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20190526 – China’s Crisis of Success

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MAIN IDEA:

The main idea of this book is that China went through very specific Asian path of rapid economic development that was previously travelled by other countries such as Japan, South Korea, Taiwan, and Singapore. This path is unique because it was based on fear of complete destruction that united population of these countries and allowed to go through suffering and deprivations that would not be accepted in normal times. Similarly to what previously happened to these other countries China now came to the tipping point when continuation of the same model of development become not sustainable due to both internal and external developments. At this point other countries changed mainly in direction of democracy or at least benign authoritarianism and found the new position of stability and prosperity. China however is different due to its size, culture, and ideology, so it is not at all clear what will follow.

DETAILS:

Introduction

Here author states his believe that China is approaching the crisis of success by which he means that the growth of last decade came to an end because it could not count any more on economic model that brought it this success. It is on the brink of transition similar to one experienced by other Asian tigers like South Korea and Singapore, but because of it’s much bigger and more complicated nature it is far from obvious that China will be successful.

1 China Model/Asia Model

Here author compares China and overall Asian models and expresses opinion that conditions, which create opportunity for dramatic growth of economy, are quite unique and could not be easily reproduced elsewhere. Such growth is normally based on dramatic and very painful dislocation of significant part of population and therefore could be conducted only in non-democratic countries and based on massive fear that alternative could be much worse than reform. It also required shared identity of the vast majority of population that recognizes its common fate and consequently accepts pain of restructuring. Author also compares success of Asian countries and failure of the Soviet Union, showing different priorities during change:

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Then he looks at the core reasons for rigidity and centralization of economy that led all this countries into the crisis and concludes that it was somewhat result of believe in effectiveness of war mobilization model that allows concentrate resources on limited tasks of military economy when production concentrated on war material and population accepts whatever sacrifices are required. It does not work in complex consumer economy. The inference here is that concentration of efforts on economy is beneficial for the country, while concentration on military and politics causes stagnation. Here is interesting table of Asian development:

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Then author reviews priorities within economy and stresses that success came when the human needs such as jobs and consumption have higher priority than everything else. He rejects the idea of priority of big scale changes from the top either in form of promotion of heavy industry or shock therapy of massive switch to market. However he supports idea of “rapid incrementalism”, which basically means just increase in economic freedom and opening of the market to foreign investment. The politics have vital, but secondary role. He also discount cultural prejudices noting that he saw a lot of idle workers in Japan, Korea, and China when people have no incentive to work, so the attempt to explain Asian miracles by cultural propensity to work hard in just nonsensical.  Then author moves to China and stresses that the main differentiator was idea of “one country two systems” that allowed communist leadership utilize Hong Kong and some special zones to open link to world capitalist markets assuring flow of capital and know how to vitalize economics. Author also stresses that all economic miracles occurred within authoritarian systems, in which dominant party maintained strict political control. The final point in this chapter is that all this is possible only when people are poor and well remember fear of recent disasters. However when the country gets richer people much less inclined to accept deprivations and corruption, creating crisis situation. So far it happened everywhere and solution was usually move to more democratic and much less corrupt system. Author believes that China is now approaching similar point and outcome of this crisis is far from clear.

2 The Economic Crisis of Success

Here author retells story of Chinese economic success with the stress on recent history when Zhu Rongji and Jiang Zemin introduced critical market reforms in 2003. It reduced SOE employment by 45 million people. It moved economy forward, but then Hu Jintao and Wen Jinbao who expanded it to some rural areas, but allowed it to unravel, growing bureaucracy from 40 to 70 millions. It brought China to current Xi and what author calls “Crisis of Success”  – when old drivers such as foreign investment, know how transfer, and export are becoming more and more limited. Crisis of 2008 convinced Chinese leaders that Western economic model is not that good and they start moving back to state controlled economy. Then author expresses his delight of the amazing new development plan and his contempt to silly “market fundamentalists” who do not understand that key to prosperity is government planning. Nevertheless author also states that only market could provide solution to the problem of complexity. In short, author supports “socialist market economy”. Then author discusses specific areas of transition: switch from export to domestic consumption, manufacturing upgrade, expansion of services, and development of credit-based finance. Author notes that Chinese leaders are usually have engineering background and it shows.  Then author discusses Financial squeeze in the country where there is huge shadow bank market.  Other issues that author discusses here are: demography, currency, Entrepreneurship, and Innovation.  Author ends the chapter with overview where he simultaneously glamorizes China and states that the center of everything is going to shift there, but then stresses that it will take time and it is not yet tomorrow. At the end he expresses caution that China should avoid the fate of Japan that turned inward and started stagnate.

3 Critical Social Issues of the Transition: Inequality, Corruption, Environment, and Globalization

Here author moves to social issues and discusses Chinas inequality in many dimensions including geographical between rural-urban divisions, provinces, sex, and wealth inequality. Here is picture of regional divisions in wealth:

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Author also discusses specificity of Chinese corruption, which he finds of better quality than corruption in democracies such as India. He also discusses Environmental issues that started having some impact on attitude of Chinese people. He also discusses globalization and admits that this process is at the core of China’s success story. At the end of chapter author restates that China’s economic and social problems are enormous and it is far from clear that its social structures would allow positive resolution of these problems.

