The Emergence of China in the Global Economy

In mid 2004 Lester Thurow gave a talk on the emergence of China in the global economy. He raises a number of important points. Half way through the talk, he dissects the growth numbers. China has a bottom up reporting system and a top down promotion system. Administrators advance in the ranks by posting good numbers. This is a recipe for over reporting. Unsurprisingly there is a mismatch between the amount of economic activity reported to Beijing and the amount measured through electricity use. The rule of thumb is that an increase in GDP of 1% requires an increase in electricity use of 2%. Japan is the most efficient. It can squeeze a 1% increase in GDP from a 1.7% increase in electricity, but that is only because, since the energy shortage of the 70's, Japan has systematically shut down industries, such as the production of aluminium,  that require a lot of electricity. The amount of electrical use in China suggests a rate of growth of about 4% to 6%, rather than the 8% to 10% that gets reported. 4% is a very healthy growth rate. Most finance ministers would kill for a number like that, but the difference between 5% and 10% is significant if you project those numbers over 50 years. 

This brings us to why press freedoms are so restricted in China when compared to the Hong Kong or Taiwan. The Party's legitimacy is based on performance. If the numbers don't look good, the Party is in trouble. With a free press comes greater third party review. That's a threat. It follows that we will see little movement in the direction of greater press freedoms until the Party can find a different way to sustain its legitimacy. China is a big country. The Party could use geography to their advantage. Chinese now can not move freely. A system of internal passports restricts the movement of people from one place to the next. Relaxation of those restrictions would allow people to move away from administrators they see as less legitimate toward ones they see as more.