DeLong Smackdown Watch: Dani Rodrik Strikes Back

The learned and thoughtful Dani Rodrik has a good response. He writes:

Dani Rodrik's weblog: What's different about international trade?: UPDATE: Brad DeLong does not express my views accurately. He writes:...

Dani Rodrik's country whose "labor force that is producing at low levels of productivity" is doing so because it has lousy political institutions: it lacks the "constitution... judiciary, nation-wide financial regulation, and free flow of labor" that have underpinned economic growth in the rich post-industrial core. The poor country is poor because its government is incompetent, and corrupt...

No, the argument that poor countries are and remain poor because their governments are incompetent and corrupt is one of the absurd reductionisms of the day which I do not believe in and have written against. The point I made was that a poor country would have the real prospect of converging in living standards with rich countries if international economic integration were near-total (involving free labor mobility, truly integrated capital markets, and a transnational set of regulatory, legal and political institutions that underpin this integration). In the absence of these, trade liberalization does not get you there. You are in a second-best world and you need to think appropriately. The idea that developing countries cannot employ industrial policy in such a world to good effect is downright silly.

Here is a thought experiment: does anyone really believe that China would have grown as fast as it did if it had removed all its tariffs and trade restrictions in 1978, instead of liberalizing strategically and sequentially--first in agriculture, than in industry, then on the export side, and only later in the 1990s on the import liberalization side?  There are many reasons why the Chinese strategy worked, but one of them is that it protected employment while industrial capabilities were being built up.

I would put the story of China since 1978 differently than Dani would, I think...

First, I would start with the proposition that the Chinese government from, say, 1955 (the start of the reenserfment of the peasantry) to 1978 was massively, massively incompetent and massively, massively corrupt. And its massive, massive incompetence and massive, massive corruption were so the reasons that China was then so very, very poor. If you don't start there--if you denounce that fact as "absurd reductionism"--you can't make any sense of the story.

The fact that China's government had been so bad before 1978 meant that there were enormous problems and enormous opportunities for a government that was both competent and (relatively) benevolent--in the sense of wanting to see the economy grow rapidly if that could be accomplished without endangering its hold on power. And in 1978 China had its first piece of great good luck in a long, long time--perhaps the first time some important chance broke right for China since the end of the Sung dynasty. China acquired as its paramount ruler one of the most devious and effective politicians of this or indeed any age, a man who was quite possibly the greatest human hero of the twentieth century: Deng Xiaoping. Deng sought to maintain the Communist Party oligarchy's control over China's politics while also seeking a better life for China's people, and he is guided by two principles: (i) be pragmatic ("what matters is not whether the cat is red or white, what matters is whether the cat catches mice), and (ii) be cautious ("cross the river by feeling for the stones at the bottom of the ford with your feet").

The Chinese economy as of 1978 had two main features: (i) a peasantry whose agricultural production was half of what it should have been because the peasants were serfs on communes working for lords who were party bosses, and (ii) a value-subtracting Soviet-style heavy-industrial sector. Freeing up the peasantry to work for themselves on their own land and sell their produce on markets promised to instantly double agricultural output and living standards--hence liberalizing agriculture first was a no-brainer: it promises only gains.

Immediately opening up the industrial sector to international trade, however, would have led to (a) a rapid rise in imports of foreign-manufactured industrial goods, (b) a rapid rise in exports of agricultural products to pay for those imports, (c) mass urban unemployment as the value-subtracting Soviet-style heavy industries found that they could not compete and closed, and (d) riots and revolution as the now-unemployed urban manufacturing workers overthrew the government. Hence Deng Xiaoping kept China closed in the early years, and used tax revenue from the productive countryside to keep the Soviet-style industrial sector running--value-subtracting as it was--while another, alternative industrial base was gradually built up, a market-oriented sector in which local party bosses had an important and very profitable stake. And then they were off and running.

The key elements of the situation of China in 1978 relevant to the theory of the second best from the standpoint of the Communist Party oligarchy are (i) the threat to the regime from mass urban unemployment, (ii) the fact that the economically-rational closing-down of the Soviet-style industrial base would have generated such mass urban unemployment, (iii) the need to start up exports that took advantage of China's extraordinarily low wages in order to earn foreign exchange to purchase technology-bearing capital and other goods from abroad, (iv) the need to find a supply of entrepreneurship somewhere to start up the market-sector manufacturing industries needed for development, (v) the need to find a way to protect the growing market industrial sector from predatory local party bosses, and (vi) a central government that actually sought not the enrichment of its functionaries but the prosperity of its people as its highest priority. Given (vi), realying on township and village enterprises for industrial development took care of (v), drawing on Taiwan and Hong Kong gave China a leg up on (iv), and (i) and (ii) were dealt with by protecting and subsidizing the Soviet-style industrial sector for a long, long time.

