Consumer demand in China (14 Nov 2008)

I still remember being taught in high school during the 1980s that the U.S. was superior to the Soviet Union because we could shop at the mall and choose from a cornucopia of goods while the Soviets had stand in line at gray, dreary state-owned dispensaries and basically take what they were given. The Soviet citizens envied our freedom, which is why they were always defecting and why they faced a repressive police state and fences to keep them in rather than enemies out. When the U.S.S.R. fell, many assumed that the former Soviet bloc would smoothly integrate into the global capitalist economy, greased by surging consumer demand. That hasn't worked out so well, though we still hear of the over-the-top consumer decadence of Russian oligarchs -- for example inadvertently killing their mistresses by letting them bathe in tubfuls of expensive perfume. But considering how Russia remains a bloc unto itself, it seems true that Soviet citizen weren't simply Western-style consumers in waiting, that in fact Western-style consumption is not some universal mind-set that sits dormant in all humans and is merely waiting for the opportunity to flourish as it should. It may be that the Western consumerist mentality is itself as anomalous as the Iron Curtain mind-set. What's more, those not to the consumerist manner born might actively resist adopting it.

This FT editorial about stoking consumer demand in China (also noted by Brad Setser here) got me thinking about the desirability of consumer mind-set. The FT and Setser rightly argue that from an economic standpoint, the world needs more demand from Chinese consumers. From the FT:

China’s growth to date has been phenomenal, but it was based on exports and investment, at the expense of consumption. China almost aimed to be a supersized South Korea: in 2005, capital investment made up more than half of China’s gross domestic product. The capital-intensity of its growth also meant profits grew strongly as a share of GDP. But employment growth has slowed since the 1980s, so workers have gained small benefit.
With an undervalued renminbi also making imports dear, the Chinese public has proved loath to spend. China has far too little dom­estic consumer demand. Where­as household consumption made up more than half of China’s GDP in the 1980s, it now contributes little more than a third.

Whether China wants to become more like South Korea culturally seems questionable; it's curtailment of political freedoms seems to suggest otherwise, and if the Milton Friedmans of the world are right, the procedure of fulfilling increased consumer demand habituates people to freedom of choice and leads to citizens insisting on liberty across the board. Already, no one trusts China's economic data; part of the obfuscation seems to be to conceal its efforts to manage consumer demand and suppress it. It seems probable that China, on the give-an-inch-take--a-mile principle, would want to intentionally restrict consumer demand to forestall unrest. So it keeps wages (and consumer demand) low, produces goods and sells them to the West, and then uses the proceeds to buy Treasurys and keep its currency weak (making foreign goods expensive and also pre-empting consumer demand). It pooh-poohs the West with talks of rebalancing its economy and reducing its current-accounts surplus, but takes no action. Its recent stimulus plan, as the FT argues, does little to address this. Setser adds that Chinese tax rebates on exports will only exacerbate the imbalances that are creating problems for the Chinese economy in the first place -- namely that world demand for cheap Chinese goods is falling yet the Chinese economy has little incentive to shift to manufacturing for the domestic market. (Though the Chinese government might want to consider some palliatives if this sort of thing keeps up.)

This seems to add up to Chinese government officials being reluctant to unleash consumerism in China. Perhaps they fear moral corrosion. Perhaps the ghost of Mao is admonishing them. Perhaps the Chinese people haven't effectively been taught how to demand -- maybe there is a marketing deficit there. But some attention should be paid to the political and social factors (as opposed to only the economic factors) that retard the growth of consumer demand. It may be that consumer demand can't automatically be called into being simply because economic models require it.