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Brookings, January 22, 2019

My hypothesis is that all three economies are superficially healthy but deeply stressed. In China it is the strain of suppression, in India that of inefficiency, and in the U.S. of partisanship. The strains are showing up not in headline statistics but in the moods of people. Beijing was clean and censored, Delhi sick and polluted, and Washington prosperous but depressed.

The World Bank’s report talks of darkening skies. I think the real problem is darkening moods.

Censored China

When I got to Beijing, the news was all about the trade war with the U.S., and the arrest of Meng Wanzhou, the CFO of telecoms giant Huawei, on charges of tricking banks into violating U.S. trade sanctions. I could not find anything in the Chinese media on China’s own wrongs, such as hacking into the computer systems of foreign companies and stealing industrial secrets. And there was no way that you could read the reports by outlets like the Economist, which published this thoughtful reflection on the disillusionment among the friends of China because of its actions abroad. The government’s censors make sure that articles like this are never read in China.

Mindless censorship by the Communist Party may provide one clue to what I saw as the joyless mindset of the Chinese. When I read up about it back at home, I was staggered by the size of the enterprise. In 2017, China spent $180 billion on domestic security; more than 6 percent of total government spending (it spends less on the military). The People’s Party spends more money defending itself from its people than it does on protecting its borders.

Repression by your own government would kill anyone’s joy. But perhaps a big reason for the joylessness of growth is the increasing difficulty of converting saving into output. Since 2007, the incremental capital-output ratio (ICOR) in China has tripled from 3 to 9, while the growth rate of GDP has fallen by half. The Chinese people are still saving a bunch, but investment is paying off less and less. Imagine trekking into a headwind three times as strong as it was ten years ago; it would make a pleasant hike into a painful slog. ...
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