The price was retardation of (iii). IIRC, Manchuria, Shandong, Wuhan, and Shanghai were China's industrial centers in 1978. Guangzhou (with Shenzhen leading the pack), Shanghai, and Zhejiang are its industrial centers today because those were the first areas where SEZs were opened to international trade. A lot of human resources and infrastructural capital was wasted becuase Deng Xiaoping did not dare risk the political consequences of the economic process of shifting resources out of the old Soviet-style industrial sector. I think he was right--from his perspective at least--to initially limit market manufacturing to the south. However, the logic is not economic but political.

Note that the success of the strategy that was in fact adopted hinged on element (vi): Deng Xiaoping's power and status as paramount leader, and the wisdom exercised by him and his team, and their goal of making the Chinese rich. Dani Rodrik's praise of policies that "protected employment while industrial capabilities were being built up" strikes an echo of Juan Peron's development strategy in Argentina in 1950--keep the descamisados employed and the price of beef low. It was a strategy that sounded good to many at the time (including Raul Prebisch). It was was justified in economic terms by assertions about market failures and the second best. And it turned into a complete and total disaster.

Comments

[venky]

And benevolent dictators are, I think, generally hard to find.

[KY Choong]

This is a wonderful conversation between Brad DeLong and Dani Rodrik. I hope they continue the conversation. It seems to be about a topic that we do not yet fully understand.

I grew up in South East Asia, where Singapore and Malaysia seems to have done reasonably well, but not Burma. All three were former British colonies.

[kitten]

Russia on the other hand pursued the policy of opening the industrial sector to international trade. Of course that was a complete success.

[andres]

Brad:

"China acquired as its paramount ruler one of the most devious and effective politicians of this or indeed any age, a man who was quite possibly the greatest human hero of the twentieth century: Deng Xiaoping."

Brad, this statement is a glass of fine Lafitte-Rothschild burgundy mixed in with a tablespoon of pig excrement.

I absolutely agree that Deng Xiaoping was a supreme pragmatist, plus one of the best politicians of his age, and even a fine student of economic policy as well. In that sense, you have a fine description.

But to call the man who ordered the tanks to open fire on students in Tiananmen Square "the greatest hero of the twentieth century" is utterly vile and is a statement that is totally beneath you.

Deng Xiaoping may have been a large net positive for the human race, but "hero" is absolutely not a word that can be used to describe him. True heroes never let the end justify the means, which is why they are seldom successful in the realm of politics.

[andres]

People as diverse as Peter the Great, John D. Rockefeller, Otto von Bismarck, and Augustus were large net positives in the balance sheet of the human race, but to call them heroes would also be a gigantic misconception about what it is that determines human greatness.

[andres]

"Dani Rodrik's praise of policies that "protected employment while industrial capabilities were being built up" strikes an echo of Juan Peron's development strategy in Argentina in 1950--keep the descamisados employed and the price of beef low. It was a strategy that sounded good to many at the time (including Raul Prebisch). It was was justified in economic terms by assertions about market failures and the second best. And it turned into a complete and total disaster."

Absolutely not. Prebisch, for example, was a macroeconomist by training if not education, and furthermore detailed knowledge of the Theory of Second Best was relatively obscure in the 1950's. Import Substitution was _not_ justified by market failure and Second Best-Theory arguments. It was justified by a systemic flaw in the world economy, ie, the tendency of agricultural and mineral commodity-exporting economies to face progressively lower export prices relative to manufactured imports, a tendency which precluded convergence (if not growth), hence the need to build up a manufacturing base even in defiance of comparative advantage considerations.

Import Substitution, as advocated by Prebisch when he directed ECLA in the 1950's, advocated trade protectionism, if necessary backed up by state subsidies. It did _not_ advocate running budget deficits of such magnitude that inflationary financing would soon make the domestic currency worthless. Prebisch was not that incompetent, and by 1948 he was no longer in the Argentinian government and had no truck with Peron or his economic insanity.

