China's Coming Slump?

Robert Samuelson, 01/0912

WASHINGTON -- Even China? Could the world's economic juggernaut, having grown an average of 10 percent annually for three decades, face a slowdown or what for China would be a recession? Does it have a real estate "bubble" about to "pop"? What would be the global consequences? Treasury Secretary Timothy Geithner visits China and Japan this week. These questions form a backdrop. With Europe's slump and America's sluggish economy, a sizable Chinese slowdown would be bad news.

China inspires ambivalence. Its policies -- especially its undervalued exchange rate -- are skewed to give it an advantage on world markets. This has cost jobs in the United States, Europe and developing countries. Still,  China is now such a powerful economic force that an abrupt slowdown would ripple beyond its borders. Trade would suffer. China's protectionism might intensify to offset job loss. If surpluses of steel and other commodities were dumped on world markets, prices and production elsewhere would fall.

There are warning signs. Economist Nicholas Lardy of the Peterson Institute cites three.

First, Europe's slump has weakened China's trade; Europe buys about a fifth of its exports.

Second, housing is showing signs of a bubble and is deflating.

Finally, China's government will have a harder time deploying a stimulus than during the 2008-09 financial crisis. Government debt rose from 26 percent of gross domestic product in 2007 to 43 percent of GDP in 2010.

How all this affects China's growth is controversial. "Most likely, China will have a soft landing," says Justin Yifu Lin, the World Bank's chief economist. "Growth goes to 8 percent or 8.5 percent." That's down from about 9 percent in 2011. Government debt is still low enough to permit ample stimulus, Lin thinks. Many forecasts agree.

But skepticism is mounting. The Japanese securities firm Nomura sees a one-in-three possibility of a "hard landing" -- a drop in growth to 5 percent or less. To Americans, now experiencing annual economic growth around 2 percent, this may seem fabulous. But for China's modernizing economy and huge labor force, a 5 percent growth rate would raise unemployment and social discontent. The adverse GDP swing would roughly equal the U.S. decline in the 2007-09 recession.

Housing may settle who's right. China has vastly overinvested in housing, argues Lardy in a new book ("Sustaining China's Economic Growth After the Global Financial Crisis"). The main reason, he says, is that financial policies prevent savers from realizing adequate returns on their money. The stock market is seen as rigged. Government regulations keep interest rates on bank deposits -- the main outlet for savings -- low. From 2004 to 2010, they were less than inflation. Frustrated savers invest in housing, where prices are not regulated.

The result seems a classic speculative bubble. People buy because they believe prices will go up; and prices go up because people buy. A 2010 survey found that 18 percent of Beijing households owned two or more properties; another 2010 survey of all cities found that 40 percent of purchases were for investment. Many units, Lardy reports, are vacant because rents in Beijing, Shanghai and other major cities are low.

Unfortunately, booms breed busts. Buyers ultimately recognize that rising prices reflect artificial demand. Purchases slow. Prices fall. New building declines. The process feeds on itself. With modest imbalances, the result is a correction. Otherwise, there's a crash.

Which does China face? A popped real estate bubble could exert a big drag. Housing construction exceeds 10 percent of GDP. That's historically high, says Lardy. At a similar stage of economic development, Taiwan's housing investment was 4.3 percent of GDP. In the recent U.S. real estate boom, housing peaked at 6 percent of GDP. In China, housing stimulates much consumer spending (furniture, appliances) and accounts for 40 percent of steel production, notes Lardy. Land sales are also a big revenue source for local governments. All would suffer from a housing bust.

There are mitigating factors. Outside Beijing and Shanghai, it's unclear that housing prices are "out of line with household income growth," says economist Eswar Prasad of Cornell University. Chinese buyers also typically make large cash payments for their properties. Compared to United States, a housing bust is less likely to become a banking crisis as mortgages sour.

Whatever happens, China's economic model is reaching its limits, as Lardy argues. It has relied on exports, promoted through the controlled exchange rate, and investment, including housing, subsidized by cheap credit. Meanwhile, Chinese savers have been punished by the low returns on deposits. This dampens their incomes and consumption spending. The trouble is that the global slowdown threatens exports and housing's excesses threaten investment. Unless China can switch to stronger consumption spending, its economy will slow -- or it  will achieve growth by becoming even more predatory toward other countries.

http://www.realclearpolitics.com/articles/2012/01/09/chinas_coming_slump__112684.html

Malcolm Gladwell Test Has Japan Turning Chinese

William Pesek, 01/04/12

If you want to silence a room filled with Japanese politicians, suggest they should learn from China (CNGDPYOY).

The conventional wisdom favors the flip side of this dynamic: China should be studying Japan’s playbook. Japan, after all, is an example of both what China needs to do (create a vibrant domestic economy and high living standards) and what it mustn’t (slide into bad-loan crises and deflation).

Yet I have one word for Japanese policy makers who dismiss the idea they should heed China’s example: Shenzhen.

For two decades now, economists have been urging Tokyo (TPX) to create a special-enterprise zone or two. The idea is to have a laboratory where officials could try drastic alternatives to Japan’s rigid, bureaucratic and change-resistant model -- a controlled environment in which the nationwide laws and norms that thwart economic energy could be repealed.

Southern China features such a place. In 1980, Deng Xiaoping started China’s first special-economic zone in a coastal village that was nothing to look at. Today, Shenzhen is a teeming collage of huge skyscrapers, thriving industrial parks, 10 million people, one of the world’s busiest ports, and some of the biggest manufacturing and outsourcing industries anywhere.

