The Chinese and American flags fly on a lamp post along Pennsylvania Avenue near the US Capitol in Washington during then president Hu Jintao’s state visit on January 18, 2011. Photo: Reuters
Opinion
The View
by Winston Mok
The View
by Winston Mok
How US, China can recover and thrive by being more like each other
Despite the abundance of heated rhetoric, the competition between the US and China is not between two political and economic systems
The challenges each faces in economic development are similar, as are the levers each has at their disposal to improve the lives of their citizens
In marshalling allies against China and Russia, US President Joe Biden has used the term “market democracies” while resorting to non-market industrial policies in the rivalry against authoritarian state capitalism. Ironically, the key impediment against US success in such a race is the partisan politics within American democracy.
In the polarised politics of the United States, China the bogeyman has become the single unifying theme. The US Senate last month passed the Innovation and Competition Act, among the most expansive pieces of industrial policy legislation in US history.
In fact, the US has had a long and successful tradition of industrial policies. Initiated by Alexander Hamilton, the first US treasury secretary, industrial policies in various guises have played an important role in America’s rise and expansion. After World War II, US government support continued in various space, defence and biotechnology-related initiatives, continuing even after Ronald Reagan’s neoliberal presidency.
The US has been a most successful development state. Instead of emulating China or other East Asian economies, the US is arguably reviving its past. However, there is no guarantee that reviving industrial policies will be successful today.
State investments can be captured by special interests. In the Innovation and Competition Act, which is still subject to revisions in Congress, much of the funding originally slated for emerging technologies has been diverted away to parochial projects by pork barrel politics.
A poorly implemented industrial policy could make the US economy less efficient and less resilient. Still, Biden can do much good, in the spirit of Franklin D. Roosevelt, by turning away from neoliberalism and towards a more active state.
In contrast, what has driven China’s growth after a failed planned economy have been local government initiatives, not centrally orchestrated industrial policies like in Japan. How Beijing’s aspirations in priority industries will be realised remains to be seen, as competitive and uncoordinated local actions have often led to excess capacities instead of industrial upgrades.
What is clear is that China’s state-dominated banking system with a preference for supporting state-owned enterprises has led to significant inefficiencies. China’s economy has in some ways thrived in spite of, not because of, the state. China can become more competitive with financial liberalisation, away from misallocation driven by state meddling.
State intervention has been more consistently successful worldwide in the area of infrastructure development – a clear priority of the Biden administration. The World Economic Forum’s 2019 Global Competitiveness Report ranked the US 13th in infrastructure, much higher than China’s 36th. In another ranking by the International Institute for Management Development, the US was ranked sixth versus China’s 18th.
Cars run on the road over the cliff in Pingshun county in Shanxi province on July 9. Building transport infrastructure has been a challenge in this part of China due to the rugged mountainous terrain. Photo: Xinhua
Such rankings largely reflect the fact that the US is a developed economy while China is a developing country with highly uneven development. When their leading economic regions are juxtaposed, China’s Pearl River Delta, for example, has unrivalled infrastructure – in the same league as Singapore and Hong Kong.
China has been investing in infrastructure at a much higher level than the US. With China’s many advantages in infrastructure, it would be difficult for the US to outcompete China in this area, but Biden is absolutely right that America’s decaying infrastructure must be fixed for it to remain competitive.
The greatest opportunity for the US is perhaps in the area of human capital development, where US is ranked 35th by the World Bank, not much higher than China’s 45th. Given China’s highly uneven development, major cities such as Beijing and Shanghai have human capital comparable to Singapore and Hong Kong, which are top ranked in the world. The US, on the other hand, has the advantage of immigration.
The US has a better higher education system while China is stronger in its K-12 education. Although the US has some of the best universities in the world, its higher education graduation rates are only about 60 per cent compared to more than 90 per cent in China. Graduates and dropouts are often saddled with high student loan debt.
03:15
Gaokao: China's college entrance exam made even more stressful by Covid-19 outbreak
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It would be difficult for the US to emulate the K-12 education success of urban China, but the limited access to quality education in rural China is no better than inner-city schools in the US. Despite high scores in maths and science, critical thinking and creativity can be stunted in China’s education system. For more of China’s universities to become world class, greater academic freedom is needed and less fealty to the Communist Party is required.
Unbridled globalisation and market fundamentalism have helped fracture US society. To heal the nation, Biden has launched social programmes to address the needs of the working and middle classes. Such programmes, which will be partly financed by taxing the rich and corporations, have met with resistance from vested interests.
While China has made strides in reducing poverty, it growing economic disparity is no better than that of the US. To propel innovation-driven growth, perhaps market-led vibrancy is more important than state guidance. The party needs to make good on its pledge at the end of 2013 to let the market play a decisive role in allocating resources.
The competition between the US and China is not between two political and economic systems. The key challenges they face – such as unequal access to education and health care – and available levers for economic development – investing in infrastructure and human capital – are similar. Paradoxically, the US and China can be more successful by being a little bit more like each other.
Winston Mok, a private investor, was previously a private equity investor
