The myth of Chinese overcapacity

Early in the morning, factory whistle blows

Man rises from bed and puts on his clothes

Man takes his lunch, walks out in the morning light

It’s the work, the working, just the working life

– Bruce Springsteen

The East Asian export model is the worst economic model – except for all the others that have been tried.

Winston Churchill was actually referring to something else but we are going to apply his quip to development economics because the original hasn’t been aging so well.

While some may marvel at how Japan, South Korea, Taiwan and, of course, China exported their way to riches, it was, in reality, an arduous, grueling and brutal process that has left lasting scars. Economic development really is not supposed to happen this way.

The East Asian export model is swimming upriver, playing the video game on hard mode, running up the down escalator. What kind of development strategy requires poor countries to scrimp and save only to lend that money to rich customers to purchase one’s manufactures?

East Asia had to do battle with the Lucas paradox. East Asia won not because the export model is so effective; it won because East Asia is East Asia.

The Lucas paradox is the observation that capital does not flow from rich country to poor as predicted by classical economics. In theory, as capital experiences diminishing returns in rich economies, it will flow to poorer economies which still have low-hanging fruit.

In practice, however, rich countries have hoovered up capital from developing economies, leaving much of the world starved for investment.

East Asia, starting with Japan, was able to develop despite the Lucas paradox. After WWII, Japan’s Ministry of International Trade and Industry (MITI) husbanded the nation’s meager