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But, first, here my take: We are all going to watch over the next year or two one of history’s great political experiments. It will test the proposition does authoritarian capitalism work?

For the past few decades, the Chinese economy’s meteoric rise, faster than any large economy in human history, has dazzled the world. It has made many people wonder if China’s model of a pro-growth dictatorship is the best path for developing countries.

Some have questioned whether Western democracies, with their dysfunctions and paralysis, can ever compete with China’s long-range planning.

Now, as its growth slows to almost half its pace in 2007, its political system faces its most significant test.

Over three decades, China’s growth has averaged 10 percent a year. Crucial to Beijing’s success has been its ability not to pander to its people to gain votes or approval.

You see, unlike most developing nations, China spends little subsidizing current consumption, food and fuel subsidies for example. Instead, it spends massively on export-free zones, highways, rail systems and airports.

It is also investing in education and training and soon will turn to health care. No developing democracy has been able to ignore short-term political pressures and execute a disciplined growth strategy with such success.

But the Chinese model is no longer working that well. Partly, this is the product of success. China has become the world’s second- largest economy; its per capita income is that of a middle-income country. It cannot grow at the pace it did when it was much poorer.

But growth has dropped faster and deeper than many had predicted and it could slow further because the truth is, China’s authoritarian system has made significant mistakes in recent years.

When the financial crisis hit in 2007 and growth began to drop from a giddy 14?percent, Beijing responded with a huge expansion of credit and a massive stimulus program. As a percentage of gross domestic product, it was twice as large as the 2009 stimulus bill in America.

These two forces have created dangerous imbalances. To economists, the solution is obvious. Stop favoring state-owned behemoths and exporters, open up the economy, encourage the Chinese people to spend more money at home.

But all the subsidies to companies over the past decade have created entrenched industries and sectors that will resist any change. Can Beijing turn off the tap in the face of opposition from economically powerful groups, many of whom are politically well- connected, even related to members of its Politburo?

Now, to be fair, the above critique could have been made by China’s new leaders. Li Keqiang, an economist who became premier in March, has given several surprisingly frank and critical speeches.

The reforms he outlines in detail would open important sectors of the economy to market, reduce the state’s role and provide incentives for domestic consumption. The question is whether these goals can be met and whether the reforms will be implemented after opposition gathers, as it surely will.

Reform is hard in any country as can be seen from Italy to Brazil to India. Countries are very reluctant to impose short-term pain for long-term gain. China had been the exception to this rule, but now it faces its biggest test.

Success will suggest that there is still life in its unique brand of authoritarian capitalism and will extend the power of its ruling Communist Party. And if it fails, well, China becomes just another emerging market with a model that worked for a while


Posted July 22, 2013 by tmusicfan in Politics, Quote of the Day

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