Rebuttals to McArdle's Dispatches on China

Well, not really rebuttals, but rather some quibbles. The Atlantic's Megan McArdle has fired off several very good dispatches as she traipsed around China last week (incidentally, I was in China on research at the same time she was). I won't cover every post, but there are several on which I will comment. 

1. On industrial policy (see here). Yes, the Chinese government is taking a chapter from other Asian giants like Japan in industrial policy, precisely because they saw how competitive Japan became under a set of industrial policies. Does it have its limits? Sure. And the inability for the Japanese economy to adapt fast enough may be a contributor to its current ills, but I won't wade too deeply into this as I'm not a Japan expert. China is far from being anywhere close to that limit at this point. And if it has learned the lessons of Japan, it may become more nimble as the country approaches the perceived limits of what industrial policy can generate in terms of competitiveness and sectoral growth. 

At a comparable stage of development, India is usually touted as a contrast to China's predilection toward strategic, long-term "planning". And it has been that focus on the "hardware" and rapid execution in China that has made it the growth darling story of Asian emerging markets rather than India, which is still just about 1/4 of the Chinese economy. There are all kinds of arguments about why India will eventually surpass China in growth, and that India's already formidable foundation in "software" means that its growth will be more sustainable over the long term. The Chinese are often confounded by India, and perhaps due to their own political biases, shake their heads at the hyper democracy that exists in India. The Japanese kind of democracy is more palatable, India's...not so much. With 1.3 billion people, a little planning at this stage may not be a terrible idea if you're sitting in Beijing. [If you've ever ventured into a Chinese train station during the October "golden week" holiday, that is when you fully internalize the size of this country. The sight is incredible.] There is little risk that China is simply returning to a "planned" economy of yesteryear, but the state as a participant in the economy won't recede any time soon either. As more markets are opened in China, the state's role could eventually be limited to that of a "referee" rather than starring player, but that progress remains to be seen.

2. On energy and environment (see here). I too returned to Beijing from central China on that horrendous day in which the capital was enveloped in a thick, yellow concoction of pollutants. It was also the day that triggered the "crazy bad" tweet from the US embassy. 

From my conversations on the trip and in the past, I don't get the sense that Chinese policymakers are conflating pollution mitigation with clean energy. Though green tech is undoubtedly an extremely hot topic around Beijing, pollution control actually falls under the jurisdiction of the Chinese equivalent of the EPA. There are specific air pollution measures like limiting the number of cars on the roads (also for traffic purposes), possibly finally measuring the smaller PM 2.5 pollution particles, and an array of environmental taxes are being discussed to further curb pollution, among others. I don't know many Chinese who complain about the air but are actually talking about CO2 emissions. For urbanites, it has largely become a quality of life issue that local authorities need to address. Mayors in large metropolises like Shanghai and Beijing increasingly wrack their brains over how to solve air quality, traffic, and living space problems. And this matters for attracting human capital too, particularly foreign talent whose standards for air quality are generally quite high. I am reminded of an interview of Google's Eric Schmidt, during which he said that Silicon Valley works in large part because of the weather and its natural environs. Young, energetic professionals actually want to settle in the Bay Area for a long time. And if Beijing wants to replicate its own Silicon Valley in Zhongguancun, well, the air needs to improve immensely to get people committed to the city.    

Green tech is viewed more as a strategic emerging sector that can foster Chinese high-value added industries, acquire cutting-edge technology, and create new skilled jobs. And I tend to disagree that the Chinese government is looking at renewable energy as its savior of all of the country's energy and environmental woes. In fact, China will be the biggest market for nuclear power for the next decade, potentially expanding its capacity ten-fold. Hydro power will also play a major role, and the government is under no illusion that traditional energy sources like natural gas will help to offset reliance on coal. And so the question of whether political will is going to dissipate behind green tech as the pollution dissipates is essentially irrelevant. Green tech is not particularly viewed as a panacea for pollution but as a competitive advantage and buttressing Chinese desire for technological prowess. 

And this notion of the 8% magical growth number and its linkage to political legitimacy ought to be peddled less frequently. Even the Chinese government doesn't have much clue about the correlation between that growth level and job creation, and indirectly, maintaining social stability. During the depths of the "Great Recession," China's GDP, if viewed on a q-on-q basis, was well below 8% for at least one quarter if not more. And it had some 20 million jobless wandering around the country. Yet nothing happened...the CCP remains as legitimate as when it was at 8% or above. And those 20 million, well anecdotally, they seemed to have been put back to work for the most part. 

3. On labor (see here). I will just note briefly that wage pressures are indeed growing, and shortage of labor supply, especially along the coast, has become a reality. One of the debates among economists, Chinese and foreign, is whether China has reached the so-called "Lewis turning point", where higher wages will simply become a fait accompli given the structure of the Chinese economy presently and going forward. Migrant workers, many of whom have entered their 40s or 50s, prefer to stay closer to their homes as well, which has prompted a more forceful push to develop China's interior. Infrastructure and logistics are being significantly expanded to accommodate this shift, and high-speed rail is one component of that grand "plan". [I was somewhat disappointed that the high-speed rail line I rode this time only hit 326 km/h, about 24 km below its designed top speed.]

One parallel that might be useful here is to think of the European Union, where developed western EU countries like Germany and France can be used as proxies for coastal giants like Shanghai, Guangdong, and Beijing. As China moves to connect the coast with the rest of China, it is akin to integrating EU markets from Germany to Latvia, though the gaps and inequalities from Shanghai to Tibet are likely much more pronounced. 

In any event, I hope Megan and I will sit down and talk more about China some day.
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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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