What About China?

WASHINGTON – Nothing is more convincing than apparent material success. And China, just by looking at historically unprecedented rates of growth, in excess of 10 per cent, year after year, and looking at its trade and balance of payment surplus and at its mountain of currency reserves seems to deserve admiration for having apparently unleashed the creative potential of hundreds of millions. They have turned this country, asleep during the XIX century, later on torn by revolution and the messy end of the Imperial system, Japanese occupation, civil war and then oppressive communism, into the tireless, booming workshop of the world.

We look now at very confident Chinese engaged in their self-described “peaceful rise”. Already a few years ago, they discarded the Mao suits that suggested regimented little ants kept in line by a rigid police system. They openly engage in money making activities. They display western style consumerist attitudes. So much so that we are tempted to welcome them as our newly found spiritual brothers and sisters, clearly engaged in genuine capitalist enterprises.

The fact that China formally remains a “Communist” autocracy is glossed over. Compared to the economic triumphs of what appears to be capitalism, the lingering of the old system’s institutions seems unimportant detail. It means the clean up crew is late. They’ll come in due time and they’ll remove anachronistic remains of a bygone era. Or will they? Does economic growth provide sufficient evidence of an idelogical transformation that many take now as a given that requires no further proof? 

Indeed, some go as far as arguing that the old fashioned Yankee rugged, do-it-yourself capitalism and the Chinese single minded preoccupation towards growth are just different aspects of the real brand. We have now discovered a profound kinship with the Chinese, based on the simple, sure fire notion that those who are singlemindedly bent on making money must have their heart in the right place. You know: “right sort of values”.

And, anyway, who else is around? Soft, soggy socialistic Europe has no stamina and is destined to decline. It is overpowered by the combined toxins of a relaxed attitude towards work and the ever growing cost of a gigantic welfare state, tilted to favor the needs of an increasingly older population. Welfare now absorbs now most of the residual energy of an Old Continent that appears to have gotten “old” in every sense.

Japan, deeply wounded by its self-inflicted bubble economy and subsequent financial crisis of the 1990s never came back –manifesting a puzzling inability to react, thus revealing a deep social and political paralysis. While it may still have world class companies that do well worldwide, Japan is mired by an extremely inefficient institutional framework that weighs heavily on the productive components of an otherwise modern society.

And India is too complicated to be taken really seriously –at least for the moment. We should give credit to the smart entrepreneurs who have created important competitive niches for Indian industry. Yet, looking at the bigger picture, we see a country that is still mostly poor, rural and very disorganized. India is afflicted by gigantic inefficiencies and political institutions that, while democratic, are supremely unsuitable for taking fast action where it is needed: such as the modernization of the country’s ancient and totally inadequate infrastructure.

And the rest? Well the rest is just small fry.

So, upon quickly (and hastily) reviewing the world scene, we could conclude that it is just “us”: that is we the Yankees, and the Chinese. And, if we Americans want to make sure that we stay in the game of enterprise and profits, we better shape up: go back to work, fix what is broken and get on with it, just like the growth oriented Chinese.

So, here we have it. The vision of the new paradigm: “the American-Chinese emerging special relationship”, based on our (assumed) shared belief in the power of economic growth as the cure all, that will reshape the world.

Of course, until not too long ago, we had other models. But –the practical people say– they do not fit reality anymore. We used to have an “Atlantic Community” vision that shaped strategy and and determined our worldview during the Cold War years. We used to think that NATO, our military alliance with Europe, combined with our vibrant economic and trade relations with the reborn and self-confident Europeans, would not only provide the necessary counterbalance against the Soviets, it would also provide a two pronged machinery that would guarantee economic growth and guaranteed Western pre-eminence at the same time. In Asia we had a similar relationship with a new democratic Japan, rebuilt according to our post war specifications.

But now all this is history. The old Soviet problem that justified the NATO Alliance disappeared. Meanwhile, overtime, we lost confidence in the Europeans. The Europeans have proven to be too timid and weak and thus useless partners (witness their hesitant and almost laughable contribution to the war in Afghanistan). Economically, Europe is also feeble, if not weak. Not many leading sectors; while social justice concerns and welfare preoccupations override the imperatives about competing seriously in the global economic race. So, the practical people can say that Europe lost its relevance and geopolitical significance and that it is destined to become even less relevant in the years ahead.

But Asia is different. Asia is growing. There is a more diffuse sense of hope. More and more Asians are inclined to believe that they too can participate in the economic development game and improve their standards of living. And, in a neo-Confucian way, large numbers of Asians tend to believe that education and hard work can provide the tools to climb the social ladder and reach new social and economic heights, for previously excluded large segments of the society. This energetic fervor, compared to a relaxed and especially non vibrant Europe, has convinced many that we have entered a new era characterized by the Renaissance of Asia.

