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When I want to feel optimistic about China, I look at data from Economic Freedom of the World to confirm that there was a lot of economic liberalization (triggered in part by some civil disobedience) between 1980 and the early 2000s.

Then I look at how that period of capitalist reform dramatically improved living standards and reduced poverty.

But I also look at the same data if I want to feel pessimistic about China. That’s because there hasn’t been any additional liberalization in the past 15 years. China is basically treading water, and that means it is actually losing ground as other nations reform.

Indeed, it is now ranked #107 after being ranked as high as #87.

Which is why I’ve arguedrepeatedly – that China needs a new period of free-market reform.

And that includes adopting better trade policy.

Which raises an interesting question: Is Trump’s saber rattling on China trade helping or hurting?

Here’s some of what I wrote for Inside Sources on this issue.

President Donald Trump has launched a new attack in his trade war with China… Is it possible…that his bluster will produce a good long-run deal to offset short-run costs? Let’s hope so, but it’s unclear…we all have a stake in the outcome of these trade negotiations. So here are five things to understand as discussions continue.

Starting with two reasons why there’s a trade deficit and why it doesn’t matter.

First:

Americans are much richer than their counterparts in China. …per-capita economic output in the United States is six times larger than it is in China ($60,000 compared to $10,000). This means Americans can afford to buy a lot more, including more goods and services from around the world. As such, a bilateral trade deficit with China is neither surprising nor worrisome.

And second:

The United States enjoys a far higher level of economic freedom than China. …the United States is ranked No. 6 while China is a lowly No. 107. This helps to explain why Chinese entrepreneurs who earn dollars by selling to American consumers often decide to invest those dollars in the American economy (the United States is the world’s top destination for global investment). This means the trade deficit is matched by a capital surplus.

I then explain China is guilty of protectionism and it would be good for both nations if these barriers were eliminated.

China has more protectionist barriers than America. …average Chinese tariffs are nearly three times higher than America tariffs. And China is also guiltier of using subsidies to help domestic companies. …people of both nations are the main victims of these bad policies, but it would be good for all of us if those trade barriers were reduced.

But what’s the best approach to encourage better policy from China?

I don’t think Trump’s unilateral protectionism will be successful.

Bullying and tit-for-tax retaliation is not an effective strategy. …tariffs hurt China, but they also hurt the United States by raising the price of consumer and intermediate goods. Taxes on Chinese goods also reduce incentives for America companies to become more efficient and better producers. Perhaps most important, there is little reason to think these taxes will have the desired effect of altering Chinese behavior.

I’d be much more hopeful if Trump used the World Trade Organization to push for good policy.

The WTO is an underused tool for trade liberalization. It has a dispute resolution process that has been successfully used to cajole and pressure nations into reducing trade barrier. The president has publicly criticized the WTO, but he probably doesn’t realize that the United States wins about nine out of every 10 cases when it challenges other nations’ trade barriers. …many other nations would have supported the United States if we had used the WTO as a vehicle to achieve more liberalization.

The bottom line, for what it’s worth, is that I’m not terribly hopeful.

It’s not too late for the president to select that strategy, of course, but that won’t be likely as long as he mistakenly sees trade as a zero-sum proposition.

Let’s close by looking at relevant excerpts from three other articles.

First, a columnist for National Review explains how cronyism infects the Chinese economy.

…just because China has many private companies, allows Communist-Party member Jack Ma to become a billionaire as head of Alibaba Group, and translates capitalist classics into Mandarin doesn’t mean it’s capitalist. The fact that few describe the Chinese economic system without putting a modifier in front of the term “capitalism” — “authoritarian,” “state,” “predatory,” “Communist,” etc. — should tell us something. …China has more than 150,000 state-owned enterprises, accounting for 40 percent of industrial assets. However, Chinese state capitalism is not just, or even principally, about the number and size of such enterprises; it’s about the central role the Chinese Communist Party (CCP) plays in virtually all aspects of economic life. …Chinese state capitalism is a system in which the purpose of firms — private and public — is to fulfill the goals of the Communist Party. …capitalism is…a system in which…property owners have considerable…freedom to pursue their goals without influence from the state. By this standard, China’s is far from a capitalist economy.

