Professional Documents
Culture Documents
Page 1 of 15
User Account
Register Login
Main navigation
Economists' ClubExclusive commentaries and debate featuring the world's leading economic thinkers. Mind, Matter & PoliticsExclusive cutting-edge commentaries on science, philosophy, and global affairs. Topics Focal Points Focal Points Asia's Tipping Point? The Roubini Factor Back to Mexico's Future? Free Trade in Troubled Times Europe's Crisis Goes Global Central Banks in the Firing Line Soros on Europe The Big Bank Theory The Road to Rio+20 Would Eurobonds Work? Will India's Boom Go Bust? Austerity and its Discontents America's Precarious Recovery The Euro at Bay China's Scandalous Politics
View all Focal Points Africa Africa African Politics African Economies African Development Public Health
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 2 of 15
Asia Asia Asian Politics Asian Economies China India Japan Korean Peninsula Southeast Asia Central Asia
Culture and Society Culture and Society Social Changes/Social Movements Philosophy and Ethics Religion Human Rights Technology Health and Medicine Science and Society
Economic Reflections Economic Reflections Economic Justice Economic History Economic Theory Market Economy/Capitalism
Environment Environment Global Warming/Climate Change The Environment and the Economy
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 3 of 15
Europe Europe European Politics European Economies Eurozone EU Member States Non-EU Europe Germany France United Kingdom Russia Central Europe
Finance Finance Financial Institutions Banking Central Banking Monetary Policy Financial Regulation
Growth and Development Growth and Development Fiscal Policy Development Strategies Regulatory Policy Corporate Governance Trade
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 4 of 15
International Financial Institutions US Economy European Economies Asian Economies Developing World
International Institutions International Institutions G-7, G-8, G-20 IMF/World Bank UN EU NATO International Justice Others
International Relations International Relations US Foreign Policy European Affairs Asian Affairs Military Affairs Diplomacy
Latin America Latin America Latin American Politics Latin American Economies Brazil Argentina Mexico
Middle East
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 5 of 15
Politics Politics US Politics European Politics Asian Politics Human Rights Women's Issues Democratic Transitions Constitutional Government
United States United States US Politics US Economy US Foreign Policy Most recent commentaries on this topic
type to search live in this topic
Videos/ Podcasts On DeckWeb-only features and blogs. About us About Project Syndicate Submission Guidelines Contributors Member Papers Archive RSS Feeds search Facebook Twitter RSS
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 6 of 15
Featured Articles
Daniel Gros
Javier Solana
Mark Roe
Christopher R. Hill
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 7 of 15
Minxin Pei
Minxin Pei is Professor of Government at Claremont McKenna College. Full profile Jul. 5, 2012Email | Print EnglishEnglish ArabicArabic ChineseChinese FrenchFrench GermanGerman SpanishSpanish
CommentsView/Create comment on this paragraphCLAREMONT, CALIFORNIA Chinas current economic slowdown has no shortage of causes: Europes financial turmoil, sputtering recovery in the United States, and weak domestic investment growth, to name the most commonly cited factors. Since exports and investment account, respectively, for 30% and 40% of Chinas GDP growth, its economy is particularly vulnerable to weakening external demand and accumulation of non-performing loans caused by excessive and wasteful spending on fixed assets.
Illustration by Paul Lachine CommentsView/Create comment on this paragraphBut Chinas vulnerability to these factors, as serious as they are, is symptomatic of deeper institutional problems. Until these underlying constraints are addressed, talk of a new consumption-based growth model for China, reflected in the governments recently approved 12th FiveYear Plan, can be no more than lip service.