And China is the new Asian power. China, with its industrial might and its fleet of container ships loaded with toys, cell phones, bras, toasters, computers, electronic components and hair dryers that will populate the shelves of Wal-Mart –to the delight of American consumers who can buy goods at ridiculously low prices– is the spearhead of the new self-confident Asia.

Hence the need for America, in the light of the decline of its post-war allies, to rethink its priorities and devise a way to craft a new relationship with China, the country that has clearly reformed itself and that, “communist” labels aside, in practice at least, seems to have genuinely embraced capitalism, becoming thus “one of us”.

But is it really so? Do we have a linear narrative for China that says: “Away from Communism, wholeheartedly embracing the free market and pluralism”? Not really. Or, at the very least, not entirely.

To put it simply, as noted by the British journalsit and writer Will Hutton, in his interesting and insightful book, The Writing on the Wall, China and the West in the 21 Century, China is still in the middle of the river. It may come to our side; but it has not quite done so –and there is no guarantee that it will do so.

Its staggering success so far, is not based on having embraced capitalism and democracy. Its undeniable success is based on a uniquely Chinese, and arguably unsustainable, model that cannot provide the foundations for a modern capitalist society.

Capitalism, argues Hutton, is not just about rates of growth. A truly functioning, innovative capitalistic system is premised on, indeed it requires pluralism and the institutions, public and private, economic and non economic that would nurture and sustain it. And China, for the time being, has not created anything like the ecosystem necessary for a modern, polycentric, vibrant, capitalist society.

Indeed, the secret formula of real success is that economic success is largely predicated on the care and repair of non economic institutions. Genuine pluralism creates vibrant societies. Vibrant societies can create and sustain the genius of research, its applications and the consequent economic benefits. Economic success without the underpinnings of pluralism rests on an uncertain base.

The purpose of pluralism is not just to have an economy that responds to the market; but to have a society dedicated to the proposition of offering and expanding opportunity in a fair and balanced way. Thus sustainable economic success is a byproduct of genuine pluralism.

The legitimacy of democratic capitalism is based on the shared belief that the system, while imperfect, grants access to most and that it does not act arbitrarily. If not all people, at least most of them should genuinely believe that they have a shot, on the assumption that real “access”, real opportunity exists and that basic, fair rules apply to all and are respected by all. And openness and accountability are not just desirable extras when it comes to the economy. They become essential ingredients in economic enterprises that want to foster innovation and the exploration of new frontiers.

In China today we have mostly regimented enterprises mainly focused on the exploitation of low cost advantages. Current success notwithstanding, these Chinese enterprises may do well only until the present labor cost advantage holds. But, in their current form, they are quite unsuitable to become major players in a future environment in which the genuine innovators will get the top prizes. A system still featuring a large number of State Owned Enterprises run rather inefficiently with continuous political scrutiny, with funding guaranteed by state banks, does not represent a good capitalist model. It is both brittle and slow moving, and thus not capable of encouraging and channeling creative talents that thrive in a free environment.

And this is today’s China. This is not detract anything from the staggering success of the ingenious formula that for more than a generation managed to effectively combine the pooling of private savings into large investments in export oriented industries.

This worked very well indeed.

But, while the machinery managed to produce wealth and staggering growth, this is not the real brand of capitalism. This is a sophisticated system mostly based on state run enterprises that can perform only in as far as the cost differential with the West remains significant. Otherwise, for the moment at least, China does not have any world class players that can be and stay competitive on the basis of quality and innovation. And Hutton doubts that China, as currently configured, can create such world class players.

Alright, you may object. China has its flaws. But where is this “Magic Kingdom”, this “Happy Place of Balance and Moderation”, this good society of pluralism, opportunity, balance and creativity fueled by  healthy, forward looking innovative impulses, tempered by a deep belief in the need to preserve the commonwealth? Does it exist in America? In Europe? Well, right now, in the middle of the financial crisis that revealed horrendous, unsuspected gaps in responsibility, accountability and any notion of balance, nobody looks good. In fact, America’s idea of easy money, with super swindler Bernard Madoff as its standard bearer, looks especially bad. All true. Still, at least in terms of cultural heritage and aspirations, the West, and America in particular,  has pieces of this precious heriatage somewhere in its intellectual attic. 

Whereas China has none of this. The Confucian idea, assuming that this is what is supposed to replace the clearly outmoded communist model, however benevolent and aimed at instigating doing good, is not focused on the realization of individual aspirations. Its vision is still about the pre-eminence of the state and thus it is not ideally suited to foster diffuse enterprise on the part of many independent, innovative actors who work individually, albeit within a rules based system recognized and honored by all.

