In Authoritarianism, Most Economic Risk is Ultimately Political
Menzie Chinn raises a provocative question – is China becoming uncompetitive in export markets? I cannot judge the merits of the argument about “true” measures of yuan appreciation, but I think the more interesting question is what it will do to the political economy of China.
My (admittedly weak) understanding of the current situation is that China’s government works as a public-private development cooperative. Boundaries between the state and corporations are fairly fluid, shading from fully private companies to organs of the state at each extreme, with most organizations residing somewhere in between. These may be “state-owned enterprises” or “state-owning enterprises”, depending on which way the influence flows but often the distinction is unclear and irrelevant. The nature of the relationship between the state and business varies at different levels, with provincial and local government often hopelessly corrupt.
If China is truly becoming uncompetitive in export markets, it raises the interesting question of what will happen to the political economy status quo. After all, the entire current arrangement is based on producing goods for export rather than for domestic consumption. For example, the policies of “financial repression” that channel cheap credit to corporations producing capital goods and export goods. Western popular media generally portrays Chinese politics as being nimble due to its authoritarianism, but these policies have created their own constituencies. Giant and powerful export-oriented corporations are no doubt terrified at the prospect of their cheap credit being taken away, which would no doubt doom many of them. They will fight tooth and nail against any major changes in the economic arrangements.
If one is to fear an economic crisis in China, I’d fear one rooted in politics. There is some recent alarm in the Western financial media about the fact that the Chinese financial sector is built on sand – shady “wealth management products” based on underperforming (or fictional) real estate assets. A Chinese friend has made the argument that pure economics doesn’t matter here – the government rules by fiat and can ultimately handle by fiat almost any economic crisis it chooses to handle. This was pretty persuasive to me. The real danger for China lies in its political economy – that the past few decades have created political constituencies that will pursue policies creating a crisis bigger than the will to handle it.