Second, here are some excerpts from an Atlantic column about why it is difficult to alter China’s misguided approach.

…the trade dispute is about far more than tariffs and deficits. It is a contest of two very different national ideologies. Though the Trump administration has deviated from this somewhat, the United States believes that openness—political, economic, and social—creates prosperity, resolves disagreements within society, and promotes the diversity that spawns innovation and progress. China—or, more accurately, its leadership—sees government control as critical to developing the economy, achieving social peace, and forwarding the best interests of the nation overall. Americans tend to think open, free markets that are operating in a fair regulatory environment produce the best economic results. Beijing, on the other hand, doesn’t trust market forces and instead wants the state to play a more direct role in achieving the economic outcomes it determines are necessary for the country. …As a result, what Trump is demanding is extremely difficult to achieve: a “level playing field” for American firms. In fact, nothing of the sort actually exists in China, even for Chinese companies. The state has a nasty tendency to favor its own, with government-controlled businesses enjoying a smorgasbord of official assistance, including tax credits, low-interest loans from state banks, and other subsidies that give them an undue edge in local competition. That leaves private Chinese companies and entrepreneurs often facing the same kinds of hurdles to doing business that foreign ones face.

Third, Professor Deirdre McCloskey has a more optimistic assessment, arguing that it is foolish for the U.S. government to fixate on China’s distortionary policies.

The White House is pursuing two stupid policies, trying to reduce the United States’ “balance of payments” with China and trying to protect “intellectual property” from China’s thievery. These policies are leading to a crash in the Chinese economy, which has been grossly ill-managed under President Xi Jinping. …when did you last feel the U.S. balance of trade? You feel only the idiotic policies advocated in reaction to it by Peter Navarro, a White House economist who never learned economics. (His Ph.D. is from Harvard. I’m thinking of turning mine back in.) It would be better if the government did not calculate and announce the balance of payments at all. It’s meaningless and an occasion for sin. What about China stealing intellectual property? Intellectual property sounds nice. …Patents and copyrights make things that are free in nature artificially scarce in order to cream off profit for the influentials. They are comparable to hack medallions, recently threatened by monopoly breakers Uber and Lyft. …Economists would be satisfied with a rough-and-ready rule of, say, a 10-year monopoly. But asserting an expansive right to intellectual property, which Congress then regularly extends in order to preserve the privileges of drug companies and the Walt Disney Corporation, is no solution.

I’ll add one final point.

We should support Chinese economic reform because it is good for the United States and good for China.

Here’s a chart showing 2017 World Bank data and 2019 IMF data on per-capita economic output in both nations.

In other words, notwithstanding all the growth China has enjoyed, it is still well behind the United States.

That’s the price the country is paying for insufficient reform.

Beijing should copy Hong Kong and Singapore if it wants to converge with America.

P.S. The last thing China should do is listen to the OECD or IMF.

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Every Thanksgiving, I share the story of how the Pilgrims nearly starved to death because of their experiment with collectivized agriculture.

Once the settlers shifted to a system based on private ownership, however, their problems disappeared.

The obvious moral of the story is that incentives matter. Socialist systems encourage slackers (see this cartoon strip) and market systems encourage productivity.

A column by X in the Wall Street Journal tells a similar story about China.

It’s actually the story of an important anniversary.

The People’s Republic of China turns 70 in October and will celebrate with flag-waving and fireworks. …2019 also marks the anniversary of the result of a smaller, quieter but just as defiant protest—one that will receive little attention in or out of China, even though it launched the economic reforms that kick-started the country’s rise.

Here’s the background.

After taking power in 1949, China’s Communist Party had effectively abolished private land ownership, grouping farms into “people’s communes” subservient to the state. By 1978 villages were crippled by quotas that seized most of what they grew for redistribution. …there was no food. Xiaogang’s farmers dug up roots, boiled poplar leaves with salt, and ground roasted tree bark into flour. Families left their thatched-roof homes and took to the road to beg.

