Date: Sat, 28 Feb 1998 20:48:55 -0500 (EST)
From: louisgodena-AT-ids.net (Louis R Godena)
Subject: M-I: Re: Dic Lo's thesis



>Lo's book [*Market and Institutional Regulation in Chinese
>Industrialization, 1978-94* (Macmillan, 1997)] embodies this 
>heterodox view...that "free markets" (as near as the West dare 
>approach that mythic beast) produce high unemployment, sub-optimal
>growth, and, in the long run, widespread market failure...


Professor Rosser and I quarreled last year in this vein over inflation
controls in China.  Like many of his orthodox colleagues, Rosser tends to
write off China's rapid growth as part statistical artefact and
part inevitable consequence of abundant surplus labor.  If I remember
correctly, he further denied the fact of productivity growth in
centrally-owned industrial enterprises (while redefining locally-owned state
enterprises as part of the private sector).  

And, as Lo Dic points out, although China continues to set its face against
privatization and the removal of tariff barriers, its spiraling fiscal
deficit is now being brought under control, and inflation has been all but
defeated.  How has this happened?  Surplus labor *helps* to explain the
degree of China's success (just as it helps to explain the successes of
Japan and Germany since 1945), but it is hardly the whole story.  Nor does
China's hypothetical embrace of "market reforms" (this parroted canard has
been repeated so often by Sachs, the IMF, and the World Bank, that it has
the status of a Holy Writ.  It is, really, as Lo Dic discovers, quite wrong).

As I see it, there are three factors operating to produce the Chinese
macroeconomic miracle.  First, rapid demand growth has led to
learning/dynamic economies of scale along Kaldor-Verdoorn lines, and this,
in turn, has been reflected in economy-wide productivity growth.  If one
disaggregates the state sector by enterprise size (as Lo does), one sees
that although small-scale enterprises have a poor productivity record
(because of a loss of flexibility), the same is *not* true of their medium
and large-sized cousins.  Third, a key characteristic of the Chinese economy
in recent years has been the extent of structural change, and in particular
the growth of a modern consumer-goods sector.  This sector has benefited
both from rapid demand growth and from the increased availability of more
advanced technology through international trade.

None of this would have been the case under the orthodox Western model.
Like those of Japan, South Korea and Taiwan, China's industrial policies
have not been seen by its government merely as transitional measures on the
road to the free market but rather as an integral part of economic success.
In Alice Amsden's phrase, these economies have all grown rapidly by "getting
prices wrong".  The recent currency crisis in non-Communist Asia may further
buttress the argument by China's "Stalinists" that centrally-controlled
industrial policies, and its concomitants such as "selective protection" of
industry are the guarantor of future success.  A series of crises racking
capitalist Asia, with severe aftershocks throughout the developed West, may
put paid to the orthodox free market model for developing countries for some
time to come.

Louis Godena




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