Don't mistake import substitution and economic structuralism for economic populism. They are not the same. Brazil began to adopt import substitution in the 1930's and did quite well (growthwise) until the 1970's. And their political leadership after 1964 was a universe away from Peronist populism. The same, of course, can be said of China.

[Slocum]

"First, I would start with the proposition that the Chinese government from, say, 1955 (the start of the reenserfment of the peasantry) to 1978 was massively, massively incompetent and massively, massively corrupt."

Along those lines, can Rodrik provide examples of poor countries that did not suffer from "massively corrupt, massively incompetent" government (even if the current regime is not so terrible).

[Eric Bloodaxe]

Not to forget the advice that Elaine gives them.

[Matt]

Let me second Kitten's remark that it's too bad that Russia wasn't advised (in part by certain Harvard professors) to follow a plan more like this- it would have helped ease the massive pain suffered by millions during the 90's, might have helped prevent the rampant resentment and nationalism that runs wild there now, and generally had been better off. Too bad we were not smart enough to support something like that. Too bad that some advisers saw so much money to be made in other ways.

[Michael Carroll]

SO if we are allowed to think protection of the Chinese heavy industrial sector was economically rational in 1978,

[*Politically* rational; not economically rational. Restrictions on imports of luxuries were, I think, economically rational in the 1990s and today; a degree of exchange-rate undervaluation (not today's mammoth undervaluation) was economically rational in the 1990s and I think today; but protecting the heavy industrial sector in 1978 had a political, not an economic rationale.]

- why are we NOT allowed to think that some level of protection of US manufacturing and information processing is economically rational in 2008?

[r flanagan]

Deng Xiaoping's approach could be characterized as the "monkey theory": be sure you have a firm grasp of the new branch before letting go of the old. The complete opposite of "shock therapy". To borrow Barber Conable's phrase , Deng was a "raging incrementalist".

[Kimmitt]

What's the difference between politically rational and economically rational in this context? Seriously -- if a particular political move would logically result in the collapse of the day-to-day order which allows economic transactions to take place, then isn't it economically rational as well as politically rational in a second- (or third-) best world?

I can't help feeling like this is something of a semantic debate; surely, everyone agrees that all countries should have basically open regulatory regimes with individual variations on the themes depending on local labor and environmental concerns. The open question is whether one should attempt to leap heroically from current status to there or whether it is better to engage in some intermediate policy set which is different from either in order to facilitate a transition and spread transactions costs over a longer period of time. That is, are economies all like very long, straight, golf holes where one just whacks as hard as one can until one gets close, then breaks out the finesse, or are they more like the hole from the climax of Tin Cup, where there is a real question of how to play? Or both?

[josh bivens]

brad

your take on China's trajectory is interesting enough, but, it really does no damage at all to Dani's contention: smart industrial policy has the potential to deliver gains much larger than simple trade liberalization for developing countries, and, intelligently-directed protection can be good for growth.

would you call your characterization of post-1978 Chinese economic strategy anything other than smart industrial policy?

it's really unclear to me what argument you think you and Don are having with Dani, but, the one appearing in print on the weblog is nothing like the "knockout" you declared.

[Slocum]

"your take on China's trajectory is interesting enough, but, it really does no damage at all to Dani's contention: smart industrial policy has the potential to deliver gains much larger than simple trade liberalization for developing countries, and, intelligently-directed protection can be good for growth."

Of course it damages his argument because the problem is that you rarely get a Deng Xiaoping -- you usually get a corrupt autocrat who uses trade restrictions to line his own pockets and reward supporters.

But that aside, there's just no sense in which the U.S. circa 2007 is in a situation anything like China circa 1978 or in a situation like any of the current poor, developing countries.

You want a prominent example of government directed industrial policy? Look no further than the idiotic, harmful ethanol subsidies and tariffs. Would any of you really like to see this repeated with autos? Steel? Software?

[josh bivens]

slocum

second part first: read hard and tell me where i recommended industrial policy or protection for the US, and, yeah, the clue is the phrase "developing country".

and, i'm sorry, but, Rodrik's argument is clearly about the possibility for development-enhancing industrial policy, not a guarantee that any and every such intervention will work. and, brad has done no damage to it.

brad (and don's) original argument was the embarassingly simple: if you're for any kind of international protection anywhere, you need to be in favor of intra-state tariffs.