By the way, the Chinese system of collective farms was an example of hardcore socialism – i.e., government ownership and control.

So it’s hardly a surprise that it produced awful results. Including mass starvation.

But desperate times were the motivation for desperate measures.

…a farmer named Yan Hongchang summoned the heads of the village’s desperate families to a clandestine meeting. On paper torn from a child’s school workbook, the farmers wrote a 79-word pledge to divide the commune’s land into family plots, submit the required quota of corn to the state, and keep the rest for themselves.

And what happened?

Incentives and property rights worked. Spectacularly.

…farmers…reported a grain yield of 66 metric tons. This single harvest equaled the village’s total output between 1955 and 1970—but for once the figure was not exaggerated. In fact, villagers underreported their actual yield by a third, fearing officials would not believe their record haul.

And the really good news is that the successful experiment in Xiaogang led to market-based reform for the entire nation.

The grass-roots experiment did spread. In Beijing, three years after Mao Zedong’s death, Deng Xiaoping urged the Chinese to ignore political dogma and instead “seek truth from facts.” Now came news that dissenting farmers were actually growing food. This year marks the 40th anniversary of Deng’s decision to scrap collective farming. In its place came one of the country’s most popular reforms, the Household Contract Responsibility System, or chengbao, which allows families to farm their own allocation of land and sell most of the harvest at unregulated prices.

Indeed, China now celebrates Xiaogang’s rebellious shift to markets.

Xiaogang village is a “red tourism” attraction, albeit the only one whose “patriotic education base” (museum) celebrates local defiance of government policy. Its exhibition hall displays a copy of the farmers’ pledge—the original was lost years ago—and floor-to-ceiling photographs of its signatories. The men are lauded as heroes, and Xiaogang celebrated with a slogan: “The origin of our nation’s economic rise!”

Maybe future historians will look upon the events in Xiaogang the same way some people look at 1356 in Europe?

In any event, what began forty years ago already has yielded great results for the people of China. Grinding poverty has virtually disappeared.

To be sure, China still needs a lot of reform. It’s only ranked #107 according the latest edition of Economic Freedom of the World.

But if some good reform yielded some good results, just imagine how much prosperity China could enjoy with a lot of good reform?

P.S. Just as the village of X helped to rescue China from hardcore socialism, there’s a grocery store in Texas that played a role in rescuing Russia’s economy.

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During my early years in public policy, back in the late 1980s, I repeatedly crossed swords with people who argued that Washington should have more power over the economy so that the United States could compete with Japan, which supposedly was an economic juggernaut because of “industrial policy” directed by wise and far-sighted bureaucrats at the Ministry of International Trade and Industry.

Given Japan’s subsequent multi-decade slump, it certainly seems like I was right to warn against giving American politicians the power to pick winners and losers.

But not everybody learned from that experience. In the words of Yogi Berra, “It’s deja vu all over again,” only this time we’re supposed to be terrified because the Chinese government wants to subsidize and promote certain industries as part of “Made in China 2025”.

At the risk of understatement, I’m not scared.

Yes, China has enjoyed some impressive growth since it partially liberalized its economy in the late 1900s, but it will remain far behind the United States unless – as I recently explained on CNBC – there is a new wave of free-market reforms.

Needless to say, a government initiative to favor certain industries is hardly a step in that direction.

Some Chinese policy makers even realize that it’s counterproductive to give that kind of power to politicians and bureaucrats.

Here are some excerpts from a report in the South China Morning Post.

“Made in China 2025” has been a waste of taxpayers’ money, China’s former finance minister Lou Jiwei has said…“[Made in China] 2025 has been a lot of talking but very little was done,” Lou, chairman of the National Council for Social Security Fund, said on Wednesday… “those industries are not predictable and the government should not have thought it had the ability to predict what is not foreseeable.” …“The negative effect of [the plan] is to have wasted taxpayers’ money.” He suggested the market should have played a greater role in developing the industries that MIC2025 was designed to push. “The [resources] should have been allocated by the market; the government should give the market a decisive role,” Lou said. “Why has the government pushed so hard on this strategy? [Hi-tech industry prospects] can all change in a few years, it is too unforeseeable.”

