Why State Capitalism will Inevitably Fail in China

The question has long been put up for discussion as to whether State Capitalism is a feasible solution to combat the economic fluctuations of a free market system.
The answer, regardless of the sprawling economic success of the Republic of China, remains no.
China settled into state capitalism after the global financial crisis in 2008.
In the next half-decade, it had made China the single biggest economic powerhouse in terms of GDP growth rate, alhough they have recently lost this title to India.

China’s GDP growth rate struck a whopping 7.6 in early January 2014.

However, since then the curve has taken a downward spiral. It went under seven in July 2015 and now stands at 6.7.
In a report by the International Monetary Fund, it was stated that China’s economic growth is expected to slow towards 5.8% by 2021.
The country’s exports have fallen for 12 out of the past 13 months till July 2016.
The reasons, as expected, highlight the drawbacks of State-monitored businesses.

China’s economy is state-authorized meaning the commercial economic activity is controlled by the state.
The means of production, from the processes of capital accumulation and labor wage, are regulated as state-owned business enterprises.

China expects to bolster its domestic enterprises by tinkering with much of the business regulations, bearing in mind the significant importance of it in the daily economic activities of her people.

On one hand, the free market works through a process of trial and error. The companies which fail to satisfy the demands of their customers go out of business. Only those which are competent enough stay in business.

In state-capitalism, the state businesses are not subject to the rigors of a free market.
In China, the government can keep a non-profitable company, afloat, by pumping tax-payers money into it.

China’s devaluation of their currency to lower the cost of the exports has now been hit by an expected tremor.
While the process of devaluation works well within a time-frame, the long-term consequences are terrible. It badly slows down the economic growth and brings on high-scale inflation as the competitiveness of the economic products decline.

State capitalism is neither driven by nor subject to the constraints of economic efficiency; and therefore, there is no guarantee that the outcomes it yields would be economically optimal.

Even China’s significant debt problem has an inside link to their state-capitalist structure. Macquarie analyst Larry Hu said earlier this year,

‘China’s high debt is just a reflection of the problem instead of the problem itself. On the surface, China’s high debt is inevitable due to its high savings rate (47% of GDP) and low equity financing. But, at a deeper level, a high savings rate is the outcome of a system we call “State Capitalism”, under which the state extracts resources from the private sector through three channels: financial repression, SOE monopoly and land controls. As a result, the system suppresses consumption, thereby boosting savings. This is the root cause of China’s debt problem.’

To add to these inherent problems of state capitalism, China’s forty-year advocacy of One-Child policy, which they have recently lifted, had had a detrimental effect on the country’s able workforce.

With a national birth rate well below replacement level of 2.1 and some urban birth rates under 1, China faces a new challenge.

Even if the birth rate jumped to 2 children per woman in 2017, it will be well into the 2030s or even the 2040s before the children born of this policy change, may even enter the workforce.

So in no way a country should adopt a state-capitalist model to augment the productivity of their economy.

The long-term detriments far outweigh the short-term incentives.


Follow the author on Twitter @amritangshu488


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