Party membership and business acumen do not often go together. Because of the party’s fixation with high growth, government officials are rewarded for delivering, or appearing to deliver, precisely that. This incentive structure fuels a massive misallocation of capital to “image projects” (such as new factories, luxury shopping malls, recreational facilities, and unnecessary infrastructure) that burnish local officials’ records and strengthen their chances of promotion. The results of these mistakes—gleaming office complexes, industrial parks, landscaped highways, and public squares—tend to impress Western visitors, who view them as further proof of China’s economic prowess.
The Chinese economy is not merely inefficient; it has also fallen victim to crony capitalism with Chinese characteristics—the marriage between unchecked power and illicit wealth. And corruption is worst where the hand of the state is strongest. The most corrupt sectors in China, such as power generation, tobacco, banking, financial services, and infrastructure, are all state-controlled monopolies. None of that is unprecedented, of course. Tycoons in Russia, after all, have looted the state’s natural resources. China, at least, boasts genuine private entrepreneurs who have built prosperous companies. But China’s politically connected tycoons have cashed in on China’s real estate boom; nearly half of Forbes’ list of the 100 richest individuals in China in 2004 were real estate developers.
I've noted that we should not panic over recent Chinese economic growth, including here. To repeat, putting the most efficient peasant into the most inefficient factory will increase productivity statistics and GDP considerably. When this cheap input to the economy runs out, as it did for the Soviets, productivity will stall. Do we really think the communists of China have figured out the key to capitalist success? With such corruption? And pollution? With an aging population? And growing unrest?
A China collapsing is almost as bad a prospect as a hostile and powerful China. The race between these two outcomes in the decades ahead will be interesting times, indeed.
Of course, as I've also noted, just because China probably won't become a peer competitor doesn't mean they can't also be a threat to us.
But let's not worry before we need to worry--and before we know what we need to worry about.
