China’s mounting economic difficulties have embarrassed many Western observers—or at least should have. Not too long ago, many journalists and economists on this continent and in Europe praised Beijing for its disciplined and planned approach to economic management. Some counted the Chinese approach superior to their own seemingly chaotic market-oriented economies. Now the Chinese model looks less attractive. Of course, not all of China’s problems are a product of its planned approach to economic management. Some are a straightforward and unavoidable result of development. Still, Beijing’s reliance on authoritarianism and Marxist central planning bears much responsibility for the economy’s problems. Americans should take note, especially now that the Biden administration has succumbed to Washington’s ever-present temptation to use industrial policy and top-down planning, in other words, to follow a watered-down version of Beijing’s faulty approach.
The White House refers to its economic scheme as “Bidenomics.” At base, it promotes industrial policies in which planners in Washington determine the economy’s future needs and with subsidies, low-cost loans, tax credits, and the like nudge the private economy in their preferred directions. The administration has already touted the billions that have gone to compliant producers, as if somehow that added to the nation’s wealth. If the planners are correct about the future, the effort and the billions will pay handsome economic dividends. The problem is that no one, not even the best government planners, can see the future. They cannot be sure whether consumers will want the products they see as essential. Nor can they anticipate technological advances that might render obsolete today’s seemingly essential technologies. Should the plans go wrong—and that is entirely possible—the economy will have wasted huge amounts of capital and labor and likely diverted effort away from alternative endeavors that might otherwise have met future needs and spurred growth. It is just these sorts of problems that have bedeviled China’s planning and now are holding back China’s economy.
Not too long ago, Chinese planning seemed to have avoided any of these problems. China’s economy made astounding gains. From the late 1970s, when Deng Xiaoping first opened the country’s economy to the world and investment monies poured into the country, growth rates until very recently have been spectacular, especially since Beijing used the increasing national income to launch several impressive infrastructure projects that added still more the economy’s growth potential. Between 1980 and the turn of the century, China’s economy expanded in real terms at about 10 percent a year. Following China’s 2001 entry into the World Trade Organization, its real GDP grew by slightly over 10 percent a year up through 2015. When in 2010 China’s burgeoning economy surpassed Japan’s, it was easy to extrapolate its pace of expansion and speculate that China’s economy would soon surpass that of the United States to become the world’s largest. Everything in China seemed to work. All of Beijing’s plans paid off handsomely.
These astonishing advances captured the imaginations of Western journalists and economists. Their enthusiasm raised speculation that China might possess a superior economic model to the market-based systems of the United States and to a lesser extent Europe and Japan. Canada’s Prime Minister Justin Trudeau went so far as to express envy of China’s dictatorship and how it allowed Beijing to “turn their economy around on a dime.” If this man is not known for deep thinking, other seemingly more sober voices shared versions of Trudeau’s China envy. New York Times columnist Thomas Friedman echoed Trudeau’s preference for centralized planning over the messiness of markets. Articles in the Harvard Business Review heaped praise on China’s approach. One appeared as late as 2021 to explain “China’s New Innovative Advantage.” Only last year, Klaus Schwab of the World Economic Forum described China as “certainly a very attractive model,” one worthy of consideration “for many countries.” In 2020, Jim O’Neill, then head of the storied think tank, Chatham House, praised China’s system for its “fast, aggressive” response to the coronavirus outbreak.
These are only a small sample of the favorable Western commentary on China’s planned, top-down, command-and-control approach to economic management. The enthusiasm is an understandable reaction to that economy’s growth record as well as its seemingly uncanny ability to plan, but the picture that inspired so much China envy was always illusory. China’s growth and planning success were more a result of the extremely underdeveloped state of China’s economy when Deng made his change than any planning prescience much less the superiority of what is effectively a command economy.
Underdevelopment carries huge burdens, but in creating an astonishing growth record and seemingly brilliant planning, it advantaged China tremendously. Flows of investment funds from America, Europe, and Japan had tremendous impacts on the otherwise impoverished China, advancing growth rates that would have otherwise taken much greater inflows. Underdevelopment also made the job of planning relatively easy. For decades, all Beijing’s planners needed to do to see the future was look to the developed world. There, China’s planners could see that their country’s prosperity required reliable roads, power lines, rail links, port facilities, and the like. The pursuit of these projects paid huge economic dividends and spurred growth at still faster rates. Things changed, however, as China’s economy caught up with the developed world. Beijing’s central planners then lost their model of the future. China’s future needs became harder to assess. Mistakes became more common. And because Beijing’s planners have great power to marshal financial, managerial, and labor resources, those mistakes have created great waste.
Illustrative of these problems is the present difficulty China faces with residential development. Years ago, the nation had an inadequate housing stock. The planners could see the need and encouraged development through subsidies, by arranging financing through state-owned banks, and by expediting permitting as well as licensing. Developers responded to the incentives and produced the vast apartment complexes so frequently pictured in Western media outlets. Initially, the effort paid off well. But even as the effort met the nation’s housing needs, planners continued it. China until very recently continued to dedicate as much as 25 percent of its economy to residential housing development. (By comparison, the United States in a strong housing year channels about 5 percent of its economy into residential construction.) China built more housing than its population could absorb and put it in places that Chinese people did not necessarily want to live. These projects failed to pay off, which is why so many Chinese development firms—the giant Evergrande in particular—have failed.
Residential development is not the only planning failure, though it is the most dramatic. The record is replete with roads to nowhere, underused rail links, and misplaced port facilities, as well as chronic electricity shortages. In this China is not alone. Everywhere, except for the underdeveloped ones that have a model, the future is foggy. America also has many examples of wasted effort due to poor planning, usually by business interests. But there is also a big difference from China’s centrally planned system. America’s market-oriented approach keeps the mistakes on a smaller scale, and because of a greater diversity of effort in a market-oriented system, it is also more likely to meet future needs sooner than centrally planned arrangements.
In a market system, the planning is done separately by thousands of firms and individuals. To be sure, business managers are no better at seeing the future than government planners, perhaps even less capable. But each mistake is smaller than in the centrally planned approach that can and does marshal huge amounts of the economy to the comparatively narrow range of activities favored by the planners. Also, unlike government efforts, business planners face tighter budgets, are constantly reviewing their efforts, and because they are also closer to their customers, are less likely to pursue a failing project for as long as will necessarily distant central planners. Perhaps most significant is the very lack of focus in a market system, the lack of discipline and organization that once seemed so attractive in China. Where thousands pursue diverse projects, the possibility rises that somewhere in the chaotic mélange of activity one of them will uncover one of those elusive future needs, build on it, and spur growth.
Relative debt levels can give an idea (admittedly a vague one) of the scale of waste caused by centralized planning. Every project, whether promoted by a planning authority or private firms, needs financing and commonly generates debt. That debt can be an obligation of the central government, local authorities, or private entities. A comparison of aggregate debt levels to income can then indicate whether the scale of projects has missed the mark and failed to generate an economic payoff. In China, the extent of error is huge. Aggregate debt levels have far outpaced national income. In the ten years that ended in 2019, just before the pandemic, overall debt in China expanded at a 23 percent average annual rate, while the country’s overall economy expanded at only 8 percent a year. In contrast, comparable data for the United States shows a 5.6 percent annual growth in aggregate debt during that ten-year period, faster than the about 4 percent nominal growth in the economy but a much narrower gap than in China.