here is why India can't catch up China... and why China can't catch up US

Discussion in 'Economics' started by richardyu301, Aug 22, 2008.

  1. Interesting articles (at least to me):

    Eventually what really counts is an open system within which everyone can be given the same opportunity and individual rights are protected.

    The author says that the Indians are limiting themselves due to their caste system and thus lag behind China.

    Personally I also think that China's rise will also be limited as it doesn't hv an open society like US.
  2. Does it say anything about how the US is starting to morph into a Chinese system of governmental control and intervention?
  3. Francis Fukuyama in the L.A. Times makes these observations about the tension between Beijing and the provinces:

    "China's peculiar road toward modernization after 1978 was powered by "township and village enterprises" -- local government bodies given the freedom to establish businesses and enter into the emerging market economy. These entities were enormously successful, and many have become extraordinarily rich and powerful. In cahoots with private developers and companies, it is they that are producing conditions resembling the satanic mills of early industrial England.

    The central government, by all accounts, would like to crack down on these local government bodies but is unable to do so. It both lacks the capacity to do this and depends on local governments and the private sector to produce jobs and revenue.

    The Chinese Communist Party understands that it is riding a tiger. Each year, there are several thousand violent incidents of social protest, each one contained and suppressed by state authorities, who nevertheless cannot seem to get at the underlying source of the unrest.

    Americans traditionally distrust strong central government and champion a federalism that distributes powers to state and local governments. The logic of wanting to move government closer to the people is strong, but we often forget that tyranny can be imposed by local oligarchies as much as by centralized ones. In the history of the Anglophone world, it is not the ability of local authorities to check the central government but rather a balance of power between local authorities and a strong central government that is the true cradle of liberty."
  4. Can China catch up to US?


    China has an increasing middle and upper class, US has increasing lower class... mainly due to influx of millions of illegal aliens.

    China has a huge untapped consumer market that is beginning to come on in the immediate years.

    China, unlike US, is not tied down with bureaucracy that prevents them from aggressively build what they what, where they want. They dont care. Example, 3 Gorges Dam.

    US cant even build an oil refinery.

    US needs to start thinking about tomorrow today.
  5. Even though I would like to see this happen as a native Chinese but I really don't think so.

    What really counts is productivity... The book "The Power of Productivity" describes the case well.

    But there are many ways to raise productivity and different cultures/societies can tend to be more productive in different areas.

    So Japan/Germany can hv higher productivity in high value-added manufacturing (automative, machineries, etc)

    China can hv high productivy in manufacturing too and may hv a good chance to follow the path of Japan/Korea/Germany.

    As for US, the way US is organized and the way the Americans behave mean that they may not be as productive in industries like automative.... but as suggested in the book mentioned above, a huge portion of the economy is NOT contributed by export/manufacturing but rather finance/retail/service sector. This is where US is way ahead.

    What makes nations wealthy?

    One of the most basic lessons of economics is that people must produce in order to consume. With that truth as a starting point, Lewis proceeded to ask what some countries are doing right and others are doing wrong. Paying no heed to the ¡§conventional wisdom,¡¨ some of his main conclusions are:
    # If poor nations take care of their production problems, then (and only then) will the capital they need for modernization flow in.

    # Education is not immediately important ¡X since workers learn most of what they need to know on the job, pouring resources into formal schooling is unnecessary.

    # Distorting markets to achieve ¡§social equity¡¨ is a bad idea.

    # Distortions in competition in product markets are much more damaging than are labor- and capital-market problems.

    # Today¡¦s big governments in poor countries are a great handicap that today¡¦s rich countries did not have when they were at a similar stage of development.

    # Consumers are the only political force that can stand up to producer interests, big government, and the technocratic, political, business, and intellectual elites.


    The details Lewis provides about the countries he studied are fascinating. Brazil, for instance, is a nation divided between an affluent, ¡§First World¡¨ sector and a desperately poor ¡X and much larger ¡X ¡§Third World¡¨ sector. The big cities gleam with modern buildings, but they¡¦re ringed by miles of pitiable slums. Most of the nation¡¦s commerce is carried out in the ¡§Third World¡¨ sector, which is beyond the reach of the taxing authorities. The problem that creates is that in order for the state to collect the taxes it needs for its prodigious expenses ¡X Lewis points to, among other things, the ridiculously generous pensions paid to government workers ¡X taxes are very high on the relatively small number of ¡§formal¡¨ businesses. That high taxation prevents them from expanding.

