Barry Naughton On The “Post-Crisis Economic Dilemmas of the Chinese Leadership”

The Spring 2010 issue of China Leadership Monitor has an interesting article by Barry Naughton on China’s economic policy choices-Reading the NPC: Post-Crisis Economic Dilemmas of the Chinese Leadership.

Professor Naughton’s conclusion:

The policy documents that came out of this year’s National People’s Congress meeting reveal that the Chinese leadership, despite the successes of 2009, feels hemmed in by the economic challenges and dilemmas that face them. Economic policy-makers see themselves as having very little room for maneuver. While monetary policy must reduce excess liquidity in the system, it cannot shift to a sharply contractionary stance. Given the difficulties policy-makers are encountering, they are increasingly stressing administrative measures to achieve their objectives.

Professor Naughton appears to have written this article before the release of the recent real estate tightening policies. Those policies are based on exactly the kinds of administrative measure that Naughton highlights, and as yet the government has not used widely recommended market mechanisms like raising interest rates (though the new real estate measures do directly raise mortgage rates and the overall cost of capital for housing).

Professor Naughton’s discussion goes to the heart of how the Chinese government views the economy, and how experts who look at China through market-based lenses may find their predictions are either wrong or take much longer than expected to prove correct. Naughton is very clear that China’s economic policies are likely building up real long-term risks. But the short-term also matters, as I wrote last week in “Are There More China Bears Than Panda Bears“:

China may very well have bubbles in many sectors, but bubbles can last for a very long period, especially when you have an authoritarian government, a non-market economy, and a ruling party that took as one of its lessons after the collapse of the Soviet Union the need to deliver fast economic growth at all costs. Maybe that growth is inefficient, maybe it is wasteful, but that doesn’t not mean it has to end anytime soon. The Chinese government still has a lot of ammunition left to keep growth afloat, they are just as adept at marking bad assets to fantasy as Western banks and governments are, and they may very well believe that making the “correct” economic choices risks stability and possibly their political lives.

Below is what I think is the most interesting passage in the Naughton’s paper:

To understand the formal government position on these issues, we need to return to the government work report and examine a third comment by Wen. Most of the government work report is devoted either to a review of the past year’s achievements, or to the prospects for the coming year. However, tucked away in between these two large sections is a revealing paragraph about the lessons learned from the experience of the last year. According to the official English translation, it says:

In the course of the past year, as we conscientiously applied the Scientific Outlook on Development, vigorously responded to the global financial crisis and completed all of our government work, we came to the following conclusions: We must continue to make use of both market mechanisms and macro-control, that is, at the same time as we keep our reforms oriented toward a market economy, let market forces play their basic role in allocating resources, and stimulate the market’s vitality, we must make best use of the socialist system’s advantages, which enable us to make decisions efficiently, organize effectively, and concentrate resources to accomplish large undertakings.

This is a very important statement, but the bland official translation fails almost completely to convey its significance. The translation loses both the force of individual terms and the implication of the Chinese sentence structure. First, the paragraph opposes “market mechanism” and “macro-control” (hongguan tiaokong). To the English reader—at least to the economist reader—this really makes no sense, since “macrocontrol” normally refers to setting interest rates, governing the money supply, and setting other macroeconomic parameters that affect most economic actors at arm’s length. There’s no sense in which “macro-control” by that [Western] definition can be meaningfully opposed to the “market mechanism,”: of course you need both. But in fact, Wen Jiabao does not at all use the word in this standard English way. This is obvious when Wen follows through the logic of the initial opposition by enumerating the actual advantages of the socialist system, which is thereby equated with “macro-control.” Those advantages are: “efficient decision-making, a powerful organization, and concentrated power to accomplish big things.” Of course, none of these has anything to do with macroeconomic instruments: All of them are attributes of the centralized, hierarchical system of administrative control that the Communist Party operates in China. The English rendering of hongguan tiaokong is not unambiguously wrong: the term was originally introduced from English to Chinese, but blown by political winds, the meaning has drifted substantially, and is now used officially (and regularly) to cover both macroeconomic instruments and any other national measures of administrative or industrial policy.

