TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Using Japan’s development as an example of what China shouldn’t do, Ethan Devine argues China must shift from exports and infrastructure to a consumer-driven economy. He points out, though, their governing model is incompatible with this kind of economy:

Yet it will likely have a hard time making such a shift. Dynamic service sectors are not generally compatible with central planning because service economies are naturally discombobulated. Technocrats can calculate where a new bridge or airport will have the greatest positive impact and then build that bridge or airport — but it is much harder to dictate from on high the creation of the next Facebook or to manifest a thriving small business sector.

It’s a great piece and I recommend reading it in full.

That is China’s main challenge over the next 10-20 years—their form of government not only isn’t ideal for a consumer-based economy, but it is fundamentally opposed to it. Currently, the Chinese economy is government-directed, with bias toward state-run companies. There is little companies can do without the support of local, regional or national government.

That’s difficult to change, but it will have to. Small entrepreneurial firms require freedom to operate and that freedom doesn’t really exist in China. It’s antithetical to the Chinese Communist Party’s main belief and philosophy: we are in control of the country and its direction. Ultimately, this switch will mean the CCP abdicating its power, and the government loosening its grip.

This doesn’t mean that, in the shorter term, the government will not be successful in creating state-run consumer markets. I think they will. But this isn’t a long-term strategy—an economy cannot be both centrally-planned and dynamic.