Quite a speech. I knew that Kornai was well known among Chinese with a Western education and of a certain age, but I had not expected this enthusiasm. In fact I believe that Kornai would have expected China to have made little more progress on the road to modern insttitutions and proper solutions for extreme poverty, that is, by now, rather than have accumulation occur mainly in the areas run by the descendants of the late communist elite. There is more to Kornai than just car mechanics approach to the economic machinery (it is interesting that this autodidactic economist discovered so much of modern economics all by himself, trying to figure out what needed to be done (pardon the Leninist pun)). Kornai wrote (i cannot type so bear with me)

..In all of them the public sector plays an overwhelming role. and hence the countries must overcome similar obstacles if they want to proceed with the privatization of the economy. Although there are sporadic elements of a genuine market mechanism, the institutions, the legal support,and, no less lignificant, the culture and ethics of a well-functioning market are not yet developed. Prices, interest rates, and exchange rates are distorted…” (from “The Road to a Free Economy: Shifting from a Socialist System, the Example of Hungary” NY, 1990) My original reason for evoking Kornai was indeed his well known theory of soft budget constraints. Mentioning him here in response to your post was simply to highlight his equally useful, timely and utterly ignored (if you look at Hungary since 1990) advice to countries going away from state domination of the economy (as applicable to Hungary at the time of writing). It had a message for China too, and as far as I can see today, there are a few things left to be done. Even if the SOEs enjoy exemplary management that could give the bright sparks at GM a lesson or two (and I guess they could, but not uniquely..).

RebelEconomist,

You are right, too many irrelevant comments. Will do our best to be brief and topical next time.

Absolutely, the very high corporate and individual savings rates in China are one legacy of the central planning era. Individuals saved during central planning, because you couldn’t use the money for anything. Chinese corporations get benefits from being big and having lots of cash because a big bank account means a bigger office, higher salary, and more fringe benefits.

However, because these are the historical legacy of the central planning era, doesn’t mean that they are incompatible with the market or that they were determined by central planning. Russian consumers had the same habits of savings as Chinese consumers, but they had their savings destroyed in the 1990′s by hyperinflation.

The incentives of Chinese SOE bureaucrats to produce big cash-rich companies means that if you have soft budgets, then they will try to make money by government patronage, but if that patronage stops, then they have to actually go out to create wealth.

There is also the element of “political correctness.” No US government official in 2009 is going to say outright, we are copying China in managing General Motors, just like no Chinese government official in 1978 was going to say “let’s learn from the evil capitalists.” But they are. You aren’t going to see any Chinese officials on the board of GM, but there are ways of getting advice from Chinese SOE managers in ways that are politically correct (Fed asks Morgan-Stanley what to do, Morgan-Stanley asks the China Investment Corporation, CIC asks SASAC).

A lot of it is returning the favor. Much of the way that China reorganized its SOE’s and banking system was copied from the Resolution Trust Corporation.

Also, “political correctness” affects arguments in odd ways. In all my years of reading Chinese economic works, I have never seen any Chinese paper that has said the slightest positive thing about Japan. Most papers are “in what way has Japan mismanaged its economy?” If you think that Japan has a good idea, then you don’t talk about Japan, you say good things about South Korea.

Curiously “political correctness” is why Kornai ended up so influential in China. Remember that in China in 1978, the Soviets were considered as evil as the Americans, because in Maoist thinking the Soviets were “evil revisionist capitalists.” So if you have a Hungarian economist bashing Soviet central planning as completely incompetent, then he becomes wildly popular in China. The basic decision in China in 1980 was whether to reinstitute Soviet central planning or to do something else. Kornai’s ideas were powerful arguments against Soviet central planning.

Kornai is probably one of the most important and influential thinkers that has influenced Chinese economic reform. And Kornai very quickly gets you to von Mises and Hayek. Hungary is right next to Austria.

One other thing is that you miss all of this if you just see the world in black and white. Americans in 1980 saw things in terms of Communism versus Democracy, in which China became “capitalist.” That wasn’t how Chinese saw things since in 1980 the political orthodoxy was that capitalism was evil and the Soviets were as capitalist as the Americans.

In 1980, the argument against Soviet-style central planning was that by rejecting central planning that it would make China *more* socialist. Which if you understand the Chinese definitions and redefinitions of socialism, it has.

And then you have Deng Xiaoping in the background, smiling and saying “I don’t really care what you call it, as long as it works.”

It seems a shame to disregard comments simply because they are long, and I would hope that if commenters have to be selective, we would still get their more significant contributions, and written more carefully.

Don’t worry about limiting comments. Your readers can skip over long comments while looking for shorter comments that are informative and helpful.