Rodrik patiently explained, no, that's not right, here's why industrial policy (including some protection) surely *can* be development-enhancing. brad responded by launching into a long discussion about... the very successful development-enhancing industrial policy of China, and, somehow he (and you) thinks this is a rebuttal.

[Kevin Rooney]

Brad,
Despite the tyranny and famines, the pre-1978 regime accomplished a great deal in laying the foundation for the post-1978 leap forward. The reason Deng could reign as paramount leader, the reason he could turn around such a large ship was because national unity and certain basic infrastructure (including relatively high literacy) had been created by the serfs and their masters.
As bad as China was in 1977 compared to the richer parts of the world, compared to the China of 1947 or 1937, it was paradise. And that is the comparison that most Chinese found relevant in those days.
Since you mentioned the Sung dynasty, I think a large role has also been played by China's incredibly long entrepreneurial history. In some sense, the places prospering the past 3 decades are resuming where they left off when the Mongols horded in.
The role of the benevolent terms of the Pax Americana must also be acknowledged.

[Ian Maitland]

I call this one for Brad -- I think it's a knockout.

[jt]

The cats are white and black, not red and white. (I actually just saw enormous statues of the two cats in the south of China. The exact quote is something like "Black cat, white cat, if it can get mice, its a good cat.")

Vis a vis the "hero" thing -- one certainly *can* use hero to mean "a virtuous person, one who performs all of his moral duties." But that is in general not how people use the word hero, and it is not why "heroism" carries the emotional tug that it does. In a historical sense, heroes probably:
(i) Have a very significant impact on history.
(ii) Have, intentionally or unintentionally, an apparently positive impact on history.
(iii) Subordinate pettier or baser goals to which they could direct their power and gifts to a more elevated vision.

You are certainly free to argue that heroes are bad, but I don't think anyone has shown that Deng doesn't deserve the appellation "hero".

[Mr. Impressive]

My comment is about rhetoric, not substance.

Brad DeLong made a foolish rhetorical mistake when he characterized the argument between Dani Rodrick and some other lowly professor as a "knockout" for the other guy.

Is discussion nothing more than brutal competition? Is the goal to prove that the other side is a total idiot, and that you are intellectually superior in all respects whatsoever? Is the goal to prove that Dani Rodrick is a complete moron, and perhaps he does not even deserve to be a professor? Should we shun him, because we was so stupid to think what he does? Hearing that he is "knocked out" brings these sorts of questions to mind.

Basically, I think that the rhetoric that DeLong chose implies that there is nothing that one can learn from dialogue. Dani Rodrick was "knocked out" so who cares what he thinks. He is totally wrong. Probably, evne his reasons for thinking what he wrongly thought are not worth knowing.

But, it turns out that DeLong basically has adopted Rodrick's view. Funny that the person "knocked out" actually ends up having the superior point.

Let us assume that in 1978 China had opened up the industrial sector. Let us say that this caused "political" unrest. Let us say that this political unrest then caused economic dislocation and disruption, as political unrest is prone to do.

Would not the decision to not open the industrial sector be an "economic" decision, since it in fact had a massive economic impact?

Maybe, just maybe, economists need to have a more robust and intelligent definition of economics. It seems to me, that when decisions outside of what one understand to be economics have more of an impact on economic output and economic well-being than decisions within economics, then there is something wrong with your definition of economics.

Frankly, I think that Dani Rodrick has the superior view here. Economics does not exist in its own entirely seperate realm from the rest of life. Pretending like it does can do more harm than good. Thank goodness that Brad DeLong was not advising Deng Xiaoping to take actions based on "economics only" after 1978. The result would have been an unmitigated disaster.

The bottom-line is that economics does not exist in a vacuum. All your pretty little assumptions do not fit with the real world. Politics matters, even if you wish it did not. Actions that disrupt the lives of actual human beings have costs that are not measured in GDP. But, later, those costs might end up impacting GDP, as unrest or even just plain old lack of productivity due to people not able to effectively handle instability and disruptions in their lives come into play.

What really is funny is that Brad DeLong has, in effect, conceded the point to Dani Rodrick, even though he said the latter was "knocked out." What Brad DeLong is describing when he is describing the actions of China is nothing less than "industrial policy." And Brad DeLong concedes that these actions were successful. Therefore, Brad DeLong has conceded the argument. QED.