Sounds like Mr. Lou learned from Obama’s Solyndra fiasco that cronyism doesn’t work.

But some of his colleagues still need to be educated.

Made in China 2025 (MIC2025) strategy, Beijing’s blueprint for tech supremacy. …Since the plan’s launch in 2015, the government has poured money into MIC2025 to try to turn a number of domestic industries – including artificial intelligence, pharmaceuticals and electric vehicles – into global leaders by 2025. …Lou said: “It [the strategy] should not have been done that way anyway. I was against it from the start, I did not agree very much with it.

I hope senior government officials change their minds about this harmful exercise in central planning.

Not because I’m afraid it will work, but rather because I like China and I want the country to prosper. The partial reforms from last century produced great results for China, including huge reductions in poverty.

Additional reforms could lead to mass prosperity. But that won’t happen if the Chinese government tries to control the allocation of resources.

Let’s close with a big-picture look at central planning and industrial policy, starting with the common-sense observation that there are degrees of intervention.

Here’s my back-of-the-envelope perspective. We have examples of nations, such as the Soviet Union, where the government had near-total control over the allocation of labor and capital. And I suppose Hong Kong would be the closest example of a laissez-faire jurisdiction. And then there’s everything in between.

I’ve already shared two great videos on government planning versus the market. I strongly recommend this Prager University video, narrated by Professor Burton Folsom, on the failure of government-dictated investment. And also this video narrated by Professor Russ Roberts, which shows how a decentralized market efficiently provides a bounty to consumers.

Here’s a third, which celebrates the work of the late Don Lavoie, one of my professors when I studied at George Mason University.

By the way, there is a terrible flaw in the video. The photo that appears at 1:38 shows select faculty and students in 1987. Why is that a flaw? For the simple reason that I was part of the photo but got cropped out in the video.

P.S. Some people worry that China’s industrial policy will have a negative spillover effect on the United States because American companies will lose market share to the subsidized Chinese companies. That’s a legitimate concern and American officials should use the World Trade Organization to counter mercantilist policies.

P.P.S. To my dismay, some people don’t want China to become a rich nation. I assume those people are hoping China follows the advice of the OECD and IMF.

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Since trade promotes prosperity, I want increased market-driven, cross-border commerce between China and the United States.

But you can see in this CNBC interview that I’m worried about achieving that outcome given protectionism from President Trump and mercantilism from President Xi in China.

There’s never much chance to elaborate in short interviews, so here’s some additional analysis on the key points.

1. China’s economy is weak because of insufficient liberalization.

I have written about how China got great results – especially huge reductions in poverty – thanks to partial economic liberalization last century. But those reforms were just a step in the right direction. The country currently ranks only #107 according to Economic Freedom of the World, largely because so much of the economy is hampered by subsidies, regulation, protectionism, and cronyism. Sweeping pro-market reforms are needed if China’s leaders want their country to become rich.

2. Trump’s unthinking protectionism hurts both sides, but China may be more vulnerable.

I mentioned in the interview that Trump’s protectionism meant that he was harming both nations. This is what always happens with protectionism, so I wasn’t saying anything insightful. But it is quite likely that China will suffer more because its economy doesn’t have the flexibility and durability of America’s more market-oriented system.

That is one of the conclusion from a recent news report.

Policymakers in Europe have spared no effort to emphasize that there can be no winners in an escalated trade conflict between the United States and China. But a fresh study shows there are several beneficiaries. …But a study by research network EconPol Europe suggests such an assertion isn’t quite true — in fact, it isn’t true at all. The survey analyzes the impact of tariffs imposed by the US on China and the effect of China’s retaliatory tariffs. …The EconPol Europe study calculates that Chinese exporters are bearing approximately 75 percent of the costs… in Asia, Vietnam has been gaining the most from firms relocating their production away from China. Malaysia, Singapore and India have also been profiting from this development.

