There’s a version of the case against free markets that goes something like this: China has proven itself able to generate economic growth through government planning, so if the U.S. is going to compete with China, it must do a little bit of government planning, too.
In a recent piece for Capital Matters, Adam Thierer corrected a revisionist history that attempted to place government programs, not entrepreneurship, at the center of the success story of Silicon Valley. In it, he noted that China’s industrial policies are not responsible for its growth, and that economic officials from Japan, the previously fast-growing competitor to the U.S., have admitted that Japan was hurt by its own industrial policy in prior decades.
Aside from that, it’s worth noting that China’s economy has been warped by its government, and the supposed success of its economic model is looking more and more like a failure.
A recent blog post from Joseph Politano describes “China’s imbalanced economy.” He writes:
In broad, oversimplified terms, China’s growth model has relied primarily on net exports of manufactured goods combined with large investments in infrastructure and fixed assets. Export-oriented growth allowed China to profit from access to larger markets in high-income countries and helped provide a steady source of funds for the country’s growing industrial base. Capital controls and direct spending from the government kept investment in housing, infrastructure, and other fixed assets extremely high. The end result has been extremely successful economically—China has steadily moved up manufacturing value chains while building tremendous amounts of domestic infrastructure, reducing poverty, and sustaining extremely high levels of GDP growth.
The downside, however, is that the model required household consumption in China to be squeezed. Spending was constrained in order to scrape together the savings necessary for large investments, the value of the Renminbi was kept low to ensure export competitiveness, and wages were suppressed to keep labor costs competitive. Final consumption expenditures therefore make up slightly more than half of Chinese GDP, compared to a whopping 80% in countries like the United States or the United Kingdom.
Politano uses the passive voice there, but it’s worth emphasizing that the actor who was constraining spending, keeping the value of the renminbi low, and suppressing wages was the Chinese government. It did so through policies purposely designed to have those effects, which were supposedly in China’s national interest.
Back to Politano:
The main problem with the export-oriented growth strategy is that eventually, you run out of other people’s domestic markets—growth has to eventually shift from an export-driven model with lots of dirigisme to a consumption-driven model with stronger wage growth as countries approach the economic frontier. China’s leaders anticipated this and began talking up “dual circulation” before the pandemic—the country was signaling that domestic consumption would take equal priority to exports as China looked to transition into a wealthier country.
Old habits die hard, however. Since the pandemic, lockdowns and limited support for households have crimped growth in domestic demand. An attempted deleveraging has damaged the country’s property sector as real estate investment falls off dramatically. Net exports—supercharged by global goods inflation, a rising imbalance between domestic and foreign demand, and efforts to preserve export-oriented industrial output amidst COVID restrictions—are once again taking up the mantle and holding up the Chinese economy.
China has not proven to have an alternative economic model strong enough to challenge free enterprise. It has proven that a formerly poor, still-totalitarian country can, for a little while and with lots of cheap credit, generate export-driven growth at the expense of domestic consumption by opening up to global trade, and become a middle-income country. That’s not really a success story — at least it’s not something that any Western country would consider a success had it occurred within its own borders.