'State capitalism the problem, not solution'

Niall Ferguson says future of global balance will depend on whether China solves problem of state capitalism.

By NADAV SHEMER
February 1, 2012 23:58
2 minute read.
Chinese factory workers

Chinese factory workers 390. (photo credit: REUTERS/Stringer China)

 
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Economists who suggest Chinese-style state capitalism provides the solution to global economic troubles are mistaken, Harvard economic historian Niall Ferguson said Wednesday at the Herzliya Conference.

Speaking at a discussion on the future of the global economy, he said: “State capitalism is not China’s solution to the problem; it is China’s problem. The future of the global balance between the West and the rest will depend on whether China solves that problem... and whether or not the West solves its problem of deteriorating institutions.”

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Ferguson said he was surprised by how many economists attending last week’s World Economic Forum meeting in Davos, Switzerland, bought the argument that we were witnessing the emergence of the Beijing consensus, in which state capitalism is the answer.

In actual fact, he said, the role of the state in the Chinese economy has gradually declined since the late 1970s, to the point where China has fallen far behind European economies when measuring total government expenditure as a percentage of GDP.

Instead, the key to economic success is competitiveness, Ferguson said, presenting WEF-compiled data from 2004-2011 showing the decline in the economic competitiveness of the United States and the increase in the competitiveness of China.

“It would be a fatal mistake to attribute this to the role of state capitalism,” he said. “In fact, the opposite is true; it is the diminishing role of the state in China, which explains increased competitiveness, and vice versa, the increasing role of the state [in developed economies] helps to explain declining competitiveness.”

Dr. Zhu Min, deputy managing director of the International Monetary Fund and former deputy governor of the People’s Bank of China, addressed concerns the world’s second-largest economy could suffer a hard landing.

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Poor January data was the result of the coinciding of the Chinese and Gregorian calendar new years, he said.

The Chinese people worked only 15 days in January, which explains the low purchasing managers’ index score, Zhu said, and it will cause weak export and growth data.

“You will see lots of concerning figures about Chinese growth in the next few weeks,” he said, “but that’s fine, because everything will pick up in February.”

Zhu also addressed the deteriorating economic situation in Europe, saying that EU leaders were moving “in the right direction” in efforts to solve the deteriorating economic situation, but “they must act much faster and more decisively.”

He said Europe has three immediate issues to deal with: putting a 2-trillioneuro firewall on the table to boost market confidence; implementing structural reform to ensure competitiveness and growth; and integrating labor markets to support the common currency.

Jacob Frenkel, chairman of JPMorgan Chase International and a former governor of the Bank of Israel, said European leaders must learn from their previous mistakes, when they focused too much on economic union and not enough on monetary union.

“How do we ensure that the new policies are not just about stability but also about growth, and not just about monetary union but also economic union?” he asked.

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