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The Chinese Century

If China surpasses the United States as the leading world economy sometime around 2040, historians may look back upon the economic issues described in  Morgan Stanley's latest "Global Economic Forum."  (Believe me, I don't read these things regularly, but my friend Larry Lynn does and sends them to me with instructions what I should  say about them.)  Qing Wang and Steven Zhang recount how, along with its huge stimulus program, which is aimed at building infrastructure, China is also undertaking "reinvigoration plans."

These plans are designed to "protect ‘advanced productive capacity' in general and the market share of leading enterprises and brand names in particular." According to a Chinese government report, China has vowed to adopt

a combination of coordinated measures, including intensifying the technological transformation of enterprises, promoting mergers and reorganizations, shutting down backward production facilities, developing major products, innovating major technologies, and apportioning key development projects.

The industries covered include automobiles, shipbuilding, petrochemicals, information technological, and machine tools.

These measures will boost demand, but more important they will help position China so that when the dust finally clears from this recession/depression, it will not have sacrificed key industries at the altar of temporary global overcapacity, and will be poised to compete effectively in a new world economy.  Of course, China could pick the wrong winners and losers - that's always possible.  But it could also emerge much stronger - as Japan, which also employed a similar industrial policy,  did after recessions in the ‘70s.

The Obama administration understands the economics here. That's why it has included productivity increasing investments in energy and education and targeted subsidies for new "green industries" in its stimulus program and budget.  These kind of expenditures might not raise demand as quickly as, say,  road-building, but they are absolutely necessary if the United States wants to stay competitive in the post-recession world economy.  The Republicans, of course, and some conservative economists don't' understand this, and to the extent they can eliminate these kind of investments from the budget, they will have made it more likely that this will  turn out to be the Chinese rather than the American century. 

--John B. Judis