Saturday, March 17, 2007

Two Models to Grow From

While I think there's little doubt over China's phenomenal economic growth to date, a friend keeps reminding me to let him know "when the party's over" so he can consider repositioning his portfolio. China's recent successes isn't so much about what it's done right as it's arguably about their past failures.

China's just starting to catch up and it will take some time before it really is the economic behemoth everyone seems to already think it is. Despite all its growth, it bears recalling that China only surpassed the GDP of Italy, France and the UK at the end of 2005 despite each having only around 60 million people compared to China's 1 billion or so. And compare China's estimated $2.5 trillion GDP to the USA's $13.2 trillion. of As William Dodson writes:

I always bring to students' and participants' minds when I lecture that until the mid-1800s China represented 30% of the world's GDP for more than a thousand years. As one Chinese put it, "China just had a bad couple hundred years."
China has much to learn from two leading lights - particularly the one that they took over from the British - Hong Kong, and the other, Ireland. From John Fund in
Looking back, Milton Friedman said that in the 1990s he offered three words of advice to countries escaping communism: privatize, privatize, privatize. “But I was wrong,” he said shortly before his death. “That wasn’t enough. It turns out that the rule of law is probably more basic than privatization. Privatization is meaningless if you don’t have the rule of law.” Economist Robert Lawson, co-author of the Economic Freedom of the World annual report, published by Canada’s Fraser institute, concurs: “Giving people property rights and the ability to settle disputes peacefully and fairly—that is the number-one thing that matters.”

Lawson notes that the two top countries on his economic freedom index are Hong Kong and Singapore. Neither is particularly democratic, but both once belonged to Britain and adhered to that nation’s common-law traditions, built from bottom-up practical experience over centuries.
Next they should consider Ireland's successes despite being previously an economic basket case they've led old Europe in growth. From Cato's Chris Edwards in the National Review:
Irish government spending fell from more than 50 percent of GDP in the 1980s to 34 percent by 2005. For Europe that is a triumph of restraint, given that the average size of government across 25 EU countries today is 47 percent of GDP.

And Ireland has steadily reduced its tax rates. The top individual income tax rate was cut from 65 percent in 1985 to 42 percent today. The capital-gains tax rate was cut from 40 to 20 percent in 1999.

However, the key to Ireland’s success has been its excellent tax climate for business. In 1980, Ireland established a corporate tax rate for manufacturing of just ten percent. That low rate was subsequently extended to high-technology, financial services, and other industries. More recently, Ireland established a flat 12.5 percent tax rate on all corporations — one of the lowest rates in the world, and just one-third of the U.S. rate.

Low business tax rates have helped Ireland attract huge inflows of foreign investment. Given the country’s modest size, it boosts a high-tech industry second to none. Intel, Dell, and Microsoft are among the island’s biggest exporters. Ireland also hosts booming insurance, banking, money management, and pharmaceutical industries.
While I won't argue that either Hong Kong or Ireland are perfect (from what I've seen, Hong Kong still can go a ways), I think they illustrate just how far China can go - that while a crash is almost inevitable, continued structural reforms will mean that they emerge better and stronger than before.

No comments: