Opinion: Beijing, Washington Face Similar Economic Challenges

China’s economic success over the past several decades coupled with America’s struggles to rebuild its economic base since the global financial crisis has spurred a debate about the relative roles for the state and market in guiding each country’s particular form of capitalism. This debate has been nurtured by a widespread sense that the U.S. model of market-led capitalism represents one extreme, with China’s state-led version of capitalism representing the other. Most observers see the two systems as not only fundamentally different in the way they operate but also in the challenges they face. The reality, however, is that the two systems may actually have more commonalities than differences regarding the problems they need to deal with.

Moderating rising income disparities. America’s version of capitalism has had no more success in curbing inequality than China’s. Both have generated a Gini coefficient of inequality around 0.45, but different factors are at play. The dominance of China’s state-owned enterprises is seen as exacerbating disparities. But crony capitalism and dollar politics in the West can be just as pernicious. Both favor connected insiders over innovative outsiders. Globalization is also under attack for exacerbating disparities. The incomes for highly skilled workers have increased while returns to the average worker have stagnated across countries. This has contributed to stagnating wages for middle-class workers in the U.S. and widening disparities between China’s trade-driven coastal areas compared to its interior. Trying to moderate such disparities with regulatory and fiscal policies runs the risk of stifling innovation in both countries. However, there is no escaping the need for the American economy to invest more to increase the productivity of its workers. For China, it is more about moving up the value chain to keep growth going.

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