3. China’s cronyism presents a challenge for supporters of unilateral free trade.

I’m a supporter of unilateral free trade. America should eliminate all trade barriers, even if other nations want to hurt themselves by maintaining their restrictions. That being said, it’s not genuine free trade if another country has direct or indirect subsidies for its companies. As I noted in the interview, some economists say we shouldn’t worry since the net result is a wealth transfer from China’s taxpayers to America’s consumers. On the other hand, that approach means that some American workers and companies are being harmed. And if supporters of free markets are upset when American workers and companies are hurt by domestic cronyism, we also should be upset when the same thing happens because of foreign cronyism.

The challenge, of course, is whether you can use trade barriers to target only cronyism. I worry that such an effort would get hijacked by protectionists, though Professor Martin Feldstein makes a good argument in the Wall Street Journal that it’s the right approach.

China’s strategy is to give large government subsidies to state-owned companies and supplement their research with technology stolen from American and other Western companies. …That is the real reason why the Trump administration has threatened tariffs of 25% on $200 billion of Chinese exports to the U.S.—nearly half the total—unless Beijing reforms its policies. …The purpose of the tariffs is not to reduce the bilateral trade deficit but to counter Chinese technology theft and forced transfer. …the U.S. could impose heavier tariffs and other economic penalties in order to force China to play by the rules, ending its attempt to dominate global markets through subsidies and technology theft.

4. Trump should have used the World Trade Organization to encourage Chinese liberalization.

I wrote last year that the President would enjoy more success if he used the WTO to apply pressure on China.

It’s not just me making this claim. Here are some excerpts from a story in the Washington Post.

Pressure from Europe and Japan is amplifying the president’s vocal complaints about Chinese trade practices… “it wasn’t a Trump issue; it was a world issue,” said Jorge Guajardo, …a former Mexican ambassador to China. “Everybody’s tired of the way China games the trading system and makes promises that never amount to anything.” …Germany and the United Kingdom joined the United States this year in tightening limits on Chinese investment. …In September, trade ministers from the United States, European Union and Japan issued a joint statement that blasted the use of subsidies in turning “state owned enterprises into national champions and setting them loose in global markets.” The statement…also rejected forced technology transfer… The United States did win E.U. and Japanese support for a complaint to the WTO alleging China has violated U.S. intellectual property rights. But rather than use the global trade body for a broader attack on China, the administration has demanded changes in the way the organization operates. To critics, the administration missed an opportunity to marshal China’s trading partners behind an across-the-board indictment of its state-led economy.

5. The imperfect Trans-Pacific Partnership was an opportunity to pressure China to reduce cronyism.

Because of my concerns about regulatory harmonization, I wasn’t grievously disappointed when the United States chose not to participate in the TPP, but I fully recognized that the pact had very positive features. Including the pressure it would have placed on China to shift toward markets and away from cronyism.

6. Additional Chinese reform is the ideal outcome, both for China and the rest of the world.

Three years ago, I wrote that China needs a Reagan-style revolution of economic liberalization. That’s still true today. The bottom line is that China’s leaders should look at the progress that was achieved last century when the economy was partially liberalized and decide that the time is ripe for the free-market version of a great leap forward. In other words, the goal should be great economic success, not modest economic success.

I’ll conclude by pointing out that I don’t want China to copy the United States, even though that would be a step in the right direction.

According to data from Economic Freedom of the World, there’s a much better role model.

Indeed, I would like the United States to copy Hong Kong as well.

The recipe for prosperity is the same all over the world. The challenge is getting politicians to do what’s best for citizens rather than what’s best for themselves.

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Last November, I shared a one-minute video from Freedom Partners on the economics of trade.

Here’s a full-length (but still only four minutes) treatment of the issue from the Center for Freedom and Prosperity.

The first part of the video is a quick glimpse at some of the academic evidence for open trade, and I hope it helps make the case against protectionism.

I then cite some country-specific examples, including how Herbert Hoover’s protectionism contributed to the economic misery of the Great Depression.

Argentina is another bad example mentioned in the video. It used to be one of the world’s richest countries, but it plummeted in the rankings in part because of its protectionist policy of “import substitution.”