Howard

If you want to predict the current account deficit for this year, the best place to look is the latest actions of the Chinese State Council (the Chinese cabinet). In late May, they:

1. Reiterated that they are going to keep their currency pegged to the dollar.

2. Increased their export subsidies on high-tech, labor-intensive, and textile exports. In fact, they raised their export subsidies on textiles to 16%.

Geithner’s response, in his speech at Peking University, was to call on China to increase its household consumption and “continue progress toward a more flexible exchange rate regime”.

President Obama and Treasury Secretary Geithner live in a dream world in which they can talk China into changing its policies.

I recommend, instead, that they enact an import certificates plan which ties American imports from China to Chinese imports from us.

Would it be possible and desirable to set a limit on the length and/or number of comments per post on this blog? There seems to be an increasing number of long, insubstantial, sometimes rhetorical comments which drown out and possibly deter more considered, informative and thought-provoking contributions. I am not in favour of banning any individuals or views, but some way of encouraging selectivity and brevity might raise the quality of discussion.

I guess we are reading from the same page but have different associative thoughts. Anyway, If you believe that the GM case demonstrates a US (as opposed to Chinese, and there it needs to be tested, right now these companies are allowed to squirrel away so much earnings that they get the AAA syndrome (entrenchment) s well as a legacy of soft budget expectations) ttachment to credible commitments, I guess you are an optimist..

Anyway, fine comments!

The role of General Motors is to make cars. It’s not in the banking industry, the health care industry, the unemployment benefits industry, or the pension industry. If they board of directors of General Motors is concerned about something other than making a profit, then something is wrong. It’s not the health care, pensions, banking, unemployment benefits, are unimportant, it’s that someone else should worry about them, and not GM. If the board of directors has to worry about health care every time it decides how to make a car, then it’s being distracted from its job.

Also, if the US is copying the Chinese playbook, then we ought to see the US government assuming GM’s health care liabilities. The next step is when people start asking if the US government is funding GM’s health care liabilities, why shouldn’t it fund every one elses………

There’s no reason that I can think of that it wouldn’t. The structure that China ended up with was to have the various public and private entities act the shareholders, and then apply American management theory to the corporatized enterprises.

Basically public ownership within a pricing system in which access to capital is restricted.

Huizer: I had hoped that someone with Mainland roots would have been familiar with Kornai’s wisdon, especially his mixed economy observations.

Kornai was probably of the most important influences on Chinese economics, and a lot of the theoretical economic and practical work in the 1980′s and 1990′s in China was precisely how to avoid the soft budget constraint and other problems that Kornai identified. You really couldn’t and can’t read anything in China about Chinese SOE’s without running into the importance of prices and hard budget constraints.

Conversely Kornai happens to think very highly of the Chinese economic system.

The issue that the United States faces now is similar to the one that China faced between 1985 and 1995. State-owned enterprises exist. They aren’t going to be privatized anytime soon. That decision has been made. So rather than throw up our hands and give up, the point now is to go through the accumulated knowledge of what works and what doesn’t to make the best of what we have.

Rien Huizer: The jury is still out on whether or not the current SOE approach has viability in indusrtries where competition is complex and where managers are facing scarcety of finance and labor for instance.

The idea behind much of Chinese economic reform was that SOE’s would function better if they were forced to compete with private corporations, and if their access to finance and labor were restricted. One of the (several dozen) important parts of SOE’s was to change them so that they did not have access to infinite capital, because very bad things happen when capital is too cheap, which is Kornai’s point.

Once access to external capital is limited, then SOE’s are forced to horde internal generated capital, which means they are forced to make a profit and thereby generate wealth.

One of the reasons that the SOE sector in China is doing rather well in comparison to the “private” export industries, is that after the banks were reformed in 2000, the SOE’s were faced with restrictions on their access to external capital. By contrast, private export industries had access to vast amounts of overseas money which led to an export boom and bust.

The problem with a lot of the discussion is that people assume that Chinese SOE’s look a lot like Soviet or Japanese corporations, when they don’t. The whole point was to change the incentives so that managers in the SOE’s would function a lot like managers in American corporations do, which is to maximum output given restricted inputs.

The other thing that I suspect will happen with GM, is that the government will take over GM’s health and pension liabiities in the “old GM” leaving the “new GM” free to run a car company rather than an pension annuity company.

I know, but that does not mean that it would work well under very different circumstances. This is neither a low cost produces nor a leader in product development. It has (in the US, elsewhere the situation is a little more complex, Opel for instance may well make a good car company once it is rid of GM) many other weaknesses than just financial legacies and inefficient plants. Those weaknesses require inspired management. Not so sure the Chinese SOE structure with US characteristcs would do the trick. I had hoped that someone with Mainland roots would have been familiar with Kornai’s wisdon, especially his mixed economy observations.

The jury is still out on whether or not the current SOE approach has viability in industries where competition is complex and where managers are facing scarcety of finance and labor for instance.

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