One of these important little bits of economics. Trying to play catch up is different from trying to expand the universe of knowledge.
That is, it’s possible – possible only mind, we’ve seen far too many failures at even trying this – to develop a poor place into a rich one by using government. What’s not possible – at least no one has managed to show the evidence of doing so as yet – is to make a rich place richer through that planned development course.
But it was also subject to diminishing economic returns. Credit fatigue slashed the GDP multiplier of fresh loan creation by two thirds. The smoking gun is found in a World Bank study of total factor productivity. The growth rate of TPF has fallen from 3pc in the early 2000s – the rate you expect in a catch-up economy – to near Western levels of 0.7pc.
As Paul Krugman has remarked, productivity isn’t everything but in the long run it’s pretty much everything.
The difference here is that “catch up” means that other places have already become considerably richer than yow. So, it’s possible to observe how they did so and get government driving everyone in that direction. Again, possible, many people have rather missed the vision bit and demanded a steel works, a national airline and the paved highway to connect the presidential palace with the runway.
But what happens when there is no example to go copy? Then this now rich economy has to experiment to find out what are the next actions that make the place richer again. Experimentation not really being something that government is good at. Again, Krugman:
But what they actually found was that Soviet growth was based on rapid growth in
inputs–end of story. The rate of efficiency growth was not only unspectacular, it was
well below the rates achieved in Western economies. Indeed, by some estimates, it was
That is, Soviet total factor productivity growth was around zero.
Planned economies don’t increase – after the catch up stage, whenever that is – TFP growth.
As to why. This is speculation from me, not something ex cathedra from a Novel Laureate. But I think it’s because TFP growth isn’t a single thing. It’s not a new technology, it’s most certainly not building a new technology, designing it, researching it. It’s applying it to doing things.
Think of the mobile phone, the canonical case in the literature is of sardine fishing off Kerala.
This more efficient market benefited everyone. Fishermen’s profits rose by 8 per cent on average and consumer prices fell by 4 per cent on average.
This isn’t about whether government invested in the technologies behind the iPhone, a la Mazzucato. It’s about what people use something for, to increase the efficiency with which extant tasks are performed as well as the ability to perform new ones. And those little (well, 10% increase in welfare is enormous by these standards, but sardine fishing off Kerala is a pretty small part of the global, or even Indian, economy) increases in this and that little part of the economy are what drive the overall increase – and also aren’t what planners are going to be good at.
Catch up growth is different from technological edge stuff. And if China’s already fallen to technological edge TFP growth rates – while still being a long way behind the actual technological edge over the whole economy, that’s why it’s still markedly poorer per capita – then China is screwing itself through that planning stuff.
Oh, and, of course, we don’t want to then adopt their economic management process, do we?