Moreover, given the original Chinese sentence structure, Wen is emphasizing that while the market mechanism and “macro-control” are two co-equal measures of economic control, the government has been using the market mechanism all along and has only now recognized that it must also fully bring into play “macro-control,” that is, the advantages of concentrated political power. This formulation specifically equates the market and the centralized deployment of administrative and political resources, but the emphasis on the centralized deployment of resources is new. The sophisticated Chinese reader will understand that the novel element of the formulation is what is really significant. However, this rhetorical emphasis has been effectively eviscerated by the translation. This is probably the most unambiguous movement to reemphasize centralization and administrative instruments to govern the economy since the term “socialist market economy” was incorporated into official Chinese rhetoric in September 1992

These comments are obviously not the conclusions of Wen Jiabao as an individual, but of the entire Communist Party leadership. It is their essential take-away from the crisis of 2008–2009. To be sure, it is a historical fact that the concentrated political power of the Communist Party and government was instrumental in overcoming the crisis of 2008–2009, by quickly mobilizing investment resources at exactly the critical time. Many people worldwide benefited indirectly from this use of concentrated power. But that same concentration of power creates substantial long-run costs for the economy and society. While it was necessary to wield it, the task today is to wind down and reverse this extraordinary and crisis-driven assumption of power. But as we can see, this is not the lesson the Chinese leadership has drawn from the events. Their lesson is that this type of concentrated power will have to be used more frequently, and with more consistency.

So is China on a treadmill to hell, as Jim Chanos suggests? Maybe, but it could be a very long treadmill. Then again, China may very well muddle through, accepting lower and inefficient growth as it works through the substantial long-run costs associated with these policies. Given that the US and European economies would have collapsed without massive state intervention, which Western experts have the credibility left to advise China on what exactly is the right economic model for its current political environment and stage of development?

I highly recommend reading the entire paper.

Please tell me what you think in the comments.

If you use RSS you can subscribe to this blog’s feed here, and if you use Twitter you can follow my more frequent updates @niubi. You can also follow my blogging on digital media and the Internet in China at DigiCha.

Subscribe to the Free Sinocism China Newsletter! Enter Your Email In The Box Below And Start Getting Smarter About China.

5 thoughts on “Barry Naughton On The “Post-Crisis Economic Dilemmas of the Chinese Leadership”

  1. The leadership is caught in the dilemma of having to make short-term corrections because of emergencies and expediency. The only question is when and where everything will blow up: which country goes first, and how does the violent contagion spread?

  2. While the govt can continue its policies for a while to come, the area where China is clearly unsustainable is water and energy inputs needed to maintain current levels of growth. Currency and real estate depend on values set by governments, but energy inputs are real and merciless and cannot be made up out of this air. For China’s coming coal bubble, see http://www.theoildrum.com/node/6434

  3. The leadership is caught in the dilemma of having to make short-term corrections because of emergencies and expediency. The only question is when and where everything will blow up: which country goes first, and how does the violent contagion spread?

  4. While the govt can continue its policies for a while to come, the area where China is clearly unsustainable is water and energy inputs needed to maintain current levels of growth. Currency and real estate depend on values set by governments, but energy inputs are real and merciless and cannot be made up out of this air. For China's coming coal bubble, see http://www.theoildrum.com/node/6434

  5.  Westerners’ advice to, and criticism of the Chinese government grows more and more hilarious with each passing year, as our citizens sink into poverty and their rise from it.

    This is not a passing phenomenon:  our wages have been falling for 30 years; theirs have been rising.  Our freedoms have been steadily curtailed for 30 years; theirs have expanded both de facto and de jure.

    I could go on…

Comments are closed.