Wednesday, December 9, 2009

Bottom-Up Innovation: China

Alexandra Harney wrote an article on Foreign today, bemoaning the lack of central direction from Beijing, in the area of industrial policy. She ended up arguing for more centralization, less local regulations, and voila, currency de-regulation. She compared China against Japan, where the Ministry of International Trade and Industry pretty much ran the country, economically speaking.

However, Harney fails to establish clearly why Bottom-Up innovation, seems the case in China, is worse than Top-Down Innovation, the case in Japan.

The general problem with an opaque policy-making process is that it imposes too many regulations and encourages corruption. Is that the case with China? Harney does not say.

Harney bemoans the saving nature of the Chinese consumers. What's wrong with that? A lower velocity of money helps to head off a bubble in China, which is good news for everyone (except perhaps India.)

Lastly, Harney talks about currency deregulation, but fails to establish why that's good. It seems to be conventional wisdom that currency pegging is bad, but conventional wisdom is frequently wrong. If the prices reflect the inputs, ie not artificially distorted, a pegged currency is not market-distorting. Now China may be giving up control of its monetary policy, but a currency peg is not automatically bad.

She also ignored the case of the United States, where we had 50 states running their own industrial policies. Which is the better model for China?

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