"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Tuesday, August 16, 2016

China’s Embrace Of Big Government And America’s Rejection Of It–A Story Of Success And Failure

The prevailing mantra in America – at least within more conservative quarters – is that government is the problem, not the solution.  Within the social, economic, and political culture of the United States, Ronald Reagan was right.  Market economies thrive on free competition, little regulation, and private enterprise and individual incentive.  Reagan broke the air traffic controllers’ union and by so-doing sent a message to labor that it would no longer hold business and the country hostage to its demands.  His efforts to privatize government agencies and to encourage the private sector were nothing less than revolutionary in a country which had gotten used to government sclerosis and the corrupting principle government preeminence.

Even among liberals, Reagan’s call for economic liberation has resonated.  The ever-rising deficit resulting from largely from profligate spending was disabling those government programs which in fact were necessary.  The Libertarian Cato Institute has said it best.  It is not against government programs per se, just against those which are ill-designed, inefficient, and which crowd out more productive private activities.

The problem with progressive/liberal economic policy, Cato goes on, is the a priori assumption that government investments, as expressions of public stewardship, are always in the interest of America.  In order to encourage a dynamic, competitive economy, Cato proposes, one must ask three questions: 1) Is the government program evidence-based? If there is no substantial proof that it has or will achieve the objectives set for it, it should not be funded; 2) Can private enterprise achieve these program objectives more cheaply, more efficiently, and more effectively?  If so, it should not be funded; 3) Does the program have a definite, compelling public value, once again based on fact, prior performance, and objective review.  If not, it should not be funded.

Given the decades of government investment in programs which have been wasteful, inefficient, and politically-driven, it is obvious that few Congressional leaders have even bothered to ask these questions.  Social programs – welfare, food stamps, job-training; pre-school, primary, and higher education, and many others – have been the obvious targets of conservative scrutiny.  After billions spent on public primary and secondary education, at per-capita costs in major metropolitan areas $20,000 or higher, and with declining student performance, conservatives had said enough is enough.  Government subsidies in agriculture and energy have persisted despite increasing world demand for products, significant increases in industry productivity, and technological innovation.

The American system is rigged in favor of wasteful public spending.  The fact that Representatives are elected to Congress for only two year terms means that they must begin their re-election campaign from the day they first sit in the Rayburn Building.  How best to ensure re-election? By providing government money to their constituents.  Those who were particularly good at manipulating Congressional rules to permit riders, bills, and codicils favoring their state – and the funding that went along with them – lasted forever.   Lobbyists from both industry and consumer groups are powerful and influential players in the money game. 

A case can be made for investment in certain areas where the private sector while having an important role, cannot be the sole benefactor.  Without government support of the military, national security, law-and-order, infrastructure, and basic research to name but a few, the private sector alone could not do the job.  Yet the last two get short shrift.  The United States is far down the list of countries supporting scientific research, notably behind China which has, in only 30 years, risen to the top.
The central government’s expenditure on science and technology this year was set at US$43.6 billion (267.4 billion yuan renminbi), an 8.9% rise on last year, which slightly trails the overall projected budget increase of 9.3%. The biggest winners are 16 ‘megaprojects’ with an emphasis on engineering and applied research in areas such as transgenic crops, nuclear power plants and lunar exploration, which together will receive a whopping $8.1 billion (Nature, June 2014 edition)
Sources: PRC Statistical Yearbook 2013/US NSF Sci. and Eng. Indicators 2014
One of the most impressive examples of Chinese investment in research is its constructing of the world’s largest (500m diameter) and most sophisticated radio telescopes.
Five-hundred-meter Aperture Spherical radio Telescope (FAST) is a Chinese mega-science project to build the largest single dish radio telescope in the world. Its innovative engineering concept and design pave a new road to realize a huge single dish in the most effective way. FAST also represents Chinese contribution in the international efforts to build the square kilometer array (SKA). Being the most sensitive single dish radio telescope, FAST will enable astronomers to jump-start many science goals, such as surveying the neutral hydrogen in the Milky Way and other galaxies, detecting faint pulsars, looking for the first shining stars, hearing the possible signals from other civilizations, etc. (World Science, February 2011)

Why space and science?  First and foremost China understands that science and technology will be more than ever the cornerstones of economic development. It also realizes that the short-step, quick-results investment in business-related research is necessarily limited.  The pressure of the market will always dictate immediate, applicable results.  Only projects that expand the boundaries of scientific exploration can ultimately produce major if not existential discoveries.

