In an article on China’s need to begin the transition to a more service based economy, Barry Eichengreen has some very Bryan Caplan like optimism about China’s lack of a democracy: it may mean less occupation licensing. First he outlines how in Asia, much like in the U.S., occupational licensing is used in the service sector to protect incumbents from competition:

In both Korea and Japan, large firms’ entry into the service sector is impeded by restrictive regulation, for which small producers are an influential lobby. Regulation prevents wholesalers from branching downstream into retailing, and vice versa. Foreign firms that are carriers of innovative organizational knowledge and technology are barred from coming in. Accountants, architects, attorneys, and engineers all then jump on the bandwagon, using restrictive licensing requirements to limit supply, competition, and foreign entry.

If China follows a similar path as Asia and Korea, they would shift to a much lower growth rate:

One can well imagine Chinese shopkeepers, butchers, and health-care workers following this example. The results would be devastating. Where value added in Chinese manufacturing has been growing by 8% a year, service-sector productivity is unlikely to exceed 1% if China is unlucky or unwise enough to follow the example of Korea and Japan.

His Caplan-esque observation is that the lack of democracy in China may allow them to avoid this fate, and thus experience the productivity growth in the service sector that other Asian countries haven’t had. Barry Eichengreen is no democratic fundamentalist.

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