2/ I also believe your characterization of the Chinese model is focused far too much on their handling of their real estate sector and infra sector, which has undoubtedly been a failure and also highlights structural issues with their decentralized model of growth. Having said that, I find their patronage of their EV and solar industries quite fascinating, and the rapid advancements in the tech capabilities of Chinese companies under the broader umbrella of govt support schemes also points to strength of Chinese state capacity. In fact, in my opinion, ingenuity from the Chinese govt and ministries is a key reason for the success of China’s model, and the Chinese state, relative to its income levels, has been very impressive in terms of their state capacity and ability to execute on goals, particularly in hi-tech sectors. The best example of this can be seen in the spectacular growth and success of the telecom industry in China in the 80s and 90s, despite the fact that the country faced many of the same incumbent and regulatory headwinds that prevented other far more developed countries from being as successful in their initial experiences with the telecom industry.
To begin with, around the world, a major reason holding up explosive growth in telecom in the 70s and 80s was the initial monopolization of the sector by state-owned PTT companies. (PTT stands for postal, telegraph and telephone, and these companies were monopoly providers of these services in many countries, including China). When the new communications tech began improving, there was conflict as PTT companies wanted their monopoly to be extended to telecom. In countries where they were successful at this, adoption and tech upgradation were normally slower.
In China too, there was a monopoly PTT company, that initially extended its monopoly to the rising telecom sector. However, the company was slow in adopting new technology, and their products and services were subpar and inefficient. As a result, a coalition of ministries that were unhappy with their monopoly actually set up a rival company called China Unicom (still China’s 3rd largest wireless carrier), combining the expertise of the Ministry of Electronic Industry in manufacturing telecommunications equipment with the expertise and know-how of Ministry of Railways, Coal, Petroleum in operating private telecom networks, introducing competition and new tech standards to China's telecom system. This led to fall in prices, greater cellular density. They also began investing into CDMA networks between 90s and 2000s, coming up with a new tech called personal handy system, which allowed fixedline customers to roam within their local phone area, using their handsets as if they were mobile phones, thus ensuring a perfect bridge between fixedline and cellular ecosystems. Eventually, the old monopoly ministry was forced to separate itself from the dominant monopoly telecom company, and a new regulator ministry was set up as part of a broader restructuring drive. This regulator included representatives from both the ministries, ensuring that it would not discriminate against anyone.
Source: Cellular an Economic and Business History of the International Mobile-Phone Industry (Daniel D. Garcia-Swartz, Martin Campbell-Kelly). MIT Press. Chapter 5
Again, even if this was still catch-up growth to some extent, I still think credit must be given to the ingenuity shown by different actors within the Chinese state, especially considering the difficulties other developed and developing countries faced with respect to the telecom sector, even with private players involved. The Chinese state, in this case, managed to create an incredibly successful state-owned company that was competing with another state owned company, driving improvements across the sector, matching and exceeding efficiency levels shown by telecom sectors in countries with mostly private players. THIS IS UNEQUIVOCALLY BASED
Finally, the example of the telecom industry also highlights a major feature (in some cases like real estate, perhaps bug?) of the Chinese system, which is that even though many industries might be completely govt-owned or dominated by govt players, there is significant competition between different ministries and govt owned companies within the broader umbrella of the state itself, and the central authorities, at least in the case of telecom, let this competition play out. This means that even though many industries might be nationalized or state-dominated, they are able to recreate private sector like competitive dynamics within the state’s umbrella. Ofc the dynamics of perfect competition might be tough to fully recreate in this setup, but then observers argue that China’s cutthroat EV sector is a better example of perfect competition than any industry in the West?
Thus, despite the flaws in the Chinese state, this is a regime with incredibly high state capacity, and tons of internal govt competition, which unlike in most govt systems around the world, does not manifest through holding back policies and projects, but by competing to create new projects and industries. Ofc, this isn’t perfect, and has drawbacks, like local govt promoted real estate bubble, but the Chinese state, unlike most govt systems around the world, CAN ACTUALLY EXECUTE, AND AT SCALE. This is also why I believe it will remain a formidable player going forward, as they have abnormally high state capacity, not just for their income levels, but generally.