The video also mentions the examples of China and India. Since I think this point is especially compelling, I want to take this opportunity to briefly elaborate on my comments in the video.

First, let’s establish that both nations did liberalize trade. Here’s a chart from Economic Freedom of the World, and you can see that there was dramatic liberalization starting about 1990.

Both nations are still a long way from total free trade (Singapore and Hong Kong, for instance, respectively get scores of 9.29 and 9.32), but it goes without saying that there was considerable liberalization in China and India.

And how did that work out?

Trade liberalization was a slam-dunk success. Based on data from the World Bank, here’s a look at how China and India started converging with the United States after opening to the world economy.

To be sure, both nations still have a long way to go. And it’s highly unlikely that either nation will ever fully converge to American living standards unless there is a lot more pro-market reform. Not just in trade, but all facets of economic policy.

But as I mentioned in the video, the reforms that already have occurred – particularly trade liberalization – have contributed to huge reductions in poverty in China and India.

Given all this evidence, I’ll close with a version of my two-question challenge. Can anybody identify a nation that has prospered by moving to protectionism (h/t: the USA in the 1800s is not a good answer) or a nation that has suffered because of trade liberalization?

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I periodically mock the New York Times when editors, reporters, and columnists engage in sloppy and biased analysis.

But all these instances of intentional and unintentional bias are trivial compared to our next example.

The New York Times has gone above and beyond conventional media bias with a video entitled, “How Capitalism Ruined China’s Health Care System.”

Here’s the part that caused my jaw to drop.

After the sad opening story about the guy with the sick mother, there’s a section from 1:33-2:27 that makes two observations that basically show the premise of the video is totally wrong.

  • First, it points out (from 1:33-1:42) that there is a universal, government-run health system that ostensibly covers the guy’s mother, so her unfortunate status is yet another example that coverage in a government-run healthcare system is not the same as treatment.
  • Second, it points out (from 2:05-2:27) that life expectancy soared once the communist party relaxed its grip on the economy and allowed some liberalization, which would seem to be powerful evidence that capitalism leads to better health outcomes.

These are astounding mistakes.

But it gets worse. Sarah Lilly, who lives in China, debunked the rest of the video in a column for FEE.

The New York Times…attempts to blame capitalism for the many problems in China’s health care system. …As a resident of China and a recipient of outstanding private health care here, I was confused as to why the Times would show us the horrors of a capitalist system without actually visiting a private health care facility. …All of the horrors depicted in the high-quality video—the long lines, the scalping, and the hospital fights—occurred at government-run health care facilities. …At the very least, failing to feature a single private medical facility while blaming capitalism for the dysfunction of China’s public health system is intellectually dishonest.

She points out that the big-picture analysis in the video is wrong.

In the video, the Times praises Chairman Mao’s introduction of “free” health care and claims that when capitalism was introduced into the country, the state retreated and care was no longer free. Neither statement is true. First, health care was never free; it was paid for by tax revenues. Second, the state never retreated; rather, its regulatory apparatus became vaster and even more invasive. Out of sheer necessity, China allowed for the creation of private hospitals to ease the burden of the country’s heavily bureaucratic and deteriorating health care system.

And she also explains that the details of the video are wrong.

The Times video depicts the ungodly long line most Chinese face to see a physician. …It’s an appalling scene. …There’s just one problem. The Shanghai Cancer Center is a public hospital, not a private one. The long lines, scalpers, bribes, and physical fights with hospital staff—all of these exclusively happen in the public, communist, government-run hospitals. …In an egregious bit of sleight-of-hand, the Grey Lady asserts that capitalism is ruining Chinese health care while presenting us with a hospital where capitalism is not practiced.

To be fair, we get the same type of mistake when journalists look at the flaws in the American health system. They blame capitalism when the problems of ever-higher prices and uneven coverage are the consequences of government intervention.

P.S. My columns about sloppy bias at the New York Times don’t include Paul Krugman’s writings. Debunking those mistakes requires several different collections.

