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China's State-Planned Economy Is Doomed to Flop: David Pauly
Nov. 23 (Bloomberg) -- The biggest obstacle to China becoming the world's No. 1 economy is China.
The communist nation's determination to keep as tight a rein on its economy as it has on its citizens will lead to failure -- just as it has for other countries that embraced central planning schemes.
China is reversing its flirtation with a type of quasi- capitalism that allowed entrepreneurs to thrive and propelled the economy forward at an annual rate of about 10 percent.
The Chinese now follow the so-called Beijing consensus, a belief that concentrating more control of industry in government hands will avoid the financial debacles caused by free markets.
The nation's state-owned companies are buying up independent businesses in the auto, steel and energy industries. A government-run company even plans its own Internet search business to compete with Baidu Inc., whose shares trade on stock exchanges.
Monopolies in China might appeal to investors who think merged companies can cut costs and maximize profits. Though huge Chinese companies may be well run today, they will die from the inefficiencies, cronyism and corruption that often plague state- controlled enterprises.
Manipulating the Economy
Inflationary pressures springing from China's rapid growth has the government threatening to interfere even more in the economy -- by imposing price controls on items including food and fuel.
Capping prices doesn't stop inflation, it's merely a delaying tactic. China's decision to raise interest rates and this month's order to force banks to increase reserves are better tools to combat the current inflation rate of 4.4 percent.
As it moves away from free markets, China ignores two recent central-planning failures.
Remember Japan Inc.? Thirty years ago, pundits said Japan's economy would rule the world as its bureaucrats allocated capital to key industries, protecting them from foreign competition. The U.S. railed against Japan's manipulation of the yen to keep its exports moving -- just as today it moans about China keeping the yuan low.
Russia's Troubles
Although Japan did become the second-largest economy after the U.S. -- until being dethroned by China earlier this year -- it's been in a prolonged stall. Its peak growth rate in recent years was 3.4 percent in 1997.
The collapse of the Soviet Union starting in 1989 is a more pertinent cautionary tale. The communist nation that controlled everything within its borders down to the barbershops is now defunct. Sadly, Czar Vladimir Putin is reversing Russia's chaotic moves toward democracy and capitalism.
China won't collapse tomorrow. Its exports continue to flood the globe, earning it money to make major investments -- and amass political clout -- abroad. But don't let so-called experts fool you into thinking China has discovered a new and better way to organize an economy. State-run capitalism is an oxymoron.
(David Pauly is a columnist for Bloomberg News. The opinions expressed are his own.)
To contact the writer of this column: David Pauly in Fort Myers, Florida, at dpauly@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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