China Rises
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| Detail of the Forbiddin City via Wikimedia Commons |
The reason these events will transpire is simple: before the decade is out, China will become host to the largest economy in the world. Its people can expect to earn no more than the citizens of a country that is barely middle income. But power and influence in international relations are principally a matter of size. China, with a population that is four times larger than that of the United States, will have more money to buy more allies, more guns, and more ships than any other nation. And while “soft power” may have the ability to coax and convince at the margin, only a fool would believe that power doesn’t still flow from the barrel of a gun. The quiet rush with which countries across Asia are arming themselves bespeaks a frightened conviction in Mao’s famous dictum.
Today’s China is a different beast from the Soviet Union. It isn’t a pretender to the throne at the pinnacle of international affairs. For all but a few of the last centuries in knowable economic history, China’s economy has been the largest and most prosperous in the world. China devised a centralized, meritocratic bureaucracy and invented gunpowder and the printing press long before these innovations were developed in the West. Zheng He’s vast fleet of enormous ships plied the coast of Africa earlier than any Europeans rounded the Cape of Good Hope. China’s “rise” is thus merely a return to the historical norm.
The economic expansion sparked by Deng Xiaoping’s reforms is fundamentally unlike Stalin’s industrialization. In a classic paper, the economist Robert Solow showed that diminishing returns to capital mean that countries cannot grow rich simply by acquiring the machines and infrastructure that seem to distinguish poor nations from wealthy ones. Instead, the long run determinant of growth is total factor productivity: how efficiently a country uses its resources of capital and labor.
This mysterious force emerges from a variety of sources. Technological innovation, regulations that allow competitive firms to grow, and better governance all seem to make economies more efficient. The contribution of TFP to growth distinguishes the growth of the United States from the Soviet Union. Solow showed that over two centuries, close to eighty percent of the US’s growth could be explained by increases in TFP. On the other hand, almost all of the Soviet Union’s rapid industrialization and growth was due to the brute accumulation of capital through forced saving. Once diminishing returns set in, the Soviet Union’s economy inevitably stalled.
China is different. The best available research suggests that most of its growth is due to productivity increases, as firms and consumers have been gradually unshackled from central planning. These galloping increases in TFP and the incredible returns to investment they generate go a long way towards explaining China’s high savings rate.
Assuming the basic economics of China’s growth story are sound, skeptics point to other obstacles to its rise. Most importantly, the country is dangerously fractured by divisions of wealth and ethnicity. China entered the reform era with limited income distributed relatively equally in its society. As the economic returns to education, wealth, and political connections have grown larger, income inequality has reached shocking levels. These inequities are compounded by China’s hukou system of residency permits that effectively shuts out tens of millions of rural migrants from the interior from basic social services in the coastal cities.
Still, China’s economic expansion has lifted hundreds of millions out of poverty, and, by and large, most people have benefited, even if they have not done so in equal measure. The Communist Party, which prizes social stability as the cornerstone of its own survival, has pushed forward an ambitious program to reduce income disparities by eliminating the agricultural tax and increasing spending on health and education. Above all, as the once limitless gusher of cheap labor from the countryside diminishes to a trickle, China’s factory owners will have to pay their workers more, just like capitalists riding the crest of demographic transitions everywhere.
China will traverse an equally thorny path as it seeks to consolidate its grip over its territories in Tibet and Xinjiang. China crushes any organized dissent while flooding these regions with aid, investment, and ethnic Han Chinese. It hopes, much like India in Kashmir, that the promise of riches to come will quiet any nationalist impulses amongst its restive minorities. As the examples of Canada and Belgium demonstrate, wealth alone is not enough to get people to give up their dreams of independence. But China is perhaps the most long lived political unit in the world. It is also ninety-two percent Han Chinese. Ethnic divides are unlikely to tear this country apart.
This analysis presumes that China’s political system will be able to manage the vast challenges facing it. In the wake of the Arab Spring, no one can confidently predict whether authoritarian regimes will endure or collapse. But the Chinese Communist Party has shown itself to be an adaptive, learning organism. Not only did the CCP survive the tumultuous years of Mao’s rule, it has also maintained its grip on power as popular movements overthrew its peers across the Soviet Union.
It effectively steered the economy through its transition into market determined prices. And it has secured China’s sovereignty after a century of territorial violations by colonial powers. As a consequence, the Party enjoys great legitimacy within China. The CCP also learnt crucial lessons as it watched its counterparts across the Soviet Union get destroyed by popular movements. For instance, it instituted a policy of strict retirement ages to prevent its top leadership from becoming the calcified gerontocracy that came to rule the USSR. The Party is now in the process of its third leadership transition, which though opaque, appears to be proceeding apace.
Of course, it would be a mistake to linearly extrapolate China’s future from current trends. China’s political system will be tested by greater demands for openness and participation by a well-educated middle class. Demographic forces mean that China may be grow old before it is truly rich. Unlike the United States, which is sheltered by two vast oceans and bordered by two friendly neighbors, China is ringed by large, powerful countries that will challenge its hegemony in the region. As wages rise, China will need to move into high value sectors, and it will have to re-balance its economy away from investment and exports and towards consumption. But the day when China’s economy becomes the biggest in the world is near, and all must prepare for the consequences.