Analysis

China and U.S. in new global faceoff between economic planning and deregulation: Don Pittis

Chinese Premier Li Keqiang says he will enforce rules to make the sky blue again while U.S. President Donald Trump wants to scrap some pollution laws. Just one example of the two countries' conflicting strategies for economic success.

Is creating rules and making plans good for the economy or is it nothing but waste and red tape?

China has announced a new plan to crack down on smog, just one example of using government activism to transform the economy. It's a sharp contrast to the U.S. plan of economic stimulation through deregulation. (Reuters)

The struggle between economies based on government planning and the unhindered free market was supposed to have been settled years ago when the Soviet Union crumbled.

Now it appears the battle between planning and the invisible hand may be back on and it's still not absolutely clear which side will win.

This week China announced a new set of government plans to boost its economy. By contrast, the U.S. moved toward a new round of deregulation with the same intent.

Planning loses Round 1

With the collapse of the Soviet Union in 1991, the triumph of free market, laissez-faire capitalism seemed complete.

Although the Soviet Communist system had demonstrated transformational successes, like catching up to the West in heavy industry, nuclear science and space technology, the top-down command economy proved unsustainable.

As dissident Yugoslav politician Milovan Djilas recognized as early as the 1950s, the system of Soviet planning was damaging many parts of the Eastern Bloc economies.
Despite nostalgia in some quarters, the Soviet system of economic planning proved unsustainable, leading to the collapse of the Soviet Union in 1991. (David Mdzinarishvili/Reuters)

Food production was falling. The Communist elite lived in luxury, observed Djilas, while ordinary people had to line up for bread.

But even as the former Soviet Union broke up into its constituent nations, the contradictions between the planned and the free market economies were as much about ideology as fact. Both sides planned. Both sides used the market. It was a question of degree.

This week it appears the clash between those two ideologies is facing another bout. 

At the opening of the National People's Congress, Chinese Premier Li Keqiang announced the government is once again getting deeply involved in the country's economic progress. At the same time, members of the Trump administration were announcing a new round of hands-off policies.

One clear point of contrast this week is on the environment.

Blue sky proposal

In response to growing public outrage over choking air pollution, Li pledged the Chinese government would "work faster" to clear the air.

"We will make the skies blue again," Li declared to the thousands of delegates in the Great Hall of the People.

Meanwhile in the U.S., there are sharp cuts planned for the Environmental Protection Agency. Various reports say the Trump administration is on the verge of relaxing U.S. automobile fuel-economy standards.
The Trump administration has promised to cut back on pollution rules, part of an economic growth strategy to reduce red tape and unleash the power of the free market. (Mike Blake/Reuters)

"The U.S. auto industry is happy with Donald Trump," Business Insider reported yesterday.

The contrast between pollution levels in China and the United States has an obvious bearing on the two strategies. But pollution wasn't the only area of divergence.

Planning for success

During his speech, the Chinese premier also outlined a $300 billion US plan to transform his country's economy, reducing its dependence on foreign markets. Instead, China wants to produce and consume its own technology.

"We will fully implement our plan for developing strategic emerging industries," Li said of the plan, which the New York Times reports has Western businesses worried. "We will accelerate R&D on and commercialisation of new materials, artificial intelligence, integrated circuits, bio-pharmacy, 5G mobile communications and other technologies."
China is already installing robots in its factories, but the government now says it will launch a multibillion-dollar spending campaign to create its own homegrown high-tech industry. (Pete Sweeney/Reuters)

The U.S. has taken the opposite tack. By cutting taxes and deregulating, the Trump administration insists it can boost the economy by letting the free market rule. Although the president has been willing to intervene on trade and push companies to make products at home, business leaders are generally thrilled.

"After a relentless, eight-year regulatory onslaught that loaded unprecedented burdens on businesses and the economy, relief is finally on the way," said Thomas Donohue, the head of the U.S. Chamber of Commerce. 

While business leaders may dislike what they describe as "red tape" and be happy about the short-term benefits of deregulation, not everyone agrees that the freest market is always the best for a country's economy.

Critics have observed that the success of U.S. business, including the dominant position of its high-tech sector, has less to do with laissez faire than U.S. government clout in international regulatory bureaucracies.

Apple's boost from government

As the biggest player in the regulatory game, the U.S. can actually use rules to boost investment in areas where it has an advantage. By forcing all companies to comply, there is evidence from the auto industry that setting industry standards can launch new waves of investment in innovation.

Similarly, there is a strong case to be made that the success of such U.S. corporate stars as Apple was only possible because of U.S. government investment in world-leading technologies, says Mariana Mazzucato in her book, The Entrepreneurial State.

Mazzucato says not only is government direction essential to business success, but government is often more daring, willing to take risks when the private sector is too cautious. The space race is a single obvious example that created huge industries, including everything to do with satellite communications. 

There is the argument that by "picking winners," governments often distort the market. But as William Berkson wrote last year in Washington Monthly, that can be overcome. "When programs fail, effective governments terminate them and try something else."

It has been well-documented that bad regulations and government spending on unproductive boondoggles can create inefficiency.

But the question of whether the best economic strategy is to let the market decide or if it's best for governments to steer business in the right direction is no less disputed than it was before the collapse of the Soviet Union. With China and the United States taking opposite paths, the world can watch as the two strategies face a rematch.

Follow Don on Twitter @don_pittis

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About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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