1/ Hey Dwarkesh, just putting my thoughts across in a few points through multiple posts (sorry lol). To begin with, roughly agree with your characterization of some of the flaws of the Chinese model. However, I don't really agree with your claim about China's total factor productivity, and your source, Prof Harry X Wu's views on China's TFP figures are controversial among observers and economists.
In fact, I have put these 3 references in this post, and I believe the one from readwriteinvest (Glenn Luk’s substack) is a particularly good summary of the problems with Wu's China calculations. Roughly, Wu assumes that Chinese offical growth rates are exaggerated, but does not adjust the proportion of capital and labor in his estimates, which are lower than govt estimates, which makes productivity estimates artificially low.
For example, if the official growth rate is 12%, under the govt estimate, labor's contribution was 2%, capital's contribution was 6%, and TFP was 4% as per the govt rate. Now Mr Wu claims that the actual growth rate is 9%. However, he does not really adjust the contributions of capital and labor in his estimate, which remains the same as the old estimate, which leads him to come to the conclusion that TFP is 1%. As seems evident, this approach has serious doctrinal issues, which were flagged by the Economist as well as FT, and deconstructed by Glenn Luk in his brilliant substack
"This creates a stealth tax on savers - you’re not allowed to start competitive bank offering real market interest rates from lending to productive private companies." -> start a competitive bank
"Advocates of an authoritarian model (who are particularly inspired by China) don't take seriously enough fragile good government is in these societies." -> enough how fragile
"The easiest way for officials to hit their targets is therefore to tell the state-run banks to lend to favored companies to invest in as much infrastructure, ..All that matters is that the quantity of spending generates enough reported GDP to meet the central government’s objectives”.
How can anyone read this twaddle without bursting into laughter (or tears) at its resolutely counterfactual claims?
If that is what China had been doing for the past 75 years it wouldn't be where it is today: debt-free, with trillions in savings and a very happy citizenry who are pleased with the country's direction.
More analysis of this kind is sorely needed. One reason I know that China is not well understood by the West is that attitudes towards China are always so bipolar.
Our stalwart ally in WW2 became hated commies after the communists won the Chinese Civil War in 1949.
Friendly communists (in comparison to the threatening Soviet Union) after rapprochement in 1972 to just another bloody communist dictatorship with Tianmanen Square in 1989.
A stakeholder in the international community after China’s ascension to the WTO in 2001 to despair at their success after the 2008 Global Financial Crisis.
Now we’re at American triumphalism post-2021, after China’s Zero Covid blunder and China’s real estate crisis.
I don’t doubt China has problems, but all the analysis now projecting forward the last few years to suggest China will face stagnant decline or even outright collapse might look foolish in the future. China’s right now going through their version of the 2008 GFC real estate crisis and frankly all the major economies and their trade partners are not doing so hot right now, teetering on recession and with record high inflation in decades. This might actually be the bottom on China, who knows.
“China’s right now going through their version of the 2008 GFC real estate crisis and frankly all the major economies and their trade partners are not doing so hot right now, teetering on recession and with record high inflation in decades. “ very sensible!
How much incremental economic impact did Internet have? Or did it just displace some old industries? Some of the benefit of Internet was included in the GDP numbers, but an accurate estimation of its impact on the economy is actually not easy.
The point about Tiananmen and its partial inflationary roots is a good one. Keynes on inflation is always a good read (https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html). Although he discusses the capitalist system here it seems inflation is corrosive to political stability where it occurs.
Appreciate the effort of trying to comment on something that are hard to understand. Strongly recommend you to read Steven N. S. Cheung's books and essays if you truly want to understand it rather than repeating what "experts" are saying.
One theory from Steven i agree the most is his comment on "county-level competition" that drives the growth of the economy.
Local government is not incentivised to fake the economic numbers and consider GDP growth as an "input" in the system. They are incentivised by rankings of economic and social development rankings competing with other provinces, cities, counties of its peers.
The tax system amplified such competition. The income tax which divided between local and central government by 40-60 and the value added tax divided between local and central of 25-75 further fuels the competition by giving back local part even 100% to reduce tax in order to attract private businesses to settle down locally. The GTM team of local government are an invisible force of economic development to help, nurture, baby-sit, even subsidise the local entrepreneurs over the past 30 years, an example you will find between the EV company NIO and local government of Hubei, although none is incentivised from state level or central government level as most "experts" imagined.