I am not going to say that Brad DeLong was "knocked out" however. Because I think that is the wrong sort of rhetoric to use. I think that Brad DeLong and Dani Rodrick both have something useful to say. I think the should avoid pissing on each others shoes and instead engage in a respectful dialogue that recognizes, that just maybe, both of them have something useful to say and contribute.

[Praxis]

Brad,

While you may have a point that industrial policy requires good leadership to be effective, a basis in reality should also force you to concede that a significant number of countries have successfully followed this strategy, such as most of continental Europe, Japan, and South East Asia.

Even if you grant Singapore and Hong Kong as uncontested cases of liberalization led development, that still doesn't make for much of a positive track record for the liberalization alternative, particularly in light of the dozens of world-wide failures to achieve development along this course.

[P.M.Lawrence]

Venky, when you write "Singapore and Malaysia seems to have done reasonably well, but not Burma. All three were former British colonies" You are making a mistake all your own, as well as making the same mistake about these countries as Brad DeLong did about China before the reforms.

You can't say Burma is doing badly, or is corrupt, any more than you can say China was or North Korea is now. It's like seeing someone heading south and telling him that isn't the way to go north - it is a mistake if and only if, he really wants to head north. Burma is doing very well in terms of what its rulers are after - and that is NOT making life easier in general. Likewise you cannot call something corrupt if it is in fact the usual practice, endorsed by custom and law, and merely not the way you yourself think a country should be run.

The mistakle all your own is putting each of Singapore, Malaysia and Burma in the single set "former British colonies". Only Singapore was. Malaysia never was a single British possession; in fact it was put together after independence mostly from three very different parts, none of which was ever a British colony: the Federated Malay States, an aggregate of protectorates; British North Borneo, ruled through a company; and Sarawak, an autonomous state ruled by a dynasty of British adventurers. None of these was ever under direct British rule, though Malaysia did end up with some former Crown Colonies that had been. And Burma's case was different again, including the way it was run as a buffer state with no-go zones that effectively grew to include the whole country as at 1945, because of the war; there was no point reimposing British control when it would only be removed again, so the simplest thing was to ratify a bad structure so that things would only fall apart after the second hand car had changed hands, so to speak. And lo, so it came to pass; just the other day the Telegraph had an obituary of someone who had to help evacuate a British population from a riot-torn part of Burma when it was nominally independent. Burma didn't even have the benefit of the curtailed preparation for responsible government that India had had, and that was intended for all the British possessions.

Anyhow, the point is that those three countries are very much sui generis.

[RedCharlie]

Rodrik writes: "No, the argument that poor countries are and remain poor because their governments are incompetent and corrupt is one of the absurd reductionisms of the day which I do not believe in and have written against."

Delong replies: "First, I would start with the proposition that the Chinese government from, say, 1955 (the start of the reenserfment of the peasantry) to 1978 was massively, massively incompetent and massively, massively corrupt."

It is somewhat silly to argue this chicken-and-egg problem when it's obvious that there are plenty of both. China's government has been corrupt and oppressive for long before 1955, and it remains so today. What was important with 1978 is that it saw the ascendence of a man who was more of a pragmatist than an ideologue, at least economically.

We don't need to know whether the chicken or the egg came first, when it's obvious that if one has plenty of one, one also gets plenty of the other. Instead of arguing chickens vs eggs, what we need to know is how do you turn a turkey into an eagle. Unfortunately, I find no silver bullet for that.

Furthermore, DeLong writes: "Immediately opening up the industrial sector to international trade, however, would have led to (a) a rapid rise in imports of foreign-manufactured industrial goods, (b) a rapid rise in exports of agricultural products to pay for those imports..."

Uh, Brad, b doesn't automatically follow a in the real world. You are omitting a crucial detail here, which is that somebody else opens their borders to China's ag exports. This doesn't happen very often, or at all (see Doha).

I think Brad forgets that trade liberalization has happened in China before, at gunpoint. (Someone may object that it was "selective" liberalization, but what liberalization is not?) If I understand my history correctly, the British very happily (nay, forcibly) sold opium to China in return not for agricultural products or anything else for which China had a comparative advantage, but for silver. The result was not only an epidemic of opium addiction, but also a monetary crisis.

I'm feeling peckish but I don't have an appetite for too much argument, so let me boil down some arguments and see how well they go down:

DeLong: "It would be good if there were no borders in the world. All other things being equal, we all benefit from free trade."

