6 Comments
Mar 7Liked by Michael Magoon

Does China repudiate the requirement for decentralized decision making/governance in your 5 step model?

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No, I do not think so, although I admit that the recent Chinese example pushes the limits of my theory. If all governments followed the Chinese path, then I would seriously reevaluate the importance of decentralization, but I think their example is almost unique and may remain unique for the foreseeable future.

From 1990 to 2012 the Chinese system was much more decentralized than people realize. Of course, the Communist party dominated but most decision-making was done at the local level.

Since 1990 local governments in China have played a very important role in Chinese economic growth. Chinese economic growth was to a large extent driven by local governments encouraging and financing massive infrastructure investments, particularly in energy, transportation, manufacturing facilities, and housing.

The Chinese central government essentially set the terms of competition between local governments so that they competed against each other to see who could build infrastructure faster. The winner won the political favor from the central government and would earn promotion to a higher level in government and the Communist party. So the Chinese system was non-violent competition between city governments rather than the Western model of non-violent competition between corporations. And the financing was through debt and not via markets.

This model worked up until recently, but it had some serious drawbacks. It has led to serious long-term problems as these infrastructure projects were financed using debt and that debt keeps growing as a percentage of the economy. And the Chinese system causes a waste of resources as local governments tend to overproduce until the central government realizes that too much has been built. So then the central government chooses a different sector and the cycle continues.

And as Xi Jinping has centralized power around himself since 2012, economic growth has fallen quite fast. Partly because of the above, I think that the next 20 years of economic growth will be much worse than the last 20 years. And a total economic and societal collapse is a very real possibility.

Also keep in mind that Chinese per capita GDP is still only 28% of USA. It is their huge population that makes it relevant on the global scene. In 20 years, other East Asian nations may seem like a much better model to follow.

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Thanks, great answer. It also brings to mind that the paths to shorter term, partial catch-up might be different from the original trail blazing.

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Yes, that is absolutely true. It is much easier to copy what worked than to figure it out in the first place.

I also think there is a big difference between how a nation gets to be 25% as rich as the USA from becoming 75% or 110% as rich. China still has a very long way to go.

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It probably makes sense to think of "China" as separate countries. You have a coastal area with PPP per capita is one par with Korea/Japan despite only having 30 years to catch up, and then you have a poor rest of the country.

Korea/Japan got rich exporting to a larger economy, but China as a whole is too big to get rich doing that and anyway manufactured goods aren't as big a part of the global economy anymore.

China is going to have to find a way to create its own internal markets to drive economic growth, which will be difficult long term with their low TFR (same goes for all of East Asia).

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And thanks for reminding me. I have been planning an article on that topic, but I got distracted...

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