Fabiola is a fourth-year economics major who studied abroad in China this past summer. Check out her reflection on her time abroad.
As an economics major at UVA is only natural that I am interested in how the world’s economy performs and how it’s changed over time. Coming from a small, in every aspect, and extremely poor country in Central America has allowed me to not only focus my interest on the big economies, specially not only on the US even though I do attend college in the US and 90% of the content I review on every single of my courses is based on the US economy and its behavior over time.Unfortunately, being accurately informed and understanding economics is not always an easy task. Economics is not an easy science. It’s based on infinite assumptions, models and states that not always, not to say ever, really occur in the real world, as we economists call it. Therefore, in order to study and understand how economics work one must first put aside several elements that are very present in both small and large economies to different degrees: dysfunctional institutions and its consequences such as corruption, extreme poverty and the special needs of the people in countries that experience it, black markets that have grown to be some countries’ top markets like drug cartels in South America… All in all, one must study economics in an ideal world where markets can move freely without any unnecessary, or illegal, intervention by the government and by the people. Once atUVA it only took me get through my Principles of Microeconomics course to understand why studying economics in the US, based on the US economy, was as close to the ideal world as one can get. Institutions in this country are much more functional than in other countries.
US has gotten where it is, one of the world’s biggest economies, because since its origin its leaders have focused on exploding its potential with everything and more than it has to offer. When the rest of the world was still struggling with epidemics, development and poverty, the US was already getting ahead and growing ridiculously compared to the other, now, big economies. People became too ambitious and the “you can make it” idea got everyone to push their limits further and further, making US big as a whole. It was and it has been a constant growth throughout history with a couple peaks and troughs. On the other hand, other big economies tell a different story. China, for example, remained stagnant together with other countries in Europe and Asia for many years and then, within a short period of time, this huge monster started growing at a pace not even the US had experienced in its past. During this period, the spotlight moved from America to theOld Continent and it focused on countries such as China for a while. The world was shaken by this event that marked the overall economy forever. Many started making their own speculations and inferences about China. Then, one day, as many expected, the growth proved to be unsustainable and the country finally slowed down. This marked another major event on the world’s economy since, once the country became the world’s biggest manufacturer, other big economies like the US started taking advantage of China’s low labor prices to make some extra profit and satisfy its consumerist population. What really happened to China, that caused the country to slow down, is explained by many economists through different lenses and by different theories. Some point it out to the country moving from manufacturing to service industry and indexes not being adjusted to this change, a few others entirely blame the inefficient communist system that completely controls the market in China making it difficult to adapt by the Invisible Hand Theorem. It is ironic that coming from the poorest country in the western hemisphere, situation caused mainly by the several corrupt governments that have ruled the country, I still have a hard time to believe how dysfunctional institutions can bring a country down. I still tend to blame the people and their lack of effort because I naively believe that even under an inefficient system there is always opportunity. This is how my trip to China opened my eyes to the truth behind the curtains.
Due to traveling difficulties my visit to China started in what I can, with all my confident, call the world’s most random city: Dafeng, a small city located north ofShanghai. As soon as we started entering the city it already seemed strange. There were no civilians on the streets, no cars on the roads, there were too many old buildings that seemed empty, the city was incredibly quite, it looked like a ghost town. As we spent more days there and then visited some companies it became clear to me that things in China work completely different. I then understood that the way people invested their money worked differently, people preferred to have all of their money invested in real estate instead of in the bank or the stock market. However, Idid not understand why. The real estate company we visited was working on a tremendous project. It had already built tenths of apartment buildings and these buildings were only the first few stages of the whole project. The managers assured us the whole project was completely sold and that 99% of the apartments’ owners were living there. This inaccurate information made everything more confusing. The whole project was sold? To whom? There was nobody in this town. And where was this 99%? Nobody was able to answer this. A museum honoring the CulturalRevolution, a Zoo with a dead horse, a Holland Themed Park and an Aquarium that tattooed their fish were the cherries on top of the weirdest ice cream.
Traumatized and curious, we arrived at our next destination: Wuxi, a larger city still north of Shanghai. This stop was a lot more revealing than the first one. We saw more people on the streets and the real estate company we visited gave us some more accurate numbers about the amount of apartments they had sold and the percentage of buyers that actually inhabited the apartments, managers seemed more transparent. It was a little shocking to hear that the company was actually state owned, thus the government fostered the project they were working on. Here was the first time we heard that the real estate industry in China was struggling,which Dafeng had already made evident despite of the company’s attempt to prove otherwise. However, the manager told us they weren’t that concerned since the government was backing the project up and it would incur any losses the first few years, which they were already incurring and had confident they would continue to incur as they completed all the stages of the project. Why in the world would a real estate company keep working on a project that is incurring so many losses and which prospects of revenues were blurry and way too FAR ahead in the future?Shouldn’t these companies keep building as they sell? Shouldn’t they operate based on the market performance? Now, I only had a vague idea of how communism works. I acknowledged that it tries to maximize social welfare equally and that in this system the government has more power and liberty to intervene in the economy; nonetheless, I was not clear to what extent. I started wondering myself,doubting this country’s authorities decisions.
Perhaps the peak of the enlightenment happened when we got to Ningbo, an even larger city more similar to Shanghai than the previous two. Here we visited a manufacturing company, and after that everything finally started making sense. The owner of the company first gave us a really weird fact: they had an area requirement that had to be filled with buildings depending on the size of the property, regardless of the infrastructure that the company actually needs for production based on the market demand. So, the owner of the firm, knowing that by producing more than the market actually demanded he would incur losses, had to rent the extra building she was not using. Moreover, he would use this money to finance his own business since the high interest made financing almost impossible for private firms. It was never clear to me if this action was considered illegal or not, but the whole situation was too strange. After he explained and described more of the regulations that manufacturing companies had in order to operate, I was able to understand how inefficient the system was. The government was forcing overproduction, this is perhaps what caused the monstrous, unsustainable growth the country experienced for many years. True, it increased China’s GDP incredibly on a macro level, but it was evidently hurting the economy on a micro level. Where all businessmen as clever as this guy? How did they manage to keep operating? I felt extremely overwhelmed.Nothing made sense, how could it make sense to the leaders of this country. Why wasn’t obvious to them that controlling the market in such way can only go on for so long? How could they not see how bad of an environment this was for people trying to succeed with their own businesses, people trying to enter the market, people looking for their way out of China’s stagnant middle class, to people trying to make it?
Once we arrived to Shanghai I was excited to visit some financial firms to understand how securities worked in this market. Our visit to these firms only confirmed what I already suspected, the stock market worked just like the real estate market. Securities’ prices are also controlled by the government, which reduces credibility among the public in the stock market. This time, it was not the regulations imposed by the government to financial firms that impressed me, but the ability of arbitrage, which is normally absent in a competitive market, that financial firms were able to pull out due to the same control on the sock market.
In conclusion, this trip really showed me how institutions can hurt the economy of a country when they don’t let the market act freely by its own. China is avery interesting case and not until you experience things first hand you can understand what is it that has slowed this monster down.