Tuesday, July 06, 2004

Journalists and economists have been fawning over China's economic growth lately. Yesterday's Times brings news that economic growth in China is so high that there is fear of an electricity shortage due to rapidly rising demand; Sunday's edition features a 10-part special I, for the life of me, could not get through, entitled The Chinese Century. A steady stream of articles on China's economic prowess has been coming from news sources over the past few years.

All of this is based on growth figures released by the Chinese government. Here is a question: why should those numbers be given any credence? After all, China has an interest in projecting economic strength; the reporting and calculation of growth is not done by an independent agency but rather by the very government that stands to benefit from it; and there is no independent way to verify how fast the country is in fact growing.

I'm generally skeptical that a communist country could sustain a course of economic growth in a developed economy -- this comes from my memories of coming of age in late eighties Russia. The problem is that there is little incentive for managers to manufacture things efficiently in a communist system, even when private enterprise is allowed; rather, people seek to increase their own influence by increasing the size of their company/division and developing connections with the government. One can try to fight this from the top -- as was done in late 1980s Russia -- but its very difficult to change the behavior of the people if the incentives are skewed; and as long as the government plays such a primal role in the country, personal connections are what ultimately matters for success, and incentives will remain skewed.


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