- Developing countries are behind precisely because they don't have a lot of the same hard / software of developed countries, ie market mechanisms. Thus they generally will need to go a different route in terms of development. This book is about how China did things differently, not blindly copying Europe or America.
- Competition Between Regions
- Effective resource allocation is the core of economic development and it depends on competition. China started off with a state-planned economy, so the government controls vast resources, and it will be like this for a long time. Thus, the way to improve the economy is to introduce competition into the government. 2 ways:
- With central government as core, divide functions into many departments in a grid as inspired by USSR
- With local government as core, and give them power and have them compete for resources
- Even during the state planned era, these models existed in parallel. Mao did not believe in just the USSR model. After the economy opened, local governments became a lot more powerful. It wasn't just competition between them for resources, but also them competing on different organizational and development models. If a region succeeded, it could be replicated nationally, if not, the risk was just in that region.
- For competition to occur, the level of industrialization cannot be too different. Luckily in the 1960s there was an effort to spread out industrialization across central China in different regions. These SOE factories formed the basis for a lot of the successful private enterprises later.
- There is also another factor of training farmers into workers. This is not an easy task and caused a lot of conflict along the way.
- Finally, for bureaucrats, they needed to compete on the market, but also this formed the basis for their political promotions. Some of the better consequences: 1) Economic performance was linked to political incentives. 2) Market competition ultimately limited the bureaucrats power because they could not single handedly decide the fate of companies. 3) The local economic performance provided quick feedback to the local government.
- But the darker side: 1) bureaucrats don't really get fired, they just don't get promoted. 2) markets are a positive sum game but political promotions are zero sum, so there will be acts of regional protectionism. 3) politician terms are short, and can engage in market distorting behaviors such as over-investment when they arrive and disregard for long term risk.
- Ultimately, in the beginning stages of industrialization and urbanization, economic growth was the most important goal of the local government, and this is aligned with those of corporations. But in today's development stage, the government has to take on more roles, investing more into education, healthcare and social services, change the way they interact with the market and corporations, and change from a "production-oriented government" to "services-oriented government."
- Government Development and Transformation
- As a country becomes richer, the share of government in the economy generally gets greater as more and more social benefits must be provided. In addition, things like IP protection are often a consequence of development for poorer countries. That's what's happened in China.
- The government needs to provide the structure for "market activity." "Entrepreneurship spirit" doesn't just appear out of thin air. Better legal protection is going to be a key element of further economic development.
- To pay for everything, the government will need revenues, and tax collection will have to be better. In China, fake receipts are not uncommon (one audit showed 8.5% fakes). But the government has invested into streamlining this process, and as of 2020, you can pay personal taxes on your smartphone.
- China's dual idiosyncrasies of "local government decentralized competition + central organization" and "politics + market" linked promotions are different from other countries.
- China needs to put more into social services, such as elderly care, which is 24% in developed countries but just 13% in China.
- As more and more "services" are in need of investment by the government, the old way of centralizing resources to complete big projects that was appropriate for infrastructure is no longer appropriate, since services projects are smaller, more nimble, and need to be more localized.
- Local governments provide the bulk of expenses for local services. for education, healthcare and social security, local government provided 96% of total expenditures, central 4%. It may be necessary to change tax types in the future and allow local governments to collect more of the revenues. This has been in discussion for a long time but has yet to be realized.
- Development Goals and Process
- Neoclassical economics often abstracts away historical, social and political context. It's also not that helpful because developing countries are not trying to figure out how to run an economy, but how to establish market mechanisms. And everyone is different.
- The key is that development process is not the same as development goals. Developed countries' histories do not provide all the answers for China's development; not even our own past can do that. Any solution for China will have to take into account the country's 3 basic characteristics: 1) autonomous local government with a lot of resources; 2) central government with great coordination and control abilities; 3) rich human resources in the form of a complete and organized bureaucracy. Not all countries have these 3 qualities.
- Policymaking should consider all stakeholders, and make sure that everyone is incentivized properly and also the right culture should exist. Must avoid things like elite capture.
- Finally, in developmental economics, there are 2 big questions: order of development ( structure), and rhythm of development (stability). Development is a continuous process, and the question shouldn't be when will China's GDP exceed that of the US, but ask - can innovation and industrial upgrade continue to progress together? Can the remaining farmers continue to urbanize? Will wealth inequality be controlled within tolerable limits?
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