I have no crystal ball, and cannot predict China’s economic performance. I doubt that anyone can; there are too many uncertain variables. Typical projections, for example in a recent National Intelligence Estimate issued by the National Intelligence Council, a prestigious group within the U.S. intelligence community, are of the “more of the same” character: China is growing rapidly and can be expected to continue doing so. About all that one can do responsibly is list some of the factors that favor and some that disfavor China’s future growth.
On the plus side, the Chinese population is highly energetic and intelligent, and of course vast; and there are still unexploited human resources, both in rural areas and in the workforces of the inefficient state-owned factories. If those factories are privatized (and probably therefore shut down), the workers will be freed to engage in more-productive economic activities. Although I agree with Becker that at some point China cannot continue progressing rapidly just by copying foreign technologies, already we see rapid growth of scientific research in China and a friendlier attitude on the part of the Chinese authorities toward intellectual property rights, which will facilitate the creation of new technologies.
But there are definite negatives in the picture. I am struck by the resemblance between China and Wilhelmine Germany (1871–1918)—two aggressively, at times hysterically, nationalistic countries, paranoid about encirclement by potential enemies (in China’s case, Russia to the North, India to the Southwest, Vietnam to the South, and South Korea, Taiwan, and above all the United States, to the East), and possessed of economic institutions more advanced than their political institutions. That is an explosive combination. It may lead China to invest very heavily in military power and even to become involved in wars that could bring disaster upon it.
The very pace of China’s economic modernization may be politically destabilizing. Fear of internal disorder, a fear rooted in bitter historical experience, is acute—how else to explain the government’s persecution of Falun Gong, an apolitical, quasi-religious Confucian sect devoted largely to physical exercise? Restive minorities include Tibetans and also a large number of Muslims in the western part of the country.
As nations become wealthier, pressure for greater personal liberty grows; and while as Becker notes dictatorship is not incompatible with rapid economic growth, it increases variance in that growth because dictatorship is (despite appearances) a fragile form of government. A dictatorship can collapse suddenly and usher in economic disaster, as happened to Iran when the Shah was deposed in 1979 and, to a lesser degree, when the Soviet communist dictatorship collapsed.
Apart from political instability, the continued rapid growth of the Chinese economy is threatened by infrastructure limitations, pollution, shortages and bottlenecks, a weak banking system, corruption—and the remarkable imbalance between male and female births. With 116 recorded male births for every 100 female births, and an excess of 70 million males over females in the population as a whole, Chinese men will soon find themselves competing for an inadequate supply of women. The result is likely to be a steep decline in the age of first marriage for women (as in polygamoous societies), which may in turn reduce female participation in the workforce and with it economic output.
But how all these factors will interact in the decades ahead simply cannot be predicted.
Only a few comments, so I can respond briefly.
I do not see how equity loans can discourage entreprenuership or investments in human capital. Does allowing companies to issue equities discourage borrowing by companies? No, for instead it gives companies greater options, and so too would such human capital equity loans. Companies that do not want to share their profits can only take on debt; similarly, individuals that do not want to share their earnings can only take on fixed interest debt.
I find it strange that some of you are perfectly willing to have governments make special rules for their insured lending so that student loans are not dischargeable by bankruptcy. Yet you are nervous about allowing this privilege to private lenders making other human capital loans. The purpose of my suggestion about bankruptcy is to encourage greater amounts of human capital loans-at present there are practically no fully commercial human capital loans. This situation does not hurt rich persons much, but does badly limit the opportunities of young persons from poor families. They might gravitate to the equity side of my proposed human capital loans, but why is that bad if this gives them more opportunity for investments in themselves, and in other ways?
A good comment about selectivity among which persons take out equity loans and which take fixed interest loans that is highly relevant. Yale's system of equity human capital loans for their students of a couple of decades ago failed partly for this reason. But this is also a problem with equities for private companies, and that works reasonably well. To the extent that information about talents and occupations, etc is generally available, then the lending market on human capital loans should adjust its conditions to the abilities and occupations of indviduals.
These were excellent comments as usual--many negative, but that's fine.
A few brief countercomments:
The main negative comment is that credit card companies have obscene profits and therefore are not being hurt by Chapter 7 bankruptcy which makes it easy to wipe out credit card debt. It is very difficult to determine whether an industry's profitability is in excess of competitive levels, which is why economists frequently fall back on market-structure indicators--all of which suggest that the credit card business is highly competitive and profits therefore probably normal. But we needn't rest on conjecture. The nice thing about a new law, from the analytical standpoint, is that it should enable persuasive hypothesis testing. Critics contend that the new law will not reduce interest rates; we shall see. (But it should be noted that, from an economic standpoint, if costs fall, a monopolistic industry, like a competitive one, will reduce price; the profit-maximizing price will be lower as a result of the reduction in costs.)
I certainly agree that if interest rates fall, it will not be out of generosity on the part of credit card companies. It will be the result of competitive pressures that compress price when costs fall.
Some commenters doubt that Chapter 7 bankruptcy harms credit card companies. But if it doesn't, the companies' support for the Bankruptcy Reform Act makes no sense. And think: if there were a law that every tenth restaurant customer can leave without paying, would the restaurant industry think the law harmless?
One comment suggests that the logic of my position is to restore debgtors' prisons! Actually, lenders would not favor such restoration, because it would make people afraid to borrow. It would be possible to abolish bankruptcy, and thus bankruptcy discharges, without restoring debtors' prisons. The effect of such abolition would be that debtors could be required to pay a modest fraction of their income--indefinitely, rather than just for five years, as under Chapter 13--to pay off the debt.
Much concern is expressed about the impact of the Act on the poor. But the poor will remain fully eligible for Chapter 7. Moreover, commenters who worry that the poor are inveigled into borrowing more than they can afford should favor the tightening up of bankruptcy, because it will deter borrowing by people who realize they're in danger of overborrowing and going broke. Liberals may think the poor too dumb to realize this, but I disagree. In this connection, while relating the new Act to a general ideology of encouraging financial self-reliance by people of modest means, I did not mean to suggest (as one commenter thought) that it is ideology that drove the reform. I assume politics drove it. And, by the way, I do not favor generous exemptions for home or other property of rich people who go broke. I would be happy to see them hung out to dry.
Some comments point out correctly that the option of bankruptcy, by reducing financial risk, combats risk aversion and encourages entrepreneurship. Fair enough; but individual as distinct from business bankruptcy is only tenuously related to this goal.