China's economic slowdown: 11 things you should know
Updated by Matthew Yglesias on September 3, 2015, 7:01 a.m. ET
11) This summer has shaken faith in China's leaders
Much of this has been in the air for years. The reason it's coming to a head now is that the stock market bubble and subsequent collapse have shaken faith in the Chinese government's ability to form and execute coherent policy.
When the bubble was on its way up, the government tried — and failed — to slow it. Then when it started to pop, the government tried — and, again, failed — to slow the pace of the collapse. China devalued its currency to boost its economy, but didn't go far enough. It's cut interest rates repeatedly, only to find that it needs to cut them again. Now the government seems to be arresting people who express negative opinions about the stock market outlet.
This summer's events have laid bare the reality beneath the incredible successes of the past 20 years. China remains a middle-income country with shaky economic institutions and an opaque and unaccountable political system. Three decades of stellar growth starting from a rock-bottom floor have landed China at a level of per capita prosperity that's similar to Serbia or Peru or the Dominican Republic — places that nobody regards as obviously amazing investment opportunities even though in some ways their political systems are more solid than China's.
Loss of faith has a self-fulfilling aspect to it. To the extent that people believe China can conquer its present-day challenges, actually conquering them becomes easier. To the extent that people begin to write China off, then it will have greater difficulties in pulling off the kind of transition the country needs.
10) Chinese politics hamper an effective response
The combination of rapid 21st-century economic growth in China, political crises in the United States, and China's authoritarian political system sometimes leads Western commentators to dream hazily about the virtues of Chinese authoritarianism in cutting through the nonsense and letting leaders do what needs to be done.
The reality, however, is that authoritarian political systems still have politics. There are still interest groups, and public officials are still sometimes more loyal to particular interests than to the good of the nation. This is a crucial issue in China's rebalancing process. It's easy for an outsider observer to say that inefficient state-owned enterprises should be shut down. It's harder for a government official who needs to worry about lost jobs. It's easy for an outsider to say that China needs more income redistribution. It's harder to defeat the political power of rich Chinese people who would rather the country not do that. It's easy to say China needs to spend less on construction projects and more on social services. But to do that you need to overcome the entrenched interests of the contractors who benefit from the projects.
China's leaders give every indication of being broadly aware of the nature of the country's problems and the kinds of solutions that are needed. What's less clear is that they can actually deliver these solutions.
Evil exists in the world, not create despair, but activity. We are not patiently to submit to it, but to exert our selves to avoid it. It is not only the interest but the duty of every individual to use his utmost efforts to remove evil from himself and from as large a circle as he can influence; and the more he exercises himself in this duty, the more successful these efforts are, the more he will probably improve and exalt his own mind, and the more completely does he appear to fulfil the will of his Creator.
The volatility of export earning of countries dependent on primary commodity exports has long been recognizeed as a key source of instability in the economic system. Unless they take strong protective measures, these countries not only experience boom-bust cycles but also tend to find themselves in debt distress and in need of additional aid when commodity prices collapse.
Developing countries that are dependent on exports of commodities with high price volatility need to establish stabilization funds and to otherwise manage their economies to reduce the extent of the boom-bust cycle, invluding by restricting borrowing during the boom phase.
