China’s Growth “Secret”

Feb 25, 2013 Editorial

While there may be quite a bit of disagreement in Guyana (especially among the politicians) about Chinese investment here, there is universal admiration for their economic success. We offer one perspective on the sources of that success in the hope that our sparring politicians might take heed and apply the lessons in our country.
Actually, while its political system might be “different”, there is nothing new about the economic fundamentals used by the Chinese. They arose out of the “American system” of the 1820s and 1830s that eventually catapulted that country ahead of Britain the economic behemoth of that era. There were three key elements of the American System: infant industry tariffs, internal infrastructural improvements, and a sound system of national finance.
These three elements are at the heart, explicitly or implicitly, of every variation of the investment-led development model adopted by number of countries in the last century – including Germany in the 1930s, the USSR in the early Cold War period, Brazil during the Brazilian miracle, South Korea after the Korean War, Japan before 1990, and China today, to name just the most important and obvious cases.
Much as the case with our products, the Americans asked how could they compete given much higher British efficiency and productivity, which translated into much lower prices even with higher transportation costs,? They could do it the same way the British did to compete with the superior Dutch a century earlier. The US had to impose tariffs and other measures to raise the cost of foreign manufacturers sufficiently to allow their American counterparts to undersell them in the US market. In addition Americans had to acquire as much British technological expertise and capacity as possible (which usually occurred in the form of intellectual property theft).
The idea that countries get rich under conditions of free trade, as is pushed today, has very little historical support, and it is far more likely that rich countries discover the benefits of free trade only after they get rich, while poor countries that embrace free trade too eagerly almost never get rich. Unless, like Haiti in the 18th century or Kuwait today, they are massive exporters of a very valuable commodity (sugar, in the case of Haiti, which was the richest country in the world per capita during a good part of the late 18th Century).
But rather than just embrace protection I would add that there is one very important caveat. Many countries have protected their infant industries, and often for many decades, and yet very few have made the transition to developed country status. Understanding why protection “works” in some cases and not in others is very important. The difference between the countries that saw such rapid productivity growth behind infant industry protection that they were eventually able to compete on their own, and those that didn’t, has much to do with the structure of domestic competition.
It is not enough to simply protect local industry from foreign competition. There must be a spur to domestic innovation, and this spur is most effective when competition leads to advances in productivity and management organisation. Countries that protect their domestic industry but allow their domestic markets to be captured and dominated by “national champions” will likely never develop in the way the United States did in the 19th Century. This that has happened with our protected chicken industry, which benefits from a 100% tariff protection but has only benefitted the few giant producers, while killing the multitude of small chicken farmers and steadily rising chicken prices.
There is nothing wrong with protecting domestic industry, but the point is to create an incentive structure that forces increasing efficiency behind barriers of protection. The difficulty, of course, is that trade barriers and other forms of subsidy and protection can become highly addictive, and the beneficiaries, especially if they are national champions, can become politically very powerful. In that case they are likely to work actively both to maintain protection and to limit efficiency-enhancing domestic competition. (To be continued)

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