Why China Faces a Difficult Road Ahead

[Christians4LessGvt]

Why China Faces a Difficult Road Ahead
A Conversation With Dr. Woody Brock


8/11/2015

With China experiencing a major economic slowdown after decades of heavy investment-led growth, everyone wants to know, where is China headed and how bad could things get?

Dr. Woody Brock, a renowned economist and president of the economic research and consulting firm Strategic Economic Decisions, explained to Financial Sense listeners the historical pattern of growth and the necessary steps China must take to prevent a further collapse of their economy in a recent podcast interview.

To understand China's fate, "you have to go much deeper, I'm afraid, than the standard, conventional stories go," Dr. Brock said. "You have to go deeper in understanding why China has done so brilliantly since 1980, and what may not be so brilliant in the future, and why."

Brock first explains the monumental work of professor Walt Rostow at MIT in his book The Stages of Economic Growth, which posited that all emerging countries around the world follow a familiar pattern. They start off with low levels of investment, low productivity, and poor, agricultural economics. This is stage one, Dr. Brock said.

"To get out of that, and end up in stage five," as you see with advanced industrialized nations, "you have to go through a transformation," he said.

"If you want to grow fast in stages one, two and three, there has to be somebody in charge," Dr. Brock said. "China in the first 30 years since 1980 did an amazingly good job in growing very fast. dictating what should be done, borrowing the necessary money. And the result was a huge, great new economic situation."

However, China has exhausted this top-down state-led strategy we see in the early stages of a developing economy and now has to transition to a more diversified bottom-up model, Dr. Brock said.

"The problem is, when you want to get to (stages) four and five, and here is where incentive structure logic comes in everything reverses, he said. "(China) can't become a decentralized, market-based, efficient consumer economy, unless the communist party on top lets go, which they're not likely to do. You need bottom-up (growth) you need you and me to start a business. And you need 10 million others to start businesses all the time."

This is the main impediment China faces, in Dr. Brock?s opinion.

"China will have a very hard time, in my view, with this transition from top-down to bottom-up type of economic growth," he said. "The communist party doesn't want private property rights. I do not believe China can cope with the challenges of becoming a full stage-five economy without radical political reforms, decent infrastructure, taking power away from the communist party, and decentralizing the whole story."

Ultimately, this means China is likely to grow at a slower pace, he said.

"I don't believe the 7 percent they've been maintaining and I think it's much lower than (what) they claim right now from what I know is sustainable in the longer run," he said. "I;m more a 4 or 5 percent long-run growth guy, not 7 (percent), and the difference is huge when you compound that over 30 years."

China's sizeable debt obligations also worry investors, but Dr. Brock thinks the country has the resources to manage its debt.

"Those who are bearish today about China, look at the massive debt, and they see real problems for growth in China," he said. ?And there is an awful lot of debt, and it is a problem. I believe they can deal with this. The central bank has trillions of reserves. It is a big problem for the short run. I think China can cope with it. " It's going to hurt them and it will certainly (cost) them short-term growth, as it is now."

Demographic hurdles may also impede Chinese growth, but Dr. Brock pointed out that there are several ways the Chinese can deal with it, including possible changes to the one-child policy and worker productivity.

"When you add it up, the notion that demography is destiny is wrong," he said. "You can equally well say life expectancy is destiny."

The end result is, China is unlikely to become a stage 5 political economy anytime soon, and Dr. Brock thinks that as a result GDP growth will slow.

http://www.financialsense.com/contributors/dr-woody-brock/china-difficult-road-ahead

[Xavier_Onassis]

Five percent long term growth. The US has not reached that for a long, long time.

The top-down method works if the people at the top understand what is needed and how to accomplish it. The Chinese leaders have made a few gaffes, but probably fewer than any venture capital driven plan would make. New Coke, Zima, Maybach, severa; versions of Windows, and Carly Fiorina's disaster at HP, just to name a few.

Of COURSE a Capitalist publication would insist that the Communists have to go. Just like Christian Dior is not going to design basketball shoes. Just like Roger Ailes face will never, ever be on the cover of O Magazine (or any other). Some things are totally predictable.

China may not be an ideal place to invest, that is another issue. There is too much corporate secrecy in Chinese companies (and the government as well).

The Chinese government has to convince the people that their personal condition is improving: that is their number one concern. Convincing the WSJ is a much lesser goal.

[Plane]

The top-down method works if the people at the top understand what is needed and how to accomplish it.

Under what circumstance can a few dozens of leaders understand more than a few millions of leaders?

[Xavier_Onassis]

A hundred geniuses will beat a million ignoramuses any time.

Chairman Mao was totally incompetent at running the Chinese economy. The previous government of Chiang KaiShek was not pretty weak and did not accomplish much, either.  The leaders of China have learned a lot from the mistakes of their predecessors. It would be a mistake to assume that a development plan for China that would not work in the US would also fail in China, because the culture is very different. China has thousands of years experience of governance, after all.

There are both advantages and disadvantages to a dictatorial government when it comes to developing an economy.

The Chinese cultural has been more collectivist than any society in the West forever.

China does indeed have a lot of problems, but there are no countries that do not have problems.

[Plane]

   Where do you get a million ignoramuses?
   Where do you get an hundred geniuseseses?


    It is a total illusion that the people in power have , that they are the best and brightest because they are the ones in power. Governments do draw valedictorians but they also draw thugs. Finding an hundred geniuses together in a small group just does not happen, and especially doesn't happen in government where the illusion of being smarter than the masses helps prevent the accumulation of new intelligence , skill and knowledge.

     Any randomly chosen million people will probably include an hundred or more geniuses, this should be true everywhere, but in China where the government is so tight , it is probably where the geniuses all are. 

[Plane]

China does indeed have a lot of problems, but there are no countries that do not have problems.

China is very interesting this way.

The scale of their problems are like the rest of China , large.

When China does something we should emulate , we can't ignore it , when they do something deplorable they can't hide it .

[Xavier_Onassis]

They claim that the explosion in Tianjin has had 104 casualties so far. Probably ten times that is the likely eventual figure. Stuff is still exploding.
The government is less to blame than the fools who disregarded regulations about dangerous chemicals.  They will try to downplay it, and will probably succeed to a degree, but not completely. The province in which this took place has over 100 million inhabitants.

A lot of what China does could not be implemented here, because the US and China have such vastly different cultures. I cannot imagine Chinese going ballistic over a five years phase out of incandescent light bulbs being a violation of personal freedom, for example.

When a citizen is only one of 1,400,000,000 people, the difference between a democracy and a dictatorship is not all that great. In a small country like Costa Rica, of you disagree with what a politician does.  You can call his mama and complain to her. The US is somewhere in between. So far, I have heard personally heard Barack Obama and Lindon Johnson speak, and my daughter was kissed and hugged by Jimmy Carter when she was four years old.