The Gold Standard  

Well-known China commentator Minxin Pei and his co-author have an interesting piece in FT on China’s failure to boost domestic consumption. Here is the link. The key points that they make are these:

First, China is among a small group of countries that has become less free (as measured by Freedom House’s Freedom Index) and experienced a significant drop in their rates of household consumption (defined here as a decline of 20 per cent or more). The others are Venezuela, Kuwait, Lebanon, Bhutan, Swaziland, Iran, Uzbekistan and Saudi Arabia – not exactly the countries that China should strive to emulate.

Second, although the overall relationship between freedom and consumption is complex, countries that have become freer in the past two decades are more likely to have registered an increase in their consumption rates. Kenya, Rwanda, South Africa, Bulgaria, Hungary, Poland, Romania and Indonesia are some notable examples. 

When we confine our focus to those countries for which the data are statistically significant, we find that 71 per cent of the countries that experienced an increase in their consumption rates became freer. Those that experienced larger gains (10 per cent or more) were twice as likely to have become freer. [More here]

I like the hypothesis immensely. I once asked this of Mr. Tarun Khanna, the Professor who teaches at Harvard, when he came to Singapore in 2003, to present his joint paper with Prof. Yasheng Huang titled, ‘Can India overtake China’ published in ‘Foreign Policy’. My question was slightly  different. It focused on Foreign Direct Investment (FDI) and democratic societies.  I asked him if developing democracies received less FDI than developing countries with authoritarian governments. He did not think so.

Later on, I found that Prof. Adam Resnick had devoted considerable time to the topic with inconclusive but very interesting results.

Given this background, I remain very interested in the hypothesis that Minxin Pei is testing. I would have preferred a more robust empirical design.

These are my considerations:

(1) One is the stock and one is the flow argument. The ’stock’ argument is that he should show that, in a cross-section of all nations, domestic consumption share of GDP is higher in freer countries than in less-free countries. I am ok with the metric he had chosen to define free and less-free countries.

(2) The second is the ‘flow’ argument: that is, in the last ten or twenty years, freer countries have increased their domestic consumption share of GDP whereas less-free countries have seen their domestic consumption share of GDP drop. I think they have done this partially.

(3) The third proof is that he should control for other factors that normally explain this phenomenon of dependence on external demand vs.
internal demand: economic size, population size, sea-faring nations, proximity to bigger nations, etc.

But, I feel that they are on to some thing.  Check out this letter (in the FT) too.