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 8 of 15
CommentsView/Create comment on this paragraphAfter all, Chinas major trading partners, international financial institutions such as the World Bank and the International Monetary Fund, and senior Chinese officials themselves have long recognized the structural vulnerabilities caused by excessive investment and low household consumption. And, for nearly a decade, China has been urged to undertake reforms to redress these economic patterns, which have undermined the welfare of ordinary Chinese and strained the global trading system. CommentsView/Create comment on this paragraphThe best-known feature of Chinas macroeconomic imbalances is heavy dependence on exports for growth, which is typically attributed to weak domestic demand: as a middle-income country, China lacks the purchasing power to consume the goods that it produces. With nearly unlimited access to advanced-country markets, China can tap into global external demand and raise its GDP growth potential, as it has done for the past two decades. CommentsView/Create comment on this paragraphIf this view is right, the solution is straightforward: China can correct its imbalances by increasing its citizens incomes (by cutting taxes, raising wages, or increasing social spending), so that they can consume more, thereby reducing the economys dependence on exports. Indeed, nearly all mainstream economists prescribe this approach for China. CommentsView/Create comment on this paragraphBut there is another explanation for Chinas excessive export dependence, one that has more to do with the countrys poor political and economic institutions. Specifically, export dependence partly reflects the high degree of difficulty of doing business in China. Official corruption, insecure property rights, stifling regulatory restraints, weak payment discipline, poor logistics and distribution, widespread counterfeiting, and vulnerability to other forms of intellectual-property theft: all of these obstacles increase transaction costs and make it difficult for entrepreneurs to thrive in domestic markets. CommentsView/Create comment on this paragraphBy contrast, if Chinas private firms sell to Western multinationals, such as Wal-Mart, Target, or Home Depot, they do not have to worry about getting paid. They can avoid all of the headaches that they would have encountered at home, because well-established economic institutions and business practices in their export markets protect their interests and greatly reduce transaction costs. CommentsView/Create comment on this paragraphThe Chinese economys institutional weakness is reflected in international survey data. The World Bank publishes an annual review of the ease of doing business for 183 countries and sub-national units. In its June 2011 survey, China was ranked 91st, behind Mongolia, Albania, and Belarus. It is particularly difficult to start a business in China (151st), pay taxes (122nd), obtain construction permits (179th), and get electricity (115th). CommentsView/Create comment on this paragraphFaced with such a hostile environment, Chinese private entrepreneurs have been forced to engage in institutional arbitrage taking advantage of efficient Western economic institutions to expand their business (most export-oriented businesses are owned by private entrepreneurs and foreign firms). CommentsView/Create comment on this paragraphUnfortunately, as China has already claimed a large share of the worlds merchandise exports (10.4% in 2010) and economic stagnation in the West is constraining external demand, this strategy can no longer work. But reorienting their businesses toward the Chinese domestic market requires far more than government policies that put more money in consumers' pockets. CommentsView/Create comment on this paragraphIn order to enjoy the same low transaction costs that they have in exporting, Chinas entrepreneurs need a much better business environment: an effective legal system, a sound regulatory framework, a government that protects their brands by fighting intellectual-property theft, dependable logistics and distribution networks, and a graft-resistant bureaucracy. CommentsView/Create comment on this paragraphChina cannot create such an environment quickly. In essence, the Chinese government must transform a predatory state into a nurturing one, and treat private
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 9 of 15
entrepreneurs as creators of wealth rather than targets of extraction. In nearly all other countries, such a transformation was accomplished by establishing the rule of law and/or moving from autocracy to democracy. CommentsView/Create comment on this paragraphThe impossibility of sustaining growth in the absence of the rule of law and political accountability presents the Chinese Communist Party with an existential dilemma. Ever since it crushed the pro-democracy movement in Tiananmen Square in 1989, the party has vowed not to surrender its political monopoly. The investment boom and the globalization dividend of the last two decades allowed the Party to have its cake and eat it maintaining its rule on the basis of economic prosperity, while failing to establish the institutions critical to sustaining such prosperity. Today, this is no longer possible. CommentsView/Create comment on this paragraphSo in a sense, the Chinese bubble as much an intellectual and political bubble as an economic one has burst. As Chinas economic deceleration exposes its structural vulnerabilities and flawed policies, the much-hyped notion of Chinese exceptionalism that China can continue to grow without the rule of law and the other essential institutions that a modern market economy presupposes is proving to be nothing but a delusion. Reprinting material from this Web site without written consent from Project Syndicate is a violation of international copyright law. To secure permission, please contact us. Share this Select a serviceX google bookmark delicious digg Tweet
Like 10 24 88
Comments (3)
You need to login in order to leave a comment. If you do not yet have an account, please register. 1. Commented
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 10 of 15
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 11 of 15
make room." Hostility and pessimism, in my view, breed hostile and pessimistic outcomes. 3. Commented
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 12 of 15
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 13 of 15
facebooktwitter
Related articles
facebooktwitter
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 14 of 15
Most read
facebooktwitter
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012
Page 15 of 15
http://www.project-syndicate.org/commentary/why-china-can-t-adjust
7/17/2012