Rodrik: "All other things aren't equal. A world where money and goods can move freely, but people cannot move freely, is not free."

(Krugman: Free trade is all good and well, but if you don't CYA and help out the domestic losers, you can get a backlash leading to Smoot-Hawley, Huey Long, or worse.)

Ladies and gentlemen, trade is a positive sum game, but it's still a game (where trade barriers like tarrifs and subsidies are "cheating"). Everybody is better off if no one cheats, and the game is just about over if everybody cheats. But how do you get everybody to not cheat?

I'm not arguing that more guns make one safer, but even Michael Moore would agree that you live longer in Deadwood with a six-shooter than without. It's a Hobbesian dilemma here. Trade Leviathan anyone?

[Christopher Monnier]

So the formula for successful development seems to be this:

1.) Shore up property rights and the rule of law

2.) Gradually (to stave off mass unrest) ramp down protectionism

3.) Liberalize trade

Step #1 requires a stable country and solid leadership, something that China in 1978 apparently had and something that many developing countries today lack. Step #2 is a necessary evil--it wouldn't be necessary if people were completely rational, but they're not, so it is. And step #3 is the fun stuff, but you can't do that until steps #1 and #2 are in good shape.

[Brian Moore]

From the Deng wikipedia entry (disclaimers apply):

"Favouring joint-ventures over domestic industry, Deng allowed foreign capital to pour into the country. While some see these policies as a fast method to put China on par with the west, Chinese nationalists criticize Deng for embracing too many foreign ideas to the point where domestic industries are now insignificant."

It sounds like Deng was criticized for doing exactly what Mr. Rodrik said he didn't, with predictable results. Is the wikipedia entry accurate, in your opinion?

[Ponzi Q. Globalization]

"2.) Gradually (to stave off mass unrest) ramp down protectionism"

"Step #2 is a necessary evil--it wouldn't be necessary if people were completely rational, but they're not, so it is."

Are you saying a sort of ''free-trade' shock therapy' is more rational?

Ah, the wonders of a world where human beings cannot suffer in the time it takes for this utopia where economic equilibrium has finally been achieved! Sadly, we are finite beings...

"Have you not done tormenting me with your accursed time! It's abominable! When! When! One day, is that not enough for you, one day he went dumb, one day I went blind, one day we'll go deaf, one day we were born, one day we shall die, the same, the second, is that not enough for you? (Calmer) They give birth astride of a grave, the light gleams an instant, then it's night once more."

It would suck to have a sucky life in the instant where the light gleams because of the foolishness of economists and their equilibriums.

[andres]

Brian: Deng definitely did allow foreign direct investment in China, starting with but not limited to the EPZs, so that part of the wikipedia entry is correct. What he did _not_ do initially was to allow unrestrained foreign financial investment in China and untaxed foreign light manufacture imports into China. Good industrial policies require a good understanding of the nuances of capital and production.

[Altoid]

Walking into this late, I see both Brad and Rodrik starting with the idea that China's development policy since 1978 has been apparently irrational in a certain economic sense.

Brad says yes, it is irrational, and in order to understand why it worked we have to look to exogenous things like politics.

Rodrik says yes, it is apparently irrational, and in order to understand why it worked we have to look to our theoretical structure. (My translation in both cases.)

As a non-economist I find this kind of dispute fundamentally silly, except that I would prefer it if those who make our economic decisions relied on theories that didn't treat the real world as a deus ex machina. Would physicists accept such theories?

[Anderson]

Andres, not to derail here, but how on earth could Bismarck be taken as a net asset for the human race?

[RedCharlie]

um, Mister Anderson, if I may call you that...
If the Kaiser had listened as attentively to Bismark as his grandfather had listened, a great deal of the horror of the twentieth century could have been avoided.

[Bruce Wilder]

Altoid expresses my sentiments.

This whole debate comes down to dueling counterfactual frames, neither of which is particularly well-informed.

Industrial productivity depends primarily on capital accumulation, where "capital" is a broadly conceived combination of political, social and cultural institutions, government, infrastructure, education and skills, as well as actual capital equipment and business enterprise organization. As andres wrote, "Good industrial policies require a good understanding of the nuances of capital and production." And, that means having a practical appreciation of the implications of sunk cost investment, increasing returns and external economies -- to use the economics jargon. These are the dei ex machina of the real world, which tend to make fools out of liberal faithful.

