Opinion: Beijing, Washington Face Similar Economic Challenges
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.
Designing effective regulatory systems. State-run services can be as vulnerable regarding inadequate regulatory regimes as private provision. The allegations of China’s lax food-safety standards and safety of its high-speed railways illustrate the importance of separating regulatory and operating responsibilities. But the U.S. model of encouraging private provision of utility services is seen as being prone to rising prices and limiting choices as monopolistic forces emerge. It is in the financial sector that both systems face the greatest risks of weak regulatory regimes. Mergers have only increased concentration in the U.S. and accentuated the risk of “too big to fail.” Much has been done to strengthen regulations, but many still feel that incentives for risk-taking have merely resurfaced elsewhere. But China’s state-led approach in banking has its own problems in generating quasi-fiscal deficits hidden in excessive bank lending, with the hidden costs of such practices fueling speculative property bubbles and risky shadow banking.
Reshaping fiscal and financial systems. Both systems are being challenged to use their financial and fiscal systems to support innovation and provide more public services. The share of government expenditures relative to gross domestic product (GDP) has increased across all countries, reflecting the increasing pressures on the state to meet growing social needs, but this has fostered concerns about affordability in the West. Meanwhile, China’s budget plays a surprisingly limited role in an economy where the state controls the bulk of resources and has a broader range of responsibilities. The consequences are excessive reliance on its banks to fund activities that should be financed through the budget, and short-changing much-needed social and environmental services.
Managing risks associated with size. Large corporations can easily undermine regulatory strategies. “Too big to fail” in the West can be just as pernicious as “too big to manage” in China. Scale economies characterize many industries, and therefore front-runners not only take the lead but can also stifle others and ultimately capture the interests of the state. This has been as true for big banks in the U.S. as for the large state monopolies in China, which are getting ever bigger due to plans to promote consolidation and mergers. Both systems fail if there is not strong competition and protection of investors, lenders, and smaller firms against monopolistic practices and fraud.
Promoting innovation. Traditionally, market-led capitalism was seen as being more effective in fostering innovation, but increasingly, America is perceived as having lost much of its dynamism because the state has not played a supportive enough role. The global financial crisis has shaken the basis of the market-led version of capitalism, mainly because of the lack of appreciation of the risks associated with innovation. America’s brand of innovation may be undiminished, but the challenge of defending its strengths has increased.
For China, a much-broader range of industries is needed as its economy becomes more sophisticated. And the state is seen as being unable to jump-start such initiatives compared with the private sector. China’s major state companies may have a prime position at home, but abroad they are not yet global champions of true innovative practices. If domestic returns are high, pressures to innovate or take risks may be reduced. Abroad, their managers may make wasteful investments because financial costs are undervalued and the state has seemingly unlimited resources.
Yukon Huang is a senior fellow at the Carnegie Endowment and a former World Bank Director for China. This article draws on his forthcoming book to be published by Oxford University Press: Cracking the China Conundrum — Why Conventional Economic Wisdom Is Wrong.
A senior fellow at the Carnegie Endowment and a former World Bank Director for China.
- 1In Depth: Cash-Strapped Local Governments Turn to Financing Vehicles to Plug Fiscal Shortfalls
- 2Weaker Demand for Chinese Goods Spells End of Shipping Boom
- 3China Foreign Minister Urges U.S. to Clearly Denounce Taiwan Separatist Activities
- 4Former Head of Exim Bank’s Beijing Branch Kicked Out of Communist Party
- 5E-Commerce Giant Shopee Cuts Jobs in China, Indonesia and Singapore
- 1Power To The People: Pintec Serves A Booming Consumer Class
- 2Largest hotel group in Europe accepts UnionPay
- 3UnionPay mobile QuickPass debuts in Hong Kong
- 4UnionPay International launches premium catering privilege U Dining Collection
- 5UnionPay International’s U Plan has covered over 1600 stores overseas