One of the people at the meetings we had today asked us what had surprised us most about China so far.  I gave a lame answer that I cannot now recall, but I later realized that the thing which had actually surprised me most is the extent to which everything here is subsidized and directed by the government--and the fact that no one seems to wonder if that's a problem.

Aside from the foreign ministry people and a few economists, everyone we've spoken to here has been either in the business of doling out subsidies, or in the business of collecting them: cheap bank loans, tax-advantaged development zones, various rural subsidies, and so on.  When the government wants something done--whether it is miles of new housing in a Tier III city, or a coal liquification plant, it essentially points at the banks and the local authorities and says "Make it so!"

It's not that I didn't understand that the government did this; it's that I didn't understand how pervasive it would be, or how popular this would be, at least with the folks we interview. Everyone--including most of the economists and NGOs--seems to think this is swell.  No fiddling around with archaic, unplanned systems; just figure out what the country needs and do it!

Perhaps it is just my ideological blindness that makes me believe that this cannot, in the long run, turn out well.  But there's a plausible story that the early boom was mostly a matter of removing distortions (and taking advantage of capital, human and otherwise, accumulated in Hong Kong and China).  Now the government is much more directly picking winners and losers. They're not trying to manage growth; they're trying to cause it in places where it shows little sign of happening organically.

It's not that I think that no form of industrial policy can ever have good effect.  Can government build infrastructure to good effect?  Yes, certainly.  Can they manage growth?  Can it occasionally pick industrial winners?  They have in the past--though on average, I'd say it's abundantly clear that governments have more often picked, and sustained, losers.  And the more comprehensive the industrial policy, the worse the economic losses have generally been.

We've heard a lot of arguments about why China is different.  The government is more responsive.  It's really smart.  It cares a lot about getting things right.

Believe it or not, this was true of many earlier planning failures--though it's hard to argue with 10% growth.

But there's always the question: Is the growth because of, or in spite of?  Most of the people seem to think that they know it's the former.  I'm skeptical.

It's not that I question the ability of the Chinese to grow into a developed country--I have no doubt that they will.  They're hard working, smart, and they seem interested in doing the right things to build their country.  Rather, I worry that the government's planning looks superficially good, but is building up internal tensions that will lead to a nasty retrenchment.  The end of the beginning rather than the beginning of the end, if you follow me.

If everything's still running smoothly in 20 years, I will have to reassess my views on the virtues of central planning, at least as done by the Chinese central committee.  But it seems like there are some real areas of tension, more about which after we meet with the bankers tomorrow, who I hope will better explain China's confusing banking system to me.

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