"China Inc."—Here We Go Again

Back in the 1980s, I was a producer for a national weekly PBS foreign policy show called American Interests. We ran a lot of nifty programs on various aspects of the Cold War. Another abiding obsession of the chattering classes was the coming triumph of Japan Inc. over a hapless America. We regularly broadcast shows featuring the likes of Robert Reich, Chalmers Johnson (see H&R obit from yesterday), and Clyde Prestowitz predicting that the wise bureaucrats at the helm of Japan's Ministry of International Trade and Industry deftly deploying their industrial policy jujitsu would soon bury us Yanks. As evidence, critics of undirected American capitalism pointed out that Japan's economy was growing at 6 to 8 percent per year. Japan was exporting its way to prosperity and the U.S. was running a huge trade deficit with the East Asian powerhouse. Japan could do no wrong and America could do no right. Then the Japanese bubble burst.

Twenty years later, the new meme of would-be industrial policy mavens is China Inc. Promoters include Thomas Friedman and Clyde Prestowitz. China is growing at a blistering pace of 10 percent per year and exporting its way to prosperity. Once again, we are told that East Asian capitalism directed from the top by wise bureaucrats is going to outcompete the United States and toss us into the dustbin of histoy.

For some perspective, let's look at what happened over the past twenty years after the Japanese bubble burst in 1990. (Americans got to enjoy both the internet and housing bubbles over that period.) According the Economic Research Service at the U.S. Department of Agriculture, in real terms U.S. per capita GDP in 1990 was $32,000 and Japanese per capita GDP was $28,000. This year, they are $43,000 and $34,000 respectively.

What about China? In 1990, its per capita GDP stood at $470 and is now $2,800. It would take almost 30 more years of the Chinese economy growing at a 10 percent annual rate for its per capita income to reach the current U.S. level.

So what's going on? Starting from a low economic base, Japan and China could grow fast after they allowed a modicum of economic freedom. Once that happened, it was relatively easy to grow fast by implementing technologies and practices pioneered in more advanced economies. Given China's still low per capita incomes, it has a lot more space to grow its economy. Instead of directing the economy from the top down, industrial planners are largely trying to claim credit for parades that have already taken off.