What If Xi Was an Economic Reformer?

Since trying to improve American policy seems pointless at the moment, I’ve turned to make-believe. But useful make-believe. How much more prosperous would China be if Xi Jinping had been a modest pro-market reformer when taking over in late 2012, and stayed that way? A good answer is a book; a merely suggestive answer is that Xi wouldn’t have had to do much to get a bigger, richer, more appealing China with global influence comparable to now. Xi as a pro-market reformer looks completely ridiculous, but, for some , it didn’t look ridiculous in 2012 and 2013. Their wish-casting aside, important goals Xi has himself articulated could have been met in large part by following a path he set aside: making (sustainable) Chinese economic size and prosperity the top priority. What would it have looked like? Most important in quantitative terms, rural land could have been partly privatized. A debt spree begun under Xi’s predecessor as General Secretary, Hu Jintao, could have been checked by reducing state intervention. Innovation could have been supported primarily for commercial return, rather than primarily for strategic or political objectives. Labor movement could have been eased faster and more decisively. Extending beyond, but complementing, market reform, the government could have moved to neutrality with regard to family size in early 2013 instead of the end of 2015 . This earlier pivot might have mattered a good deal in encouraging family formation and expansion in a more vigorous economy, in contrast to Xi’s weaker economy that may have depressed family formation and expansion . It’s been 13 years and counting with Xi declining to prioritize prosperity. Even modest improvements in 2013 to 2014, if sustained, would by this time have decidedly changed and expanded the economy. On the downside, less state support would mean less competitiveness in advanced technology. China’s export mix would include more goods with lower value added. There must also have been serious political drawbacks, at least in Xi’s mind. Most everything else would be better. Partial land privatization causes a step increase in rural income. The ensuing consumption boost draws imports and encourages trade partners. Less state-enabled overcapacity does too, and also means less debt from state borrowing and firm losses. Alternate China faces fewer trade and foreign-policy obstacles. More efficient labor allocation bolsters urban income and production for profit. Deflationary pressure is essentially non-existent. Nominal GDP growth is consistently faster, wealth creation more so. The dynamic environment encourages family formation, which doesn’t change 2020’s macroeconomic results but makes for better decades to come. A partial view of the results of mild pro-market policy implementation, 2013-2025: Indicator Major change Actual 2025 Alternate 2025 Rural income Partial privatization of rural land $3425 $5300 Retail sales More personal income $7.02 trillion $8.8 trillion Goods imports More consumption $2.59 trillion $3.1 trillion Consumer prices Less policy support for supply Flat +1.5-2 percent Total debt Less capital misallocation * 296.2 percent of GDP 240 percent of GDP National wealth Less suppression of profit motive ** $96 trillion $125 trillion Annual GDP More sustainable component mix $19.6 trillion $21 trillion Median age Better economic setting for families 40.1 39 Sources: author’s calculations, NBS Statistical Yearbook , https://www.stats.gov.cn/english/PressRelease/202602/t20260228_1962661.html , and https://population.un.org/dataportal/home?df=55ff974c-ddea-4a54-8c85-c8cce25f280d * Extrapolated one quarter from https://data.bis.org/topics/TOTAL_CREDIT/BIS,WS_TC,2.0/Q.CN.C.A.M.770.A ** Extrapolated one year from https://www.aei.org/research-products/report/annual-wealth-estimates-for-china/ The missed opportunities may seem small. But one year of median age would also signify slower future aging if childbearing decisions began to shift in the mid-2010’s. This would have mattered most of any single factor for China’s long-term trajectory. The reduction in the debt burden from a flatter trajectory is similar in impact, though not transformative. It indicates that modest GDP improvements 2013 to 2025 would have had staying power. Lower debt represents lower supply-side waste. Higher rural incomes spur consumption of domestic and foreign goods. Ensuing low inflation is quantitatively similar to no inflation, but one is near-ideal and the other sees risky deflationary pressure. The bottom line is a $25-30 trillion gain in national wealth, plus a brighter horizon. This isn’t perfection in hindsight or requiring radical change. In 2012, most middling scenarios for the economy were at least as good . Xi’s pursuit of centralization and technology has cost a dozen years that could have been more prosperous, and a more prosperous future. A notably larger, richer China would be typically too important to confront, just as Xi seeks (see the 2020 edition of Governance of China ) with his smaller, poorer version. A richer China would be a better partner, so fewer countries want any confrontation in the first place. On several of his own terms, Xi chose badly. The post What If Xi Was an Economic Reformer? appeared first on American Enterprise Institute - AEI .