Wednesday, January 14, 2009

Why China Works (?)

I was alerted this morning by an article in Economic Observer Online to the existence of this terrific article in Newsweek. I think it gushes a little too much about China's apparent success, but if you can spare about 10 minutes out of your day, it is worth your time.

This is probably one of the best articulations I have seen of the puzzle that motivates my own research. Why is it that liberal, Western economies seem to tumble from crisis to crisis while China continues its steady upward march? Why do economic theories about the pernicious effects of government intervention in the economy not seem to apply in China? How can China's government both own businesses and provide the proper incentives for commercial success?

While I don't agree with everything said in the article (for example, their populist tendency to badmouth all financial derivatives), it sets up the current conundrum quite well.

Though, as the article points out, things seem to be going well in China -- at least from the article's 30,000-foot point-of-view -- it's important not to forget that China is still a society on edge. With falling exports and falling factory employment, the potential for unrest is increasing. Though China has achieved unprecedented levels of growth, I think a lot of people would question whether it is completely out of the woods yet.

I would be very interested to read anyone's opinion on this paradox.

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Note: At some point in the future, the Newsweek link above may disappear. I have saved a pdf of the article here.