4 China’s Governance Crisis of Success

Here author starts with Mao era failed attempt to jump ahead by using communist ideology and practice. This followed by changes after Mao when leadership start building institutions of functioning state, starting with limits on officials, establishing professional standards, and, most important, fine tuning the economic system that would be acceptable for foreign businesses so they could invest and actually move production to China being relatively comfortable with legal environment. Author especially stresses what he believes is China’s great achievement: stability via incrementalism when leadership moved very carefully, but allowed small changes in multitude of areas looking at what worked and what not.  Author also discusses what he calls GE model – obsession with one key parameter, which was the Profitability for GE and Economic growth for China. He reviews specifics of Chinese model and democratic alternatives and finds Chinese by far superior for poor democratic countries, mainly India. Author believes that democratic elections in poor countries are captured by elite resulting in use of the state in elite interests combined with neglect of general interest. In Chinese model no capture is necessary and party bureaucrats are moved in hierarchy based on meritocracy that somehow make them working for common good, rather than their own narrow interest. He looks at example of other Asian countries like Korea, Singapore, and Taiwan, concluding that they’re all went through massive economic development using combination of authoritarian government and relatively free market. However upon achieving some specific level of wealth many of them switched to democratic rule under pressure of emerging middle class.  Author counter this Asia model to disastrous post Soviet shock therapy driven by free market theoreticians and very reasonably concludes that it is much better.

5 China’s Political Economy under Xi Jinping

This chapter is the review of current situation as it developed under current leader Xi Jinping. Author points out that he was selected mainly as technocrat without strong political base. Author claims that Xi was given power to manage challenges of current situation when China become strong and decided that it can through away pretense of weakness and openly claim the leading role as raising power of the world. Author analyzes emerging powerful interest groups in China and new social forces. He discusses search for filling moral vacuum left by elimination of religion and bankruptcy of communist ideology, guest of private business and intelligentsia for proper legal system, and so on. Author expresses believe that China is at turning point. Old fears disappear, powerful interest group trying to increase their role in decision-making, and financial system become quite fragile due to massive debts. Author points out that Xi’s strategy of doing everything at the same time: reforms, anti-corruption, campaign, military challenge to USA in China sea, and so on is very risky. He discusses what happened in other Asian countries at this point in their development: Japan becoming rich, satisfied and apathetic, Taiwan moving to democracy peacefully, while South Korea via demonstrations and some killings, and finally Singapore finding interesting combination of state ownership of businesses, which are managed by independent boards.   Author characterizes current point as “Complexity revolution” in China – dissipating fear, emerging hubris, economic and political complexity. He also provides list of 10 great paradoxes that China faces now:

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6 What Will Happen?

Here author reviews different scenarios of future development: Reforms or their failure / Japan Scenario / Democratization / Communist power consolidation / Leadership split.  None of these scenarios have clear and easy path and future is murky. Author concludes this book with this statement: China is on the cusp of greatness, stagnation or tragedy, and the risks are so high that small, unexpected events could make the difference. That is the defining quality of China ’ s crisis of success.

MY TAKE ON IT:

I think author is absolutely correct in both his main points: China’s success brought it to tipping point when it had to change and nobody really knows how it will do this. I think, however, that despite very good analysis overall author is missing one key point: the rapid development of China occurred as result of massive transfer of manufacturing economy from West, especially USA driven by communist party’s making available cheap labor and environmental negligence to western businesses. Obviously taking machinery from Ohio, moving it to China and start producing with cheap labor with complete absence of environmental, safety and other regulations makes for rapid increase of “made in China” and decrease of “made in Ohio”. However this model is coming to the end because many factors: China labor is not that cheap any more, growing refusal to accept environmental deprivations force increase in production costs, population of Ohio shows signs of political awakening and is not agree any more to suffer for somebody’s high profit and cheap goods. There is also growing understanding in the West that China under communist party is not going to be peaceful and accommodating member of existing world order, but would rather demand not just leading, but dominating role in the world. I do not think that this would be acceptable for western population and the part of western elite that finds it acceptable will be eliminated from its position. I have no doubt that the world is moving to confrontation, actually it is probably already in it, but I think that short of nuclear war Western values would overcome Chinese outdated strive for dominance and within the next 20-30 years China would become just another part of free world. Alternatively, if Chinese leaders could choose Cold War in hope that current level of economic and technological achievement would be enough to with in such war, they could be sorely mistaken. I think it would lead to China’s defeat with highly negative consequences for its population, not least for its elite.  The reason for this would be the same as in Soviet Union: unfree people normally are not those productive and definitely not happy. The Cold War between China, if it occur, would be about the same issues that with Soviet Union: which system if more productive and provides for better life. Communist dictatorship proved many times over its dismal performance in these areas, special Chinese case with massive Western investment and technology transfer of the last 30 years notwithstanding. Deprived of such investment and transfer China would not stand a chance.

 


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