Part Four dwelling on a Michael Pettis essay. My comment are in between the *** ***
Journey to the West
This issue of how much investment is enough is a very important topic that deserves much more discussion, but I think there is a very good example of why we need to be worried about how useful additional infrastructure investment in China might be. This shows up most clearly in China’s push to create development in the western part of the country.
***Forget about it. China’s interest in Western China is existential, not economic. Most of the territory of what we call China is lands Islamic for at least a millennia. There are strains in Islam inimicable to the Chinese state, and the Chinese are not about to allow any coalescing of opposition.
Chinese settlement of the West is about China’s survival just as their domination of Tibet is an existential imperative to control the headwaters of the Yangtse and other major rivers. It’s no accident that law is taught from the riverbank out.
It is another example of how the communists are fielding first stringers against USA’s third stringers inasmuch as where China has an existential threat both within and on their borders, yet largely peaceful relations, the USA has absolutely no interest in the Middle East yet is being broken in a conflict with the same. And working hard to make maters even worse.
Capitalism so enriches the few that they have no real interest in the outcomes of any particular event, these few will simply move on to other domiciles if ideas have disagreeable consequences.
In China, Western development will be political, not economic.***
Often when I question the economic value of China’s push to the western, poorer parts of the country (by the way economic value is not the same as social or political value, the latter of which may nonetheless justify projects that are not economically viable) I am almost always treated with the story of the American West. In the 19th Century, as everyone knows, the US went west, and most economists agree that this made economic sense for the country and was an important part of the process that led it to becoming the wealthiest and most productive country in history.
***Well, it is more nuanced than that. The legal system dominant in the Eastern states based on the English system of primogeniture eventually forced the “go west, young man” imperative of Horace Greeley. The Spanish legal system of maternal inheritance offered those young men an alternative opportunity. To this day the Eastern states’ courts upholding such contracts as NDAs and NCAs starved innovation and the Western state’s courts abjuring such contracts allowed innovation to flourish.
Will China allow Shariah law in its Western districts and see a result similar to that of the USA?***
...The US is not the only country in history that “went West”. ...
Most economists today agree that the Brazilian and Soviet experiences were economically unsuccessful and left those countries burdened with such enormous debts that they were at least partly to blame for Brazil’s debt crisis in the 1980s and the collapse of the Soviet economy in the 1970s. It turns out, in other words, that there are both successful and unsuccessful precedents for China’s going west.
***Those events are similar only in the coincidence, a 1 in 4 chance, of the word West.***
What are the differences and how do they apply to China? Again, I can’t say that I can fully understand or explain them, but one major difference leaps out. In the US it was private individuals, seeking profitable opportunities, that led the move into the American West, and government investment followed.
***In US history there are two phases of the move West, pre and post civil war.. The first involved stealing land from Mexico to keep the inviable cotton/slave regime working. Southern cotton farmers depleted their lands and needed more. So the state obliged the farmers. General Grant believed the US Civil war with near 700,000 dead and incalculable destruction was God’s punishment for the US war on Mexico.
After the war those traumatized and bent by killing were sent West to ethnically cleanse the West to make it safe for democracy or whatever. then laws began to change to benefit those who benefitted from government backing.
Government investment preceded the development of the West. The investment was in the form of violence.
The question is not whether “West” matters, but whether policies matter. British imperialists shared power with their subjects. The French never did. Around the world, and even in the USA, among people of some African heritage, the impoverished largely come from former French colonies, and the wealthy largely come from the former British colonies. Ideas have consequences, not directions.***
In Brazil and the Soviet Union, however, there was little incentive for private individuals to lead the process. It was the government that led, and private businesses followed only because government spending created great opportunities for profit. Once government spending stopped, so did business.
***If the state were to end the agricultural subsidies for the Western United states, almost nothing going on now would continue. Certainly other enterprises now crowded out would then be viable, but government interference does result in misallocation and malinvestment.**
My very preliminary conclusion is that large-scale government ambitions allied to strong political motivation and funded by cheap and easy access to credit can lead very easily to the wrong kinds of investment programs. The US experiences of government investment in the 19th Century, in other words, may be a very poor precedent for understanding China’s current policy of increasing investment spending, especially in the poor western part of the country.
***I concur!***
Brazil and the Soviet Union may be much better precedents. At the very least these gloomier experiences should not be ignored when we think of China’s policies. “Going West” isn’t always a great idea from an economic point of view and has led to at least as many, and probably more, bad outcomes as good outcomes. It is not clear why these lessons cannot possibly be applied to China.
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