to defend property rights and allow democratic dissent. This is a lesson in how difficult emerging from tyranny is rather than offering any insight into the effectiveness of liberal economic policy.

The most liberalised parts of the Chinese economy have been the most successful. Equally they have grown more successful as they have grown more liberal. A poor stick with which to beat the Washington Consensus.

Saneman said...

Haha, "kakistocracy". Anon is right, in fact most of the Asian countries which didn't listen to the cries of "rip up your economies for us to 'invest' it all up"
did much better other that did listen...

Anonymous said...

To be fair Matthew you could use the chinese expence as patridge has to beat the Washington consensus for not being free market enough...