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The good news about China is that economic liberalization has produced impressive growth in recent decades, which has helped bring hundreds of millions of people out of poverty.

The bad news is that China started from such a low position that per-capita income is still quite low compared to rich nations.

So what does the economic future hold? Will China continue its upward trajectory?

That’s certainly possible, but it depends on the Chinese government. Will there be additional liberalization, giving the economy more “breathing room” to grow?

Not if the government listens to the bureaucrats at the International Monetary Fund. I wrote three years ago about an IMF study that recommended huge tax increases in China.

And now there’s another IMF report pushing for big tax hikes. Only instead of arguing that higher taxes somehow will produce more growth by financing a bigger burden of government (which – no joke – was the core argument in the 2105 study), this new report claims higher taxes will produce more growth by reducing inequality.

Here’s the basic premise of the paper.

…economic growth has not benefited all segments of the population equally or at the same pace, causing income disparities to grow, resulting in a large increase in income inequality… This is especially of concern as the recent literature has found that elevated levels of inequality are harmful for the pace and sustainability of growth… The paper discusses what additional policies can be deployed to improve equity in opportunities and outcomes, with particular focus on the role for fiscal policy.

But a key part of the premise – the blanket assertion that inequality undermines growth – is junk.

As I noted in 2015 when debunking a different IMF study, “..they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.”

Let’s dig into the details of this new IMF study.

Here’s the problem, at least according to the bureaucrats.

Income inequality in China today, as measured by the Gini coefficient, is among the highest in the world. …Furthermore, the Gini coefficient has rapidly increased over the last two decades, by a total of about 15 Gini points since 1990.

And here’s the chart that supposedly should cause angst. It shows that inequality began to rise as China shifted toward capitalism.

But why is this inequality a bad thing, assuming rich people earned their money honestly?

When markets are allowed to function, people become rich by providing value to the rest of us. In other words, it’s not a zero-sum game.

Ironically, the IMF study actually makes my point.

…much of China’s population has experienced rising real incomes. …even for the bottom 10 percent incomes rose by as much as 63 percent between 1980 and 2015… This has implied that China reduced the share of people living in poverty immensely. Measured by the headcount ratio, the population in poverty decreased by 86 percentage points from 1980 to 2013 (see figure 6), the most rapid reduction in history.

And here’s the aforementioned Figure 6, which is the data worth celebrating.

Any normal person will look at this chart and conclude that China should do more liberalization.

But not the bureaucrats at the IMF. With their zero-sum mentality, they fixate on the inequality chart.

Which leads them to make horrifyingly bad recommendations.

…several reforms could be envisaged to make fiscal policy more inclusive, both on the tax and expenditure side. …revenues from PIT contribute only around 5 percent of total revenues, a much lower share than the OECD average of 25 percent. Increasing the reliance on PIT, which more easily accommodates a progressive structure, could allow China to improve redistribution through the tax system. …While the PIT in China already embeds a progressive schedule with marginal rates increasing with income from 3 to 45 percent, …redesigning the tax brackets would ensure that middle and high income households with higher ability to pay contribute more to financing the national budget… Property and wealth taxes remain limited in China. Such taxes are broadly viewed as progressive, because high-income households usually tend also to have more property and wealth. …Consideration should therefore be given to adopt a recurrent market-value based property tax.

And why do IMF bureaucrats want all these additional growth-stifling taxes?

To finance a larger burden of government spending.

China still lags other emerging economies and OECD countries in public spending on education, health and social assistance. …social expenditure will need to be boosted.

In other words, the IMF is suggesting that China should copy welfare states such as Italy and France.

Except those nations at least enjoyed a lengthy period before World War II when government was very small. That’s when they became relatively rich.

The IMF wants China to adopt big government today, which is a recipe to short-circuit prosperity.

P.S. I don’t think the IMF is motivated by animus towards China. The bureaucrats are equal-opportunity dispensers of bad advice.

P.P.S. The OECD also is trying to undermine growth in China.

P.P.P.S. There are some senior-level Chinese officials who understand the downsides of a welfare state.

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