there is significant excess capacity on the real side of the economy. It will be very hard to fix this problem without letting significant numbers of SOEs go under. The central government fears the resulting unemployment, plus the SOEs are the Party’s power base. Yet the leaders know what must be done, and the SOEs have been reformed before. …One danger is that SOE reform leads to a loss of political stability. A second and more likely danger is that reform is incomplete and China ends up full of zombie companies and banks.
Market-oriented economies get rid of heavy accumulations of unsustainable patterns of specialization and trade through financial convulsions. For China, the process will have to be top down.
An interesting question is which sort of economy does better at putting the pieces back together. Offhand, I would say that China could get through a transition with less person-years of unemployment. However, the risk is that the new patterns of specialization and trade are no more sustainable than the ones that are discarded.
I take it, SOE means State Owned Enterprise
I hope I am not misreading Arnold.
In writing,
“An interesting question is which sort of economy does better at putting the pieces back together,”
is he suggesting that a planned economy could be the better performer in terms of creating a well performing PSST (pattern of sustainable specialisation and trade) compared to a freer economy?
If so, does he have a theory of a high performance command economy?
But I may be misreading him. Maybe he is saying that the top-down approach that is likely to be pursued in China could actually be preferable to the outcome that might emerge if major political upheavals (aiming at a freer society/economy) were to occur.
All I am saying is that with top-down organization you can have people work at jobs that are not really productive, so you can keep the statistical unemployment rate low
Thanks for clarifying.
I would say financial convulsions are not really necessary and extended periods of subpar growth or gentle decline could accomplish the same although there is some lumpiness due both to size and shifts in growth. In the same way, state enterprises could grow at subpar growth or allowed to decline as stronger private enterprises take their place, but it does require the private enterprises grow faster, especially in employment, which can be problematic.
Long term, I still don’t see how China avoids having their own version of Japan. They have a heavily export manufacturing economy and the economy is near falling working age demographics. So I don’t know if it Japan 1970, 1980, or 1989 time period. (I think China as an additional problem today as the export manufacturing is it mostly low margin stuff unlike Japan economy which did develop name brands.) Also, I sure how well Chinese political system can handle a period of high unemployment.
So I have confidence that China is not collapsing anytime soon but I don’t see the SOE will become more effecient.
Does the fact that they are export heavy and sell to a diverse and relatively free market mitigate some of the top-down aspects?
In so far as they might be producing at an operating loss it doesn’t. It mitigates it in so far as the products are reasonably useful and not just something to meet the 5 year plan, so they can probably cut capacity and make the remaining products profitable instead of scrapping the whole industry.