China’s Economic Future

August 13th, 2008

Sure, there’s already a post about the Beijing Olympics. But I’m not a big sports fan, so my take on the US gymnastics teams, for example, shouldn’t be taken as my absolute opinion. For example, I didn’t know that the men’s team lost some of their best members yet got a medal; while the women’s team was considered the top contender, only now everyone thinks the Chinese team is the best in the world.

But do know a little more about culture and economics. And China is on display right now. The Olympics organizers are working fiercely to hide the negative and unpretty aspects of Beijing and China, but there’s a lot of people in the world who care enough about the welfare of poor and disadvantaged Chinese that it can’t be completely hidden.

In the US, China is presented in the press as a competitor to America, a rising power that will overtake us much in the same way as Japan was presented in the 80s…and except for Blade Runner  and Neuromancer, that didn’t quite happen. In fact, Japan has been battling deflation and awful credit problems ever since.

Will China turn out the same way? Probably not. But we in the US both overestimate and underestimate China’s future in the world*.

Overestimating China

It’s easy to oversimplify the Chinese economy and think that all those big numbers mean that it’s over for the dominance of the American economy. For one thing, it appears that our economy is faltering at the moment – but take a step back; most people think of the economy in the short-term. Hell, the media looks at the economy short-term, so reports of unemployment, a collapsing housing market, and a bear stock marketing are played up as being the end of our way of life. What’s really happing – and the most fiscally prudent way of looking at it – is that our economy is restructuring. When unemployment goes up every once in a while, that’s a good thing. Companies are correcting their overstaffing and trying to streamline their business. Having the price of homes drop significantly in certain markets is a good thing, because they’re overpriced as it is. Rising food prices is a little worrying though; cheap food is always a good thing. But, for most households food is still a very small expense compared to income. Our grandparents and great-grandparents had to spend a larger portion of their earnings on food than we could ever imagine.

The reason I’m not worried about the American economy is because it’s very likely the most efficient economy in the world. American workers are highly productive (though I know a few people who could challenge that assumption), and most of us enjoy an incredible amount of material wealth. We only think we’re suffering because some people always seem to have even more. But look at it this way: even the poor have televisions and fairly cheap food. I’m not discounting the very poor who don’t even have those luxuries, but that’s a problem without a fix**; a very large swath of average-earning people in the US have access to things which are essentially luxuries (extensive education, sophisticated labor-saving devices, enough forms of entertainment to keep people constantly occupied, etc).

Conversely, the Chinese economy is very inefficient. There are aspects that are improving, like transportation infrastructure and education; but the economy is still very dependent on agriculture and manufacturing, which stopped being major components in the US long ago. There is a staggering number of people, largely hidden from foreign observers, who are just barely getting by growing crops and livestock; while others are just a step better working in what would be called a ‘sweatshop’ over here.

But the biggest thing holding the Chinese economy back is a free flow of information. I may overstate the issue because I find information management fascinating, but what makes makes for an efficient allocation of resources is an unrestricted flow of information about the location and strengths of resources. That’s what makes the American economy so efficient: an investor can do pretty well relying on free resources like Yahoo Finance and a plethora of finance blogs and resources, without having to spend anything on the really expensive institutional tools. Or that anyone with some sense and an internet connection can find enough free information to start a successful business.

Underestimating China

Most of these issues are short-term, and can be easily fixed over time. Providing things go in a general path, Agriculture will be come a smaller part of the Chinese economy, and the flow of information will get better. Think of China today as America in the late 19th century. The opportunities to make a lot of money are great and that the only direction most people have to go is up. The difference is that China is much, much bigger; there’s no frontier (it’s an area that has seen civilization for thousands of years), so there isn’t an easy-to-grasp place where people can go and start new lives***; and that  many of the restrictions on people’s freedoms are artificial (the government restricts information, people are limited in what they can do and where they can live, etc.).

But – and this is a big one – the relative lack of economic development in China also means there’s many people who not only dream of a better life, they have the drive to achieve it. All those kids growing up on poor farms see that they can have it better, so they get an education or just go out and start making money. It’s that hunger that really grows an economy. I bet there’s a lot of boys and girls with that hunger that will make China a force to be reckoned with in the future. There’s plenty of people in the US with that certain hunger, but most haven’t experienced the lack of wealth that many of their Chinese counterparts have, the kind of poverty that makes some people achieve great things.

There are a few developments which could derail China’s growth. For one thing, if China had an efficient economy as the US, there simply isn’t enough resources on Earth to accommodate that. China also has a pretty uncooperative government for the type of growth that people want. The sort of openness that has pushed China this far, can be easily be hampered by a government too concerned for the survival of itself to give its citizens the freedom they need to be even more successful. It’s those kind of fringe groups that the Chinese government is restricting provide the foment necessary to keep the culture fresh and dynamic. One only has to look at China’s history to see what happens if it’s taken to an extreme: when during the late Ming dynasty (I think), China slowed down its trade and communication routes with the outside world, which led to their falling far behind European economy and culture, creating the situation of upheaval in the early-20th century and which led to the establishment of the current Communist government.

So will China be as big and powerful as America, or will it derail and morph into something else? I don’t know, it could go either way. China has lots of people hungry for a better life, but a frightening restriction of information. It’s a good time to be Chinese and smart.

*It’s an odd feeling using one word – ‘China’ – for 1.3 billion people.
**What I mean is that no one has ever come up with a successful way to eliminate some people from suffering economically.
***This is something I find fascinating about American history. By having a place where a person could go where there’s literally nothing but what you can make of it, was a powerful force in America. It’s what made us emphasize the individual, to encourage risk-taking, and to enforce those same freedoms into law for the future. But if there’s no physical frontier, where is a person to go and start over? The best suggestion I’ve heard is entrepreneurship: there’s always an untapped or underutilized market somewhere, and you can be your own boss and make your own rules. Hopefully we’ll start colonizing space, and then that will be the real frontier.

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