I am not inclined to assign primacy to the benevolent goodness of China's government in any narrative analysis. The speed of China's growth ought to be attributed to its rapid accumulation of capital. This is the prime driver. What has China done to push its rate of capital accumulation to titantic levels?

I am not a partisan of any particular line of storytelling in this regard. But, if someone's story doesn't pass directly thru capital accumulation, that someone is a damn fool.

[andres]

Re Bismarck. Bismarck, if memory serves, helped to create the first modern social security pension system. And the unification of Germany, other things being equal, was a necessary counterbalance to prevent another Napoleon or Tsar Alexander from dominating Europe, provided that counterbalance was framed in a network of European alliances and was marked by a non-militarist foreign policy once Germany was unified.

Of course, what Bismarck could not have foreseen was that Wilhelm II and von Moltke the younger (the Bush and Cheney of their day) would trash all of Germany's alliances other than Austria-Hungary (the Israel of its day) and would set off a European conflagration.

Bismarck definitely could be a bastard, eg by provoking the Franco-Prussian war and by turning a blind eye to German anti-semitism as a useful tool to keep left-wing socialism in check. But the worst evils committed by Germany as a nation occurred after he was gone, and I believe could have been prevented if he had still been in control.

[andres]

Bismarck, btw, had no truck with free trade dogma (which he considered to be a British conspiracy to keep continental Europe poor) and instituted a Deng-style protectionist industrial policy that made Germany the prime industrial economy in Europe by 1914.

[freejack]

Didn't Japan & South Korea practice the same protectionism in trade and capital markets (as China has) while their domestic industries were still developing?

In fact, didn't the U.S. do likewise back in it's day?

"The point I made was that a poor country would have the real prospect of converging in living standards with rich countries if international economic integration were near-total (involving free labor mobility, truly integrated capital markets, and a transnational set of regulatory, legal and political institutions that underpin this integration). In the absence of these, trade liberalization does not get you there"

I don’t see this challenged. I take it Brad agrees. Progress is good.

[Pierre]

Just a detail, Brad:
"And in 1978 China had its first piece of great good luck in a long, long time--perhaps the first time some important chance broke right for China since the end of the Sung dynasty."

The fact that literacy rate in China jumped from around 30% in the 50s to 65% in the 80s has probably its importance in the occurrence of this piece of great good luck.

(For reference: page 20 of http://www.crest.fr/pageperso/murtin/worldhumancapital.pdf)

[Twofish]

[q]And in 1978 China had its first piece of great good luck in a long, long time--perhaps the first time some important chance broke right for China since the end of the Sung dynasty[/q]

Something that is now becoming a consensus among Chinese economic historians is that China's economic problems really didn't start until the late-18th century. Kenneth Pommeranz has written an entire book describing China in 1750 and coming to the conclusion that Europe didn't really take off until the early 19th century.

My assessment is that China's problems through most of the 19th and 20th centuries was due to the Yongzheng Emperor's failure to develop a centralized taxation system in contrast with England's successful efforts to do so. No central taxes, no central armies. No central armies -> Warlords and civil war.

My theory as to *why* people talk about a decline of China after the Song Dynasty is because the Song Dynasty Buddhism was the "bad guy" among lots of mid-Qing intellectuals, and this eventually got transmitted to Western theories of economic growth in the 1920's. It wasn't until the 1970's that people really started looking at the data, and the idea of a Chinese economic decline starting in the Song dynasty isn't supported at all.

[q]Hence Deng Xiaoping kept China closed in the early years, and used tax revenue from the productive countryside to keep the Soviet-style industrial sector running[/q]

No. The Soviet-style industrial sector was kept running by non-market administrative direction (like price controls) which allowed it to continue functioning in the 1980's. Over the course of the 1980's, the industrial sector was incorporated into the market. At this point the sector was kept running *NOT* by taxation revenue, but rather by bank loans, which is what caused the huge non-performing loan problem of the late 1990's.

Taxes on the countryside were kept low, which also eventually caused health and education infrastructure to crumble.

Also, I disagree that industrial protection was a major factor of China's economic policy. If the Chinese government could keep the Soviet-style factories working by pumping in money for doing nothing, than whether they are facing foreign competition or not is pretty irrelevant.

Also, I don't think that Deng kept China closed for very long. Most of the tariffs and industrial protections were gone by 1985.