Cracks in the porcelain

John Lee writes in the CIS Winter 2009 edition

China’s overall use of capital is twice as inefficient as India’s when measured in terms of capital inputs used to produce additional output. In fact, World Bank findings indicated that about one-third of recent investments made generated zero or negative returns.(23) Given the regime’s need to continually stimulate the economy for political ends, it is no wonder loans keep on increasing at an incredible pace despite economic rationality demanding that it should not. This might further the end of maintaining loyalty to the ruling Party and entrenching its power, but it is at enormous cost to the country.

..One problem for China is that too heavy an emphasis on state-led development tends to exacerbate inequality as the economy expands. Since the state dispenses the most valued business, career, and professional opportunities, a relatively small group of well-placed and well-connected insiders benefit while opportunities to prosper are denied to the vast majority. This is certainly a serious problem for China

..A second problem is the lack of robust institutions needed by all strong economies. The political imperative of retaining power severely impedes the building of the soft institutions needed for successful capitalism: enforceable property rights, independent courts and rule of law, independent financial and administrative organs.

..given the weaknesses in its economic strategy and civil society, we need to consider the possibility that China is becoming more like an unbalanced South American giant such as Brazil than an East Asian success story such as Taiwan and South Korea.