China's Hidden Economic Growth

From 2007 to the present, China has seen a growth rate in GDP as high as 13%, and as low of 6.2%, and an average growth rate in this period of 9.97%. These are extraordinary numbers that no doubt can be attributed to China’s decentralization and liberalization of their economy. This has caused the media to question whether other the American economic model should supersede the Chinese economic model. However, I am not too sure if China’s GDP growth is as good of an indicator as speculated.

Given that China is a communist nation, their regulatory policies pushed a good deal of their economy into a black market. This has been observed in every nation with excessive red tape and costly regulatory policies. The Soviet Union experienced that same issue. Latin American countries have had the same issue. Hernando De Soto’s excellent expose’ in “The Mystery of Capital,” accounts for this. In this book, De Soto shows how excessive red tape moved much of the economy into the illicit black market. This consequently resulted in the GDP of various Latin American countries being underreported. As these countries liberated their economy’s their GDP began to grow as businesses operating under the table began to come out and operate within the legal realm.

I attribute what De Soto displayed and explained in Latin America to what is being experienced in China. Prior to liberalizing, China’s GDP has been underreported due to the very nature of an existing black market. As businesses in China emerge from the black market and are able to operate openly and under legal and property protection, China’s GDP has grown to figures that more truly represent their economy.

Essentially, we cannot simply attribute China’s model to its excellent production capabilities. If we were to follow anything from China, it is that our regulatory framework needs loosening.