Dragon at the Crossroads

This fall, as we prepare to elect the President, there’s another country, just as big, and just as important as the US, that’s undergoing a leadership transition: China.  The difference between the transitions is that we’ve known for some time who their leaders are going to be, and we still don’t know for sure who our leaders are going to be in the next few months.

China and the US both, face similar challenges, with softer than usual economic growth being foremost among them.  The US is a mature economy, so we don’t have quite the same scope for growth that the Chinese have, but when your entire regime is predicated on a deal with the people that, in exchange for their political acquiescence, you provide stratospheric growth rates, when those rates slow, you have a problem.

Beginning in 1978, China pursued a step-by-step policy of economic reforms that embraced capitalist economic models.  The results have been the longest, largest uninterrupted economic boom in the history of the world, bar none.  And if China plays its cards right, it can still enjoy if not the dizzying growth rates that they’ve experienced in the past few years, then something that’s a close second.  Most of the economic reforms were achieved pragmatically, that is, the Chinese leadership did what they could to liberalize the economy, knowing that they weren’t going to be able to open the whole kit and kaboodle up to competition, be it Chinese or foreign.

And China’s done well by that model.  But the fact of the matter is that if China wants to maintain growth rates that will exceed 6% for the next decade, it will have to further reform its economy in a few key areas.  The first is corruption, which in China is endemic, and a real drag on the economy.  If the country is to continue its economic (and therefore political consolidation) it must face the issue of corruption that permeates government and industry.

The second is opening up protected industries, such as finance and some manufacturing sectors, to foreign competition.  At the beginning of any round of economic reforms, there’s going to be some industries that receive state protection for them to grow enough so that they can ultimately stand on their own.  This form of ‘industrial policy’ has been a cornerstone of large developing countries for the past century, and it’s a successful one, but there comes a time when those state-backed protections have to come down.

And the third issue that China needs to ensure is stability, both internally and externally.  If you look at China, it doesn’t really get along well with any of its neighbors.  When there are territorial disputes, there’s a tendency for a bit of Chinese nationalism to go on display, and any form of nationalism, be it Chinese or of any other variety, rarely achieves anything constructive .  From the Philippines to Japan to Vietnam, China would do well to settle its territorial disputes and to do so pragmatically and expeditiously, because they’re not going to get any easier to solve in the future.  And the second aspect of stability is within China itself.  The country is an economic dynamo, but it needs to do a lot of work on its political institutions.  Were ever the Communist Party to fail in China, the country itself would fail, such is the power concentrated in its hands.  As the Chinese middle class expands, it finds ever more distasteful some of the aspects of one party rule.  And while the CCP is facing some of the challenges to its authority head on, such as environmental concerns, class inequality and land redistributions, put simply, if economic growth fails, all other bets are off.

China fascinates me.  I try not to get emotional about it, as the country neither overly terrifies nor awes me, nor do I think China is just another country that the US can push around.  Being able to look accurately at what China is and where it’s going is the best way to circumvent misunderstanding, and we have a lot to gain from one another in the coming decades.  That is, if we do things properly.  If we don’t it’s all just downside from there.

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