Monday, July 6, 2015

Quote of the Day: Leap Forward Campaigns.

Yi, Gang.  Money, Banking, and Financial Markets in China.  Westview Press.  1994.  Page 204.
The leaders of China often have incentives to overheat its economy with a so-called "leap forward" campaign. Perhaps they always want to show the socialist system is superior to the capitalist system and the ultimate way to show that is to prove that its economy is developed more rapidly in the socialist system. Once a leap forward campaign fever creates famine and shortage and drives the economy to the brink of bankruptcy, the government has to adjust to the direction of obeying economic laws, such as providing material incentives and respecting the invisible hand, etc. After the economy has recovered from the disaster, the government is ready to start another great leap forward campaign. This kind of movement happened several times in the 40 years of the People's Republic under different slogans, most notoriously in 1958 (the Great Leap Forward), in 1978 (Four Modernizations), and in early 1980s (Quadrupling the Total Output by the Year 2000) and perhaps in 1988 under some new slogans. Although China has repeatedly suffered the ill-effects of investment fever, this problem is still haunting its economy, because the incentives for such fever remain. One thing that is worth mentioning is that before the economic reform, only one economic agent, namely the central government, was capable of overheating the economy, given its tight control over local governments and firms. After decentralizing reform, local governments and numerous firms have also been infected by this investment fever disease. The economic reason behind this is simple. Facing a soft budget constraint, its is rational for a firm--or a local government--to invest more when it has the authority to do so. The relationship between the interest of the investing agent and the result of the investment is asymmetric. It enjoys the success of the investment (in terms of gaining power, material rewards, and promotions, etc.), but does not bear fully the cost of a failure. It is often said by Chinese government officials to excuse a failed investment that "this is the tuition we have to pay to learn".