The Western Enlightenment, the intellectual construct that provided the moral justification and the underpinnings for democracy and free enterprise, with all its flaws, wanted to create a society founded on the proposition that individuals can self-govern within an accepted constitutional framework; while the system would allow self-expression in all spheres, including economics. Successful self-government is predicated on respect for the individual, but also on a shared belief in the need to create and defend a public good that will work as the shared foundation for all members of the society. With this connective tissue in place, then it is possible for individuals to unleash their creative talents and do what they are good at; thus fostering a flow of creativity that will benefit the creators and the market place that their ideas and products will serve.

The American research university, with all its various facets of research, connection with public institutions, ties with finance and commercial enterprises may be the best example of this vitality. Most of what goes on is unscripted. it is produced by spontaneous and free connections and exchanges among the various players. But the success of these exchanges is premised on believing in and practicing truly shared principles: such as respect for property rights, including intellectual property, the rule of law and the sanctity of contracts.

The plethora of complicated relationships, partnerships and agreements created and modified on a daily basis to advance research and its practical applications would be unthinkable without the existence and the respect for a rules based system that protects the individual players as well as the common good of a level playing field deemed to be fair and accessible to all.

Most of this does not exist in China. The system, if not entirely dictatorial, is certainly not pluralistic, nor clearly rules based. While there is increased freedom, including freedom of enterprise, this freedom is exercised within boundaries that are not aimed at protecting a public good but at guaranteeing the security of an entrenched power structure whose only legitimacy is in its ability to inspire awe through a clear threat of retribution against those who would challenge it. The strength of this power structure, the Communist Party, of course, is extended and reinforced by its impressive ability to deliver sustained economic growth and thus improved conditions for tens of millions of Chinese. But, ultimately, the Communist Party, however modified and upgraded, is in power not because of openly manifested consent; but because it has a monopoly of force, acquired long ago through violent means. 

As we said, so far, so good. The problem is that the economic growth created through this ingenious formula enabled and fostered by Deng Xiao Ping in the 1980s cannot be sustained indefinitely, as it is predicated on the indefinite expansion of an export led economy whose primary advantage is low cost.

After the low cost is gone, economies have to compete on quality. And quality is premised on innovation. Hutton argues that it is hard to foster innovation and creativity in science, technology, business models and industry in a society still constrained by a top-down dirigiste approach. Successful capitalism thrives because it can avail itself of a number of decentralized resources, each of them representing a different set of opportunities. Capitalism is in many ways chaotic, anarchical and wasteful. But the ecosystem and the incentives in which capitalism thrives foster innovative drives that cannot be easily replicated lacking the pluralistic, decentralized underpinnings of a rules based free society.

In other words, China, given its institutional make-up, would seem to lack what it takes to move up the value chain. It is all well and good to mass produce cheap stuff that will find eager buyers in western markets quite willing to buy inexpensive consumer goods. But, when the cost advantage favoring China will have withered, it is not clear how China will be able to be competitive.

Many just assume that China will make all the necessary changes and adjustments, in time developing a pluralistic form of government. In turn, this evolution would put in place what is necessary for a thriving knowledge economy. Hutton argues that we should all pray that this is what is going to happen and that the West should do its best to encourage this transformation. But this is not a given. There is nothing scripted here. Change from autocracy to pluralism is possible; but it depends on a number of variables, most of them intangible and not quantifiable. Will the ruling elites be willing to relinquish power? And, if so, on what terms? And will China be able to create not just the institutions, but also the genuine ethos without which they will be just empty vessels?

So, the notion that we have this de facto US-China duopoly based on the vitality of the two economies proves to be wrong. A modern, innovative knowledge economy requires more than industrial plants and a steady crop of scientists. A sophisticated knowledge economy now more than ever is in fact the byproduct of a society in which both the need to preserve the commonwealth and the need to allow a chance to individual self-expression are recognized and protected via pluralistic institutions. 

Hutton argues that even in the US overall standards have declined. The fabric of shared values is torn. The American idea whereby inequality of outcome is acceptable in as much as there is tangible evidence of equality of opportunity has been shattered by growing income gaps that, in practice, deny access to many purely on the basis of the accident of birth. So, America has got plenty of work ahead in order to repair its own pluralistic institutions and make them once gain fully believable and viable. Failure to do so would put in question the legitimacy of the whole enterprise. And this is not just about prosperity. It is about the institutions that make sustainable prosperity possible.

But China has an even more impressive task ahead of itself. In order to become a truly modern country, it needs to create a pluralistic system that in turn will allow it to continue its progress. And the challenge is huge, as there is nothing in China’s cultural tradition that resembles this model.

Again, we should wish China well and not do anything that would delay or impede this salutary transformation. But it should be clear to all that there is no certainty of outcome. In fact we do not even have the guarantee that the present leadership will have the wisdom to recognize the need to move away from autocracy. For China’s good and for all of us who want China as a partner, let us all hope that it will do so.