    Here we get back to the theme of productivity. Formal business enterprises are far more efficient than are informal, ¡§off the books¡¨ ones. They make use of economies of scale to produce more consumer value for the resources used than informal businesses can. The trouble is that the heavy burden of taxation wipes out their competitive advantage. Thus, big government keeps most of the Brazilian economy stuck with the same kinds of businesses as existed 300 years ago. So if you feel sorry for the poor and want to see their lives improve, instead of looking to more government programs as the solution, you should favor a dramatic downsizing of the Brazilian state.


    Lewis also gives us a fascinating chapter on Russia. While communism has been officially buried, its ghost haunts that country at every turn with market distortions that are ruinous to economic progress. ¡§Russia distorts the ground rules for competition to such an extreme that businesses do well not because they do better, but for other reasons,¡¨ he writes. Resources remain trapped in inefficient enterprises that have changed little since the Soviet era, because local governments order unproductive firms not to shut down.

    The steel industry is a good example. Many Russian steel mills are technologically obsolete, only 30 percent as efficient as American firms, and environmentally destructive to boot. In a rational economy, those plants would have shut down years ago. They can¡¦t even pay for their use of energy. Local governments, however, control the distribution of energy and they don¡¦t want ¡§their¡¨ industries shutting down. Therefore, Lewis says, ¡§The steel plants pretend to pay the local distribution companies with barter goods whose value is grossly overstated.¡¨ To make matters worse, the underemployed steel workers won¡¦t relocate in search of better jobs because ¡§the registration system ties social benefits to the worker¡¦s current residence. Thus, workers have a disincentive to move anywhere.¡¨

    The steel industry is just one of many where government policy props up inefficient businesses and thereby obstructs the growth of modern, state-of-the-art firms. Even if the international food-retailing giant Carrefour, for example, wanted to enter the Russian market, it couldn¡¦t make any money in the country¡¦s terribly distorted economy.


    India is another pathetic picture, captured in ugly detail by the author. To give just one instance of India¡¦s hostility to the free market, the nation has a ¡§small-scale reservation¡¨ law that restricts investments in fixed assets to $200,000 for firms producing more than 50 percent of their output for the domestic market. The idea is to protect existing producers against competition from larger and more-efficient businesses. In India, the great enemy of modern productive efficiency is, Lewis writes, ¡§Gandhi¡¦s reverence for the traditional, self-sustaining Indian village.¡¨ While Indians who leave the country often prosper, the country is stuck in an antiquated rut, thanks to government policy.
  7. This article shows the breakdown of growth of China/India into physical capital, employment and productivity

    Paul Krugman has popularized a paper by Young before that the Asian economic miracle is NOT a miracle at all as it is contributed by high input of capital and labor. Economic accompishment is achieved at the cost of big sacrifice so it is no miracle. A real miracle should be driven by high productivity instead.

    China seems to perform better than Paul suggested but one big problem it has is that its productivity growth in service sector is very small. Unless it can change its path its future is greatly limited as its service sector will remain very weak.
  8. poyayan


    One thing that is very important and very hard to do is innovation.

    It is easy to march million of people to build infrastructure and such, but it takes happy people to innovate.

    China motivate people to innovate by capitalism and nationalism, but depends on how China does it. It can or cannot sustain its momentum.

    Up to now, China's growth doesn't come at the expense of its own status quo. When China reach certain GDP, people motivate by capitalism will start to marginize status quo. For example, digital camera business totally wipe out conventional camera business like Kodak. P2P/internet sorta give RIAA a big headache.

    When it is the little guys with an innovation .vs old guard with a lot of power, can China's system allow these little guys to be prosper going forward? That's the big question.
  9. poyayan


    Now, you can ask the same question in US. Can it innovate and create value and productivity going forward?

    US doesn't have the best system, but it is 1st in relative terms for now.

    Education system -- Grad 12 and below not good. Excellent in universities and that is all it matters since it attract great students from all over. Best chance to get innovative people. Cons : getting expensive.

    Capital structure -- easy to form companies and allow innovative people to do what they want to do. Cons -- The whole wall street structure is built to live off these companies.

    Tax -- can't say good or bad. This is relative to what other governments charge.

    Employment -- innovative people trained from US university so far has a relative easier time to get employment in US compare to other countries. Like tax, this is relative to what other people are doing.

    Living env -- great compare to other places. Good living standard, not much racism or anti-foreign sentiment.
    #10     Aug 26, 2008