Xi Jinping’s China Is A Country With Major Aspirations Undermined By Serious Systemic Weaknesses China's economy may have crested, while its citizens are becoming restless

By Paolo von Schirach

June 9, 2013

WASHINGTON – It is a good thing that President Obama hosted Xi Jinping, his Chinese counterpart, in order to further the relationship between these two economic and political giants. But let’s look at the context in which this new cardinal bilateral relationship is taking place. To better understand this, let’s step back  and look at other models.

Dealing with the Soviets

In the good old days of the Cold War the primary reason for US engagement with the Soviet Union was nuclear weapons, combined with vast Soviet conventional forces right at the edge of Western Europe. Of course, there was also the need to deal with Moscow-inspired and Moscow-funded Marxist forces around the world and also with “National Liberation Movements” funded by the Soviets. But the real deal was to find a modus vivendi with the only military power in the planet that could destroy America and much of the rest of the world –literally in minutes.

Otherwise, there was minimal interest in the USSR. Economic and trade relations were almost insignificant. Forget about meaningful people to people exchanges. The Soviet Union was a closed up dictatorship. Its ordinary citizens could not travel and had minimal, if any, access to the world.

Eventually the old Soviet Union collapsed because of the supreme inefficiency and rot of its economy. Sure enough, the USSR had state of the art military hardware. But this was possible only because of the massive diversion of resources to defense spending at the cost of systemic underinvestment in everything else.

Dealing with China

The relationship with today’s China it is different; and in a way much more complicated. We are dealing with a fast growing economic and military power that is however still tied to an authoritarian model. Still, unlike the case of Soviet Russia, the US economy is now strongly linked to China because the Chinese managed to become the low cost supplier of almost all consumer goods known to man. A clever combination of cheap labor and massive investments in super efficient logistics have made China the leading world manufacturer and exporter.

Unstable foundations

And yet China, while ostensibly more successful, just like the old Soviet Union is is not built on stable foundations. True enough, unlike its Soviet counterpart, the Chinese Communist Party has been very creative. It managed to transform itself into China’s “Turbo-charged Chamber of Commerce”. It has created and led an economic renaissance. This incredible success has re-legitimized the system. Yes it has; but not forever.

Indeed, the thirty year economic boom came with devastating environmental consequences felt everywhere by ordinary, and now quite unhappy, Chinese: fantastic levels of air and water pollution, soil contamination, unsafe food. Not to mention the spectacle of a class of neo-Mandarins who have enriched themselves through the widespread practice of political favors to preferred economic actors. The Chinese see all this and are restless. Many of them protest, a lot and quite openly, against polluting industrial plants, against arbitrary land grabs and against corrupt local officials. This kind of defiance would have been unthinkable just a few years ago.

The wealthy are leaving

Paradoxically, the new wealthy elites, those who have benefited the most from the past thirty years of economic liberalization, are the most skeptical about China’s long term future. They vote with their feet. Because of their wealth, they can afford to send their children to good schools abroad and in many cases they buy investor visas in order to gain legal residency in the USA, Canada, Australia and elsewhere. In other words they are leaving or getting ready to leave because they are afraid of their long term prospects.

Can China stay competitive?

And there are additional clouds. China’s spectacular growth was made possible by disciplined, hungry migrant workers  willing to toil in horrible conditions in export oriented manufacturing. This model worked extremely well. But now China’s labor costs are rising. If the Beijing leadership looks at the long term they must know that in the future China will have to compete on quality, as the price advantage of goods made in China will soon wither away. 

Innovation without freedom?

And here it gets really tricky. Can a top-down, hierarchical society be also free-wheeling, creative and innovative? I believe it cannot. And yet, if the leaders allow freedom of expression, unrestricted exchanges of ideas and more in order to foster a good eco-system for innovation, they may also allow the germination and rooting of dangerous ideas. On the other hand, if they resist cultural innovation, then they condemn the country to future economic stagnation. I guess this is probably why the rich, having figured all this out, leave. They emigrate because they believe they know the end game. They believe that China will not open up. Therefore, better to go elsewhere.

In the old Soviet Union, most people knew almost nothing about the outside world. The regime did a pretty good job at keeping the country sealed. And in any event most people were poor and thus unable to go anywhere, even if this had been theoretically possible.

But now, in the age of broad band internet it is no longer possible to keep an entire society sealed off . Sure enough, there can be restrictions and censorship, combined with stiff punishment in the still rare cases of open dissent. But an educated middle class, (armed with computers, internet and cell phones),  numbering now hundreds of million, cannot be kept in the dark. This is intuitively obvious.

Authoritarian regimes lead to economic stagnation

In the end, it is clear that for China to move to the next level of a vibrant, creative and innovative society its most creative people need political freedom on top of economic freedom. But this would entail transforming the present system into something resembling a pluralistic society. Are China’s leaders willing to undertake this journey of political reforms? I have no idea. But I am almost certain that the current arrangement, while extremely successful for over thirty years, is no longer viable.


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