China also remembers the glories of its Dynastic past and how it was once the world leader in scientific discovery when the rest of the world was still stumbling in the dark.  Space exploration (a lunar landing was recently achieved, and Mars is next) and space probes via the FAST super-telescope can return China to its former prominence.  In this way it is no different from another emerging country – Russia – which wants to recreate its Imperial past.


Medical research is another area of Chinese interest.  Recently a Chinese scientist was awarded the Nobel Prize for Medicine or her work on artemisinin the drug now preferred for malaria prevention and treatment.
Over the five years to 2016, industry revenue for the Medical Research industry is expected to grow at an annualized rate of 9.1% to total $10.2 billion. In 2016 alone, revenue is anticipated to increase 7.8%. Over the period, revenue growth has been steadily slowing; the industry is beginning to mature and competition for government funds and private funds has increased. Over half of industry revenue is derived from government funding…
Total expenditure on research and development has increased substantially in China, from $10.8 billion in 2000 to an estimated $227.6 billion in 2015. The ratio of R&D expenditure to GDP in China also increased from 1% in 2000 to 2.1% in 2015. About 56% of the total expenditure was from funding of the central government and local governments. With further growth of the Chinese economy, more investment will be made by the government in research and development activities. Therefore, the Medical Research Industry in China will continue to benefit from this funding, keeping the industry in the growth phase of its life cycle (Ibis World July 2016)
China, however, has not fallen into the common trap of dirigisme.  It has provided liberal grants to research institutions and to industry, but it has not been overbearing in its central planning.  It has certainly set priorities – like space research and medicine – and has chosen certain megaprojects like FAST to support; but the nearly 10 percent yearly GDP growth the country has enjoyed is a testament to its free market, although guided by a central hand.

Thanks to this remarkable growth (most of it in the short 30 year period since the liberalizing of the economy), China has become a major industrial power.  It has, with trillions in currency reserves thanks to its export promotion policies, become a major financial power as well.  It is tireless in its search for the natural resources needed for economic expansion, and has negotiated favorable contracts with African and Asian countries to assure them.  Its no-nonsense quid pro quo arrangements have replaced the ‘conditionality’ bi-lateral deals promoted by the West.

China has always said that economic development comes first, democracy second if at all.  In other words, it has squarely placed the country’s disadvantaged at the center of its policies.  A rapidly-growing market economy will raise millions of Chinese out of poverty; and for that they only have to cede certain civil and political rights.  It had understood that rapid economic growth and social integration cannot happen in a divided, divisive, and politically riven environment. 

The United States has always feared statism, dirigisme, or any centrally-planned economy; and for good reasons.  Rarely have government bureaucrats been better than the market in making successful decisions.  In our free market free-for-all innovation has thrived,  small-scale entrepreneurs have been the backbone of the new information technology knowledge-based revolution.

Yet, whereas China has decided to take big leaps – e.g. FAST – the United States seems to be locked into the short-term profit and investment cycle which has stood it in good stead so far; but given the impressive moves now made by China it might be time to reconsider its approach.

At the same time, in a country determinedly anti-tax, where will it find the resources?  Right now, unlike China, it is caught up in waves of international terrorism, indecisive about its geopolitical moves, spending more and more of the national budget on defense and national security with no clear vision in mind for the future.  America seems destined, at least for the near and medium future, to be on the defensive.

China is everything America is not.  It is confidently and aggressively pro-nationalist, proudly Communist in its belief in government leadership and stewardship if not ownership, muscular in its fight against political and ethnic separatism, amoral in its pursuit of bi-lateral economic agreements.  China itself admits that there are many rough edges in its new economy and social configurations; and it is determined to weed out fraud, dishonesty, and corruption.  Because of centralized state power, it can do so.

The point is that there is nothing wrong with big government per se.  It all depends on what kind of big government, on what foundations its authority has been based, and on how it uses its power, influence, and control.

China has not forgotten its Confucian principles nor the achievements of its past, nor its Communist legacy.  It has seen how Western liberal democracy is being challenged everywhere, how American exceptionalism is no longer credible, and how strong, decisive, self-interested governments are the future.


We should pay attention, although given our fractured political and social environment right now, I wouldn’t hold my breath.

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