Is China’s Capitalism Better than America’s? Why Minxin Pei Will Argue “No” at the Slate/Intelligence Squared Live Debate on…

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March 7 2012 6:18 AM

A Pox on Both Your Houses

Why Minxin Pei will argue that America does capitalism better than China—barely—at the Slate/Intelligence Squared live debate on March 13.

Minxin Pei
Minxin Pei

Courtesy the Carnegie Endowment.

Minxin Pei wears many hats: Born in Shanghai, he became a dual Chinese-American citizen after moving to the United States to attend graduate school at Harvard. He has served as director of the China Program at the Carnegie Endowment for International Peace and teaches government at Claremont McKenna College. Pei is the author of China’s Trapped Transition and From Reform to Revolution—and despite his harsh words for both the Chinese and American economic systems, he’s also a bit of a jokester. (When I asked him how the United States fit into the global balance of power, he subtracted points for the Washington Dulles International Airport.) Pei has high hopes and fears for his two home countries: He thinks China and America should embrace their growing interdependence, but he’s dismayed at the greed shown by both Communist Party bureaucrats and leaders of what he calls the “Capitalist Party of the United States.”

Katy Waldman Katy Waldman

Katy Waldman is a Slate staff writer. 

I recently spoke with Pei over the phone about American and Chinese forms of capitalism and the social forces that are beginning to challenge China’s one-party rule. Below are excerpts of our conversation.    

Slate: In the Slate/Intelligence Squared debate on March 13, you’ll argue against the motion that China does capitalism better than America. Does that mean America does capitalism better than China?

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Minxin Pei: Yes. If China does not do capitalism better than the U.S., than obviously the U.S. does it better than China.

Slate: I was thinking maybe the two systems were just different.

Pei: Well, the U.S. does not do capitalism as well as it used to, or as well as it should. You don’t have to look at China to see where America is going wrong. Let me identify a few obvious areas: infrastructure. The U.S. has been shortchanging its own economy and people by underinvesting in infrastructure for decades. So America is a First World country with almost a Third World infrastructure: aging power grids, aging bridges, aging roads, dilapidated airports.

We’ve also been underinvesting in public education. As a result, we are falling behind in terms of producing highly skilled people who can compete in the global economy.

Finally, we’ve allowed certain sectors to have a lock on the economy. The financial sector is way too big. Also the health care industry. Health care accounts for more than 17 percent of the GDP; federal revenues from taxes are about 16 percent. So, in other words, we now have the choice of either a second federal government or the health care sector.

Slate: What can American economists learn from China?

Pei: Not much. The only thing they can learn is that government needs to invest. China invests too much in infrastructure, but the U.S. doesn’t do enough. In the modern economy, in the civilized world, government does have a role to play in economic activity.

Slate: What does that role look like, ideally?

Pei: It looks like the United States in the ‘50s and ’60s. Best case scenario, the government invests in infrastructure (the interstate highway system is a great example), basic research, environmental protection, and public education on primary, secondary, and tertiary levels. Take, for instance, the GI Bill, a scholarship program for soldiers returning from World War II. The government doesn’t have to do what China does, which is give companies a lot of subsidies and invest in technology. That gets the state into the uncapitalist business of picking winners and losers—business with which it never does a very good job.

Slate: I have this list of data in two columns. On one side is America, and it says, “jobless decade,” “30 years of flat median wages,” “trade deficit,” “a shrinking middle class” and “extraordinary gains in wealth, but only for the top 1 percent.” Then, on China’s side, it says, “a 12.5 percent rate of annual growth,” “10 percent wage increase,” “expanding middle class,” “49 percent growth in tax revenue for 2011”—

Pei: Using growth as an indicator of whether one country does capitalism better or worse than another is not reliable. Growth is determined by many things other than the quality of a state’s capitalist institutions. The biggest determinant is the level of economic development. The U.S. is already a highly developed country, so the demand for goods and services is constrained. China is a very low-income country. When it began to grow 30 years ago, its average income was something like $300. The U.S. at that time was $13,000.

Investment also encourages growth. If you invest more in a product, you can grow a lot. China has been investing more than 35 percent [of its GDP]. The United States is investing less than 26 percent.

Slate: What would be a better indicator of China’s progress?

Pei: The essence of capitalism is economic efficiency. Assessing efficiency means looking at whether Chinese companies are more profitable; at whether, given one unit of investments, China produces more than the U.S. If you study these indicators, the United States outperforms China across the board.

Slate: In an article in the Economist, Aldo Musacchio at the Harvard Business School wrote, “State capitalism today is a system in which governments have realised that profitable state-owned enterprises (SOEs) make the state stronger. Thus, even if large state-owned firms have a ’double bottom line,,’ in which social and political objectives are important, profitability has become a key goal.” How would you respond?

Pei: State capitalist countries are all one-party or nondemocratic systems. What they understand is not that economic efficiency is going to keep them in power (though of course it may help). It is their control of violence, the police and the army. Having a more efficient economy may be less costly, but at the end of the day, if you give Mr. Putin a choice between that and retaining complete control of the instruments of violence, I have no doubt which he will pick.

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