Wednesday, March 18, 2009

Spectacles of State Capitalism

These days the western countries are becoming more and more like China, in the sense that governments are playing a central role in the economy. EU believes that more government regulation is the cure for the collapsing financial system, while the US is advocating for more government spending to stimulate the economy. Despite the obvious difference between the two approaches, they both center on expanding the governments' responsibilities. Some Chinese elites are already cheering: look, our banks are already all "nationalized" and government spending has always been a main engine of the economy, our system is superior after all.

China's state capitalism indeed has some merits. Particularly, the current Chinese government has shown impressive efficiency in mobilizing and coordinating a wide range of social resources for the tasks it determines to fulfill. You can see that efficiency in the well-organized Olympics, or the prompt rescue work during the Sichuan Earthquake. How would this efficiency fare with the economic recession?

The Chinese government has already announced its 600 billion dollar stimulus package. How that money should be allocated is still being debated. Grassroot voices are advocating that more money should be spent on health care, education and social safety net. But according to current plan the majority of that money will be spent on infrastructure, from railroad, highway to airports etc. No one will doubt the government's ability to execute these infrastructure projects well. And these projects will indeed boost the GDP, and absorb many unemployed construction workers.

But you can expect the old problem of corruption as long as the power of allocating resources are in the hands of bureucrats without public oversight. What's more, the concentration of resources on government projects might squeeze out resources for the private sector. Particularly, the banks would rather give loans to government projects than to private small business. Infrastructure construction does not generate as many jobs as small business in retail or service. So we might see a growth of GDP without a growth in employment.

My final point, we should really be worried that some government official will decide to waste huge amount money on building MONUMENTS of THEIR OWN ACCHIEVEMENT again! Just look at the skyscrapers to be built in the coming years.

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