Why it slows down?
It mostly because the good-will of anti corruption disturbed local government officials' incentives as there are no clear line of what is encouraged and what is not. Also with years of anti corruption, all levels of Chinese government are losing talents which erodes the capabilities of the system that doesnt matter that much if you have idiots in a small government, but not the case of China. Therefore we see it slows down and need time to regain its governance capabilities at every level.
Really, study its tax system will tell you much more about an economy and people's incentives rather than looking at Debt composition, it is the result not the reason.
As it is an anti corruption without clear rules, u might be accused of corruption for giving the subsidy or tax rebate to enterprises in your region, although you didnt take a dime out of it personally. It is like central government banned officials who was at regulator from joinning the financial institutions that were under their governance, the revolving door in China is totally shut and considered corruption, it is too much.
before there were clear rules, like if u r innovating and drives the economic growth locally, you are rewarded being considered competent and may earn your chance to be promoted to govern from a county to a city to a province. But it is also a cultural thing, like Karma in Indian culture, how do u define it clearly?
You say ”I remain confused about how this fits into the bigger point that Pettis makes, which is that the Chinese government is causing distortions which lead to too much saving and not enough investment.” Where does Pettis write this? Saving and investment are the same thing. The problem Pettis highlights is that there isn’t enough consumption in China.
I also don’t recall Pettis saying anything like “ It's essentially a pressure release valve for China's overcapacity in construction and heavy industry.” on third world investment. Instead he claims that it is a consequence of the financial surplus that China would like to invest, but investment in third world countries will turn out to be malinvestments because they aren’t developed enough to absorb them productively.
2/ I also believe your characterization of the Chinese model is focused far too much on their handling of their real estate sector and infra sector, which has undoubtedly been a failure and also highlights structural issues with their decentralized model of growth. Having said that, I find their patronage of their EV and solar industries quite fascinating, and the rapid advancements in the tech capabilities of Chinese companies under the broader umbrella of govt support schemes also points to strength of Chinese state capacity. In fact, in my opinion, ingenuity from the Chinese govt and ministries is a key reason for the success of China’s model, and the Chinese state, relative to its income levels, has been very impressive in terms of their state capacity and ability to execute on goals, particularly in hi-tech sectors. The best example of this can be seen in the spectacular growth and success of the telecom industry in China in the 80s and 90s, despite the fact that the country faced many of the same incumbent and regulatory headwinds that prevented other far more developed countries from being as successful in their initial experiences with the telecom industry.
To begin with, around the world, a major reason holding up explosive growth in telecom in the 70s and 80s was the initial monopolization of the sector by state-owned PTT companies. (PTT stands for postal, telegraph and telephone, and these companies were monopoly providers of these services in many countries, including China). When the new communications tech began improving, there was conflict as PTT companies wanted their monopoly to be extended to telecom. In countries where they were successful at this, adoption and tech upgradation were normally slower.
In China too, there was a monopoly PTT company, that initially extended its monopoly to the rising telecom sector. However, the company was slow in adopting new technology, and their products and services were subpar and inefficient. As a result, a coalition of ministries that were unhappy with their monopoly actually set up a rival company called China Unicom (still China’s 3rd largest wireless carrier), combining the expertise of the Ministry of Electronic Industry in manufacturing telecommunications equipment with the expertise and know-how of Ministry of Railways, Coal, Petroleum in operating private telecom networks, introducing competition and new tech standards to China's telecom system. This led to fall in prices, greater cellular density. They also began investing into CDMA networks between 90s and 2000s, coming up with a new tech called personal handy system, which allowed fixedline customers to roam within their local phone area, using their handsets as if they were mobile phones, thus ensuring a perfect bridge between fixedline and cellular ecosystems. Eventually, the old monopoly ministry was forced to separate itself from the dominant monopoly telecom company, and a new regulator ministry was set up as part of a broader restructuring drive. This regulator included representatives from both the ministries, ensuring that it would not discriminate against anyone.
