In light of the Global Trade War II, I am going to write a little bit about some forgotten details of our economic history. These details matter in profound ways (as I hope the example today will illustrate), they are sometimes counter-intuitive (again, as. today’s example should illustrate), and are generally misunderstood by most people.
Sometime back, I had asked a question: Why was China get colonized? Not how, but why!! How you answer that question impacts how you view the Chinese: if you think they were colonized because they are an inferior “race”, then you are likely puzzled by their rise in the last 75 years, and more likely to think that they are cheating. On the other hand, if you think that they were colonized because of a unique confluence of events that are not likely going to recur, then you are also more likely to accept that their recent rise has been largely due to honest and fair efforts. So that question is important, in that it frames how you view the current trade wars.
For instance, here is a Red-state diary mocking the Chinese, and calling for even more punitive trade measures. I believe the attitudes in this diary is fairly prevalent amongst Republicans, and probably among quite a few Democrats as well. Here is the money quote that reflects the underlying thinking:
For all the "we won't back down" talk, China spent the first half of the 20th century getting crushed by the Imperial Japanese until the United States showed up and then spent the second half murdering 60 million of its own people. So, maybe posting a video of the guy who did the latter isn't the best play here.
and here is another example
China is the economic elephant in the room that politicians haven't wanted to talk about. They steal American intellectual property, they steal American designs, they have stolen much of our industrial base, replacing American jobs with Chinese subjects earning low wages - sometimes nothing.
“China is prosperous because they steal American intellectual property, designs, industrial base, and jobs.”
So let us start with a basic question: Why (again, not how, but why) did China develop so rapidly in the last 75 years, given its complete impoverishment in 1950. You can ask a similar question of India (and in fact, you should). Answering this question is important, in that it will give you an answer that is different from “they stole from us”.
Let us first reject all the lazy answers. The lazy answers include: (a) The Chinese are hard working and intelligent. Yes, they are… but they were just as hardworking and intelligent in 1940. (b) They got rid of Imperial Japanese and British colonization. Yes, they did… but so did others (like Zimbabwe) who did not prosper to the same extent. The other obviously lazy answer is: they stole all our IP, and they are good at copying…. I will get to this in the rest of this diary.
Instead, let me reframe the problem to describe the difficulty: In the 100 years prior to 1950, China had a net zero growth rate of the GDP and a declining share of global trade (and so did India). Under these circumstances, any capitalist will tell you that you cannot attract investments. Capital does not flow to regions that do not promise a return on investments. Therefore, it was assumed that absent a miracle, China (and India) were pre-ordained by an act of God to forever remain poor. I am exaggerating… but only slightly. How exactly do you get India and China growing again, given that neither one can attract investments.
Now, none of what I am describing here is a new insight. There were quite a few economists who were studying this problem in the first half of the 20th Century. I will mention one name: MIT Professor Paul Rosenstein-Rodan, who was one of the pioneers of something called the Big Push Model. Please spend a few minutes looking at the dumbed down wiki entry. Simply put, the essence of the Big Push Model is that underdeveloped economies need massive, coordinated industrial investment all at once to escape poverty traps — you can't just have a little factory here or there, you need a huge coordinated surge across sectors. Rosenstein-Rodan’s paper of 1943 discussed the issue of growth in Eastern and South-Eastern Europe, but laid out the framework. I mention this because this model provided the ideological foundation for what Nehru pulled off in India… and what Mao pulled off in China.
Coming back to the original problem, we can now state it thus:
- Given the absence of any GDP growth in China (and India) over the last 100 years, it is impossible to attract outside investments to finance growth.
- But, as per the Big Push Model, breaking out of the poverty trap requires a very large, and sustained/coordinated investment. But it is not possible to get this investment from outside.
Once you state the problem thus, the solution also becomes obvious.
- The investments have to come from internal sources. But how exactly do you do this?
- You implement a system of controls, whereby you limit the internal resources to a finite amount of “consumer” goods (goods that are “consumed” by consumers) and more towards “capital” goods (goods that are used to make factories that either produce consumer goods, or factories that make other factories).
Basically, you are asking your population to make do with fewer consumer goods in the near term (fewer bars of soap consumed each month, fewer bicycles, fewer gallons of gasoline used to transport tomatoes etc.) in exchange for investments in more industries...more new soap factories, more new bicycle factories etc.
And, as we now know, this system of state implemented controls worked. India’s started growing again sometime around 1960, and China’s GPD started growing again sometime around 1970 .
It is important to acknowledge that both Mao and Nehru arrived at their solutions via political means. In Nehru’s case, his solution was developed via observations of Stalinist Russia, fascist Italy/Germany, and “democratic” Britain. Neither one of them understood economics, and in any case, they developed their solutions before Rosenstein-Rodan’s Big Push Model was published.
It is also important to acknowledge that both Mao and (to a lesser extent) Nehru have been discredited by the populations in their own countries. If you ask the average Chinese, and the average Indian, they will likely state with absolute conviction that Mao was responsible for millions of deaths (which he was), and Nehru ushered in socialism (which he did). But it is equally important to understand that two (seemingly contradictory) things can be true at the same time. Yes, Nehru & Mao ushered in a system of controls that resulted in a fair amount of misery/deaths (in China) and corruption (in India). And equally… in light of the Big Push Model, it is hard to imagine either China, or India, breaking out of their poverty traps without those forms of control. As Deng Xiaoping put it, Mao was 70% right and 30% wrong.
In short, China did not steal/copy its way to prosperity. They have developed because they sacrificed, and worked hard. By contrast, countries that did not sacrifice in this manner have not developed to the same extent.
Here is Larry Summers addressing the “did China cheat” its way to prosperity question.
I am also not a fan of Larry Summers. But he gets this answer 100% right.
- PN Rosenstein-Rodan, 1943: The Problems of Industrialisation of Eastern and South-Eastern Europe. The Economic Journal Vol.53
