My Blog

April 7, 2008

MON 7 APR

Is China mercantilist? By Michael Pettis

Some readers of my blog have in the past questioned my reference to Chinese economic policies as “mercantilist”, but I think these policies are in very many ways much closer to a mercantilist view of economic development than they are to the classic free-market view.  Perhaps what these readers object to is the fact that ever since Adam Smith’s scathing, and often unfair, attacks on mercantilism in The Wealth of Nations the term “mercantilist” has had negative connotations.

 

But not for me.  I am a big fan of Richard Cantillon’s brilliant and seminal Essai sur la Nature du Commerce en General (published posthumously in 1755 but written twenty or so years earlier) which is considered to be, in many ways, a classic mercantilist text, although this is much disputed by some of his more classical fans.  Furthermore probably the first serious piece I ever published (in Foreign Affairs about 15 years ago) was on the excitement that Latin America’s recent turn to neo-liberal policies was generating among bankers, economists, and the world press.  

 

In the article I argued that these free-market hard-currency policies were not particularly new and had been tried many times before in the region, without much success.  I also argued that the often frankly mercantilist policies of Alexander Hamilton, one of my great heroes in economic history, seems to have had much more success in propelling developing countries into the ranks of the rich than had the classical or neo-classical policies more widely proposed during the 19th and 20th centuries.  In particular I think that the countries with the most successful track records, the US and Germany in the 19th Century and Japan and Korea in the 20th century all followed policies that can be traced back to Alexander Hamilton and which were once referred to as “the American system” – for example German economist Freidrich List (1789-846), who is often considered the father of German economic development, got much of his economic theorizing from American Hamiltonians during his seven-year exile in the US.

 

So for me the label mercantilist is fairly neutral, and although I do not consider myself a mercantilist, there is clearly a lot to be said for some of their beliefs about the functioning of an economy – especially a developing economy in its growth stages. Was Hamilton a mercantilist?  It is a little hard to say because no one that smart and pragmatic can have easy-to-categorize beliefs, and even Adam Smith shared some decidedly mercantilist views, but I suspect Hamilton’s polices are more likely to be considered mercantilist than free market, and certainly he was no foe of government intervention in the market.  (So that I am not accused of being a protectionist I would add, however, that what strategy may work for a developing country with low productivity might not necessarily work for a highly developed economy.)

 

So what then is mercantilism?  Merriam-Webster defines it as “An economic system developing during the decay of feudalism to unify and increase the power and especially the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed to secure an accumulation of bullion, a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies.”  To go a little further, I would argue that there are a group of policies or beliefs that generally coalesce within the idea of mercantilism. I put together a list compiled from a number of sources, most usefully from Gerhard Rempel, of Western New England College http://mars.wnec.edu/~grempel/courses/wc2/lectures/mercantilism.html.  These are:

 

1.        Economic health can be measured by the accumulation of gold or other forms of hard money.  This requires a favorable balance of trade in which the excess of exports over imports leads to an accumulation of gold or silver, in the old days, or, more currently, central bank reserves. Among other things imports, especially of luxury, should be discouraged.

 

2.        Government regulation can and should ensure a favorable balance of trade. Tariffs should be high on imported manufactured goods and low on imported raw material (note that an undervalued exchange rate is often seen by economists as a tariff on imports and a subsidy for exports).

 

3.        Nations should try to achieve economic self-sufficiency, both in terms of manufacturing and in terms of agriculture. The fewer things a nation needs to acquire from abroad, the better. In order to secure access to minerals and commodities that cannot be obtained at home, governments should encourage direct ownership of assets abroad or colonization.

 

4.        A large population is a good thing because it keeps domestic wages low and so enables the country to improve its terms of trade. It also makes colonization easier by providing the labor force to people colonies.

 

5.        Professor Rempel adds:  “Sea power was necessary to control foreign markets. A powerful merchant fleet would obviate the necessity of using the ships of another nation and becoming dependent on foreign assistance. In addition, a fleet in being could add to a nation's prestige and military power.”  Today we might want to change that a little to include air power and space technology.  To this Laura Hayes, in The Concise Encyclopedia Economics, adds:  “During the mercantilist period, military conflict between nation-states was both more frequent and more extensive than at any time in history. The armies and navies of the main protagonists were no longer temporary forces raised to address a specific threat or objective, but were full-time professional forces. Each government's primary economic objective was to command a sufficient quantity of hard currency to support a military that would deter attacks by other countries and aid its own territorial expansion.

 

6.        Above all mercantilists seem to believe that the government has not only a useful function but also a necessary role in regulating the economic process so as to provide maximum advantage for the nation and state. The Columbia encyclopedia puts it this way: “The state exercised much control over economic life, chiefly through corporations and trading companies. Production was carefully regulated with the object of securing goods of high quality and low cost, thus enabling the nation to hold its place in foreign markets. Treaties were made to obtain exclusive trading privileges, and the commerce of colonies was exploited for the benefit of the mother country.”

 

Not all of these apply to China, of course, and some of these things I’d rather not discuss for obvious reasons, but look through the list and decide whether or not China can be said generally to pursue mercantilist policies.  In fairness, of course, nearly every country in the world pursues a combination of mercantilist and free market policies, so this is not an either/or game, but it seems reasonable to suggest that some countries are more openly mercantilist than others, right? 

 

I think it may also be safe to say that developing countries that joined the ranks of the developed seem to have followed a little more eagerly the ideas on this list during their period of rapid development than they did once they arrived at developed-country status (at least that is one of the arguments I made in my Foreign Affairs piece).  I don’t know if this is or isn’t an argument in favor of mercantilism (I think it is), but it seems to me that history is on China’s side here.  These “mercantilist” policies are more often correlated with developing-country growth than are others.

 

I was thinking about all of this, perhaps surprisingly, because of a small, almost throwaway article in today’s China Daily.  The article (“Premier: China self-sufficient in food”) reported on a speech by Premier Wen in Hebei Province in which he assured everyone that “the Chinese people were fully capable of feeding themselves.”  The Chinese obsession with ensuring that China can fully produce all the food it consumes – some say this obsession began with Mao – has been widely noted. It really is more of an obsession than a rational policy; after all if China can produce other things more efficiently than it can produce food, why not produce the other things and exchange them in trade with even more food.  But food self-sufficiency is seen here as being of vital national importance.  That strikes me as a ferociously mercantilist point of view, and it does seem to fit into place with a number of other policy considerations typical of the Chinese leadership.

 

Meanwhile global rice stockpiles have fallen to about half of what they were at the beginning of the decade, according to Bloomberg today, and rice prices are soaring.