Source: Cellular an Economic and Business History of the International Mobile-Phone Industry (Daniel D. Garcia-Swartz, Martin Campbell-Kelly). MIT Press. Chapter 5
Again, even if this was still catch-up growth to some extent, I still think credit must be given to the ingenuity shown by different actors within the Chinese state, especially considering the difficulties other developed and developing countries faced with respect to the telecom sector, even with private players involved. The Chinese state, in this case, managed to create an incredibly successful state-owned company that was competing with another state owned company, driving improvements across the sector, matching and exceeding efficiency levels shown by telecom sectors in countries with mostly private players. THIS IS UNEQUIVOCALLY BASED
Finally, the example of the telecom industry also highlights a major feature (in some cases like real estate, perhaps bug?) of the Chinese system, which is that even though many industries might be completely govt-owned or dominated by govt players, there is significant competition between different ministries and govt owned companies within the broader umbrella of the state itself, and the central authorities, at least in the case of telecom, let this competition play out. This means that even though many industries might be nationalized or state-dominated, they are able to recreate private sector like competitive dynamics within the state’s umbrella. Ofc the dynamics of perfect competition might be tough to fully recreate in this setup, but then observers argue that China’s cutthroat EV sector is a better example of perfect competition than any industry in the West?
Thus, despite the flaws in the Chinese state, this is a regime with incredibly high state capacity, and tons of internal govt competition, which unlike in most govt systems around the world, does not manifest through holding back policies and projects, but by competing to create new projects and industries. Ofc, this isn’t perfect, and has drawbacks, like local govt promoted real estate bubble, but the Chinese state, unlike most govt systems around the world, CAN ACTUALLY EXECUTE, AND AT SCALE. This is also why I believe it will remain a formidable player going forward, as they have abnormally high state capacity, not just for their income levels, but generally.
1/ Hey Dwarkesh, just putting my thoughts across in a few points through multiple posts (sorry lol). To begin with, roughly agree with your characterization of some of the flaws of the Chinese model. However, I don't really agree with your claim about China's total factor productivity, and your source, Prof Harry X Wu's views on China's TFP figures are controversial among observers and economists.
In fact, I have put these 3 references in this post, and I believe the one from readwriteinvest (Glenn Luk’s substack) is a particularly good summary of the problems with Wu's China calculations. Roughly, Wu assumes that Chinese offical growth rates are exaggerated, but does not adjust the proportion of capital and labor in his estimates, which are lower than govt estimates, which makes productivity estimates artificially low.
For example, if the official growth rate is 12%, under the govt estimate, labor's contribution was 2%, capital's contribution was 6%, and TFP was 4% as per the govt rate. Now Mr Wu claims that the actual growth rate is 9%. However, he does not really adjust the contributions of capital and labor in his estimate, which remains the same as the old estimate, which leads him to come to the conclusion that TFP is 1%. As seems evident, this approach has serious doctrinal issues, which were flagged by the Economist as well as FT, and deconstructed by Glenn Luk in his brilliant substack
https://www.economist.com/finance-and-economics/2014/10/11/unproductive-production
https://www.ft.com/content/cb446e10-6057-11e5-97e9-7f0bf5e7177b
https://www.readwriteinvest.com/p/is-the-chinese-economy-as-efficient
"This creates a stealth tax on savers - you’re not allowed to start competitive bank offering real market interest rates from lending to productive private companies." -> start a competitive bank
"Advocates of an authoritarian model (who are particularly inspired by China) don't take seriously enough fragile good government is in these societies." -> enough how fragile
"The easiest way for officials to hit their targets is therefore to tell the state-run banks to lend to favored companies to invest in as much infrastructure, ..All that matters is that the quantity of spending generates enough reported GDP to meet the central government’s objectives”.
How can anyone read this twaddle without bursting into laughter (or tears) at its resolutely counterfactual claims?
If that is what China had been doing for the past 75 years it wouldn't be where it is today: debt-free, with trillions in savings and a very happy citizenry who are pleased with the country's direction.
More analysis of this kind is sorely needed. One reason I know that China is not well understood by the West is that attitudes towards China are always so bipolar.
Our stalwart ally in WW2 became hated commies after the communists won the Chinese Civil War in 1949.
Friendly communists (in comparison to the threatening Soviet Union) after rapprochement in 1972 to just another bloody communist dictatorship with Tianmanen Square in 1989.
A stakeholder in the international community after China’s ascension to the WTO in 2001 to despair at their success after the 2008 Global Financial Crisis.
Now we’re at American triumphalism post-2021, after China’s Zero Covid blunder and China’s real estate crisis.
I don’t doubt China has problems, but all the analysis now projecting forward the last few years to suggest China will face stagnant decline or even outright collapse might look foolish in the future. China’s right now going through their version of the 2008 GFC real estate crisis and frankly all the major economies and their trade partners are not doing so hot right now, teetering on recession and with record high inflation in decades. This might actually be the bottom on China, who knows.
Anyways thanks for the reviews!
“China’s right now going through their version of the 2008 GFC real estate crisis and frankly all the major economies and their trade partners are not doing so hot right now, teetering on recession and with record high inflation in decades. “ very sensible!
How much incremental economic impact did Internet have? Or did it just displace some old industries? Some of the benefit of Internet was included in the GDP numbers, but an accurate estimation of its impact on the economy is actually not easy.
The point about Tiananmen and its partial inflationary roots is a good one. Keynes on inflation is always a good read (https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html). Although he discusses the capitalist system here it seems inflation is corrosive to political stability where it occurs.
Bro western talk ( main stream) about china is false propaganda mostly
Appreciate the effort of trying to comment on something that are hard to understand. Strongly recommend you to read Steven N. S. Cheung's books and essays if you truly want to understand it rather than repeating what "experts" are saying.
One theory from Steven i agree the most is his comment on "county-level competition" that drives the growth of the economy.
Local government is not incentivised to fake the economic numbers and consider GDP growth as an "input" in the system. They are incentivised by rankings of economic and social development rankings competing with other provinces, cities, counties of its peers.
The tax system amplified such competition. The income tax which divided between local and central government by 40-60 and the value added tax divided between local and central of 25-75 further fuels the competition by giving back local part even 100% to reduce tax in order to attract private businesses to settle down locally. The GTM team of local government are an invisible force of economic development to help, nurture, baby-sit, even subsidise the local entrepreneurs over the past 30 years, an example you will find between the EV company NIO and local government of Hubei, although none is incentivised from state level or central government level as most "experts" imagined.
Why it slows down?
It mostly because the good-will of anti corruption disturbed local government officials' incentives as there are no clear line of what is encouraged and what is not. Also with years of anti corruption, all levels of Chinese government are losing talents which erodes the capabilities of the system that doesnt matter that much if you have idiots in a small government, but not the case of China. Therefore we see it slows down and need time to regain its governance capabilities at every level.
Really, study its tax system will tell you much more about an economy and people's incentives rather than looking at Debt composition, it is the result not the reason.
Why does anti-corruption drive loses talents? Wouldn't it be the opposite: untalented corrupt people are gone, so talented uncorrupt people rises.
As it is an anti corruption without clear rules, u might be accused of corruption for giving the subsidy or tax rebate to enterprises in your region, although you didnt take a dime out of it personally. It is like central government banned officials who was at regulator from joinning the financial institutions that were under their governance, the revolving door in China is totally shut and considered corruption, it is too much.
If there are no clear rules of corrupt or correct policies, how does local and regional officials innovate to compete?
before there were clear rules, like if u r innovating and drives the economic growth locally, you are rewarded being considered competent and may earn your chance to be promoted to govern from a county to a city to a province. But it is also a cultural thing, like Karma in Indian culture, how do u define it clearly?
You say ”I remain confused about how this fits into the bigger point that Pettis makes, which is that the Chinese government is causing distortions which lead to too much saving and not enough investment.” Where does Pettis write this? Saving and investment are the same thing. The problem Pettis highlights is that there isn’t enough consumption in China.
I also don’t recall Pettis saying anything like “ It's essentially a pressure release valve for China's overcapacity in construction and heavy industry.” on third world investment. Instead he claims that it is a consequence of the financial surplus that China would like to invest, but investment in third world countries will turn out to be malinvestments because they aren’t developed enough to absorb them productively.
So either you or I badly misunderstood the book.
Whoops meant to say consumption there instead of investment.
In that case I don’t understand what the confusion is. The government represses consumers by creating implicit transfers to the business sector.