Henry Ergas, on vested interests as obstacles to economic and political reform

Henry Ergas, writing in the Weekend Australian of July 11-12 [page 15, ‘When the flying panda fell to earth’], remarks on how vested interests in China are preventing the economic reforms that the country needs to undertake in order to maintain growth in its living standards.

[A]ll countries that experience explosive growth, at rates that reach and exceed 7 per cent year after year, confront a fraught transition when growth eventually slows, as it typically does once per capita incomes, expressed in purchasing power parity terms, exceed $US10,000 to $US15,000.

Nor are the pressures that bear on that transition solely economic; on the contrary, especially in one-party regimes, they are also, and perhaps even mainly, political.

Their intensely political nature is readily understandable: rapid growth provides the broad base of support on which such regimes rely, making its persistence crucial; but powerful interests, including those In the ruling party, profit from, and so benefit by perpetuating, the complex of policies that underpinned the previous wave of expansion.

There is, as a result, an inherent bias to keeping those policies in place, despite the obstacles they create to the changes that must occur for growth to continue. And as the conflicts that gives rise to emerge, there is also a bias towards administering dose after dose of monetary and fiscal stimulus in a vain attempt to re-create – without the painful structural adjustments – the very high growth rates the public has come to expect …

[W]hat China requires is a dose of Deng Xiaoping’s courage in pursuing market liberalisation. That courage was amply on display when his successor Zhu Rongji exposed state-owned businesses to competitive constraints, in a restructuring that saw an estimated 60 million people lose their jobs.

Many thought Xi Jinping would take the next steps, entrenching a more market-friendly approach; but it has become apparent that there are powerful opposing forces among the old system’s myriad beneficiaries, which include state-owned businesses, substantial parts of the military, local governments and the tycoons. It is also apparent that those forces are far stronger today than they were in the late 1990s, when Zhu’s dramatic reforms were launched.

True. But let’s not forget that the same situation applies in the centre of western civilisation – during the financial crisis of 2008-09, President Obama gave the vested interests in his United States everything they wanted, which was quite contrary to facing hard facts and encouraging restructuring of failed enterprises. President Roosevelt’s example, of taking on ‘money power’, wasn’t drawn on as an inspiration. In fact the Obama administration’s response to the crisis was all about protecting vested interests, as far as I can see.

The same thing happened here in Australia. Implemented by a Prime Minister who, at the same time, boasted about how he was taking on, and seeking to replace, the capitalist system.

And, without leaders of courage who can see what needs to be done and who are able to do it, the same thing will happen in future.

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About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
This entry was posted in Decision-making, Privileges Rents and Vested Interests and tagged , , . Bookmark the permalink.

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