China’s Example

It’s the center of Chinese experimentation. There, officials can test what works and what doesn’t: which corporate tax rates offer the best balance of attracting foreign investment while filling government coffers in Beijing, which labor standards make the most sense, which corporate-governance standards are most advantageous, which immigration procedures are optimal, which regulations stay or go.

China’s experience inspired nations as disparate as Angola, Bangladesh, Brazil, Iran, Kazakhstan, the Philippines, Poland,Russia and even North Korea to erect special economic regions. India, too. You can argue that India’s software industry is such an entity -- one immune enough from New Delhi’s dysfunction to create the growth and jobs India so badly needs.

Why not Japan? Junichiro Koizumi, prime minister from 2001 to 2006, broached the issue, but his vision was never effectively implemented. Of all the growth-revitalizing strategies employed by Tokyo (TPX), the most favored ones are debt and concrete -- debt to finance white-elephant public-works projects, concrete to build them. Japan is too much about saving unproductive jobs, not creating innovative new ones.  

What Japan never tried is a dose of supply-side economics. No, this column isn’t advocating a sudden Japanese embrace of the ideologies of Ayn Rand and Ronald Reagan. Yet Japan has gotten as far it can with financial socialism. Even after more than two decades of start-and-stop growth, Japan’s focus is on preserving its way of life, not adjusting to the demands of globalization and Chinese (SHCOMP) competition. The big debates in Tokyo are over raising taxes and joining free-trade deals.

Some fresh thinking is in order, and Japan’s March 11 earthquake and tsunami provided a perfect opportunity. There are many cities the government could declare as economic-policy labs: Fukuoka, Kobe, Nagasaki, Sapporo, Yokohama. The devastated Northeastern Tohoku region is a better choice.

“Tohoku can be to Japan what Shenzhen was to China,” saysJeff Kingston, head of the Asian Studies program at Temple University’s Tokyo campus.

Kingston’s favored regime: Allow large-scale deregulation, cut red tape that frustrates businesses, offer 10-year tax holidays for new investments and incentives for employers generating full-time jobs, apply a corporate tax rate in the neighborhood of 11 percent, suspend gasoline taxes, subsidize electricity, eliminate sales taxes, and structure a variety of enticements to attract capital into renewable-energy research and production.

Tax Holiday

Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo, would take things a step further and simply make Tohoku corporate-tax free. That, he argues, would get young people and families into a region that was dying demographically even before the earth shook and the waters rose.

All this would get Japan closer to passing the Malcolm Gladwell test. Days after the earthquake that triggered the worst nuclear crisis since Chernobyl, the author of “The Tipping Point” told Bloomberg: “The only time you can get things done is in moments of genuine crisis and catastrophes -- there’s a small opportunity to do an extraordinary amount. Japan, a country whose politics were in deadlock and sluggish for many, many years, I hope they can seize this moment and accomplish a lot.”

Gladwell’s view that a crisis is a terrible thing to waste arguably dovetails with the so-called shock doctrine advocated decades earlier by Nobel laureate Milton Friedman. I haven’t spoken with a single Japanese who believes the government achieved much of anything in 2011, never mind turning disaster into an opportunity. Japan must do better in 2012.

China has much to learn from Japan. From the ashes of World War II, it created a safe, prosperous, universally literate, environmentally stable and reasonably egalitarian nation. Yet Japan has long since lost the vibrancy and policy innovation that propelled it to today’s heights.

Prime Minister Yoshihiko Noda’s first act of 2012 should be to create a Japanese Shenzhen. It would be a much-needed recognition that if Japan can’t beat China, it can at least learn a thing or two from Asia’s economic upstart.

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

http://www.bloomberg.com/news/2012-01-03/malcolm-gladwell-test-has-japan-look-to-china-commentary-by-william-pesek.html

Rethinking the ‘China model’

Shaun Breslin, University of Warwick and RIIA, 12/29/11

The idea that there is a coherent and distinct ‘Chinese model’ of political economy has gained attention in recent years -- especially as financial crisis elsewhere has undermined confidence in the (neo)liberal models often associated with Western interests and objectives.

To be sure, there are many in China and elsewhere who argue the crisis has actually highlighted key defects in China’s development model.

The argument that there is an unsustainable reliance on exports -- and investment -- to generate growth seems widely accepted, even if it is less clear how a ‘rebalancing’ can be achieved. Still, the possibility that an identifiable Chinese model exists is not just the source of considerable interest, but also a degree of national pride.

But rather than highlighting a contradiction in thinking, these apparently divergent responses point to what most observers suggest is a key component of the model; it is flexible, pragmatic and responsive, as it is built around experimentation and doing what works, rather than basing itself on rigid ideological and/or policy prescriptions. This not only means doing different things as conditions change at home and abroad, but also having different models for different parts of the country. While it might not be possible for other developing countries to do what China has done, the essence of this understanding is that they should not search for blueprints, but should instead do whatever works for them.

In this respect, the Chinese model is less important for what it is as what it is not. It is not big-bang reform and shock therapy; it is not a process where economic liberalisation necessarily leads to democratisation; it is not jettisoning state control over key sectors or full (neo)liberalisation (particularly in financial sectors); it is not the Western way of doing things; and it is not following a model or a prescription, or being told what to do by others. And unlike other communist-party states, all this has taken place under regime continuity. While the successes of China’s economic experience are clearly important in promoting this idea, so too are the failings of the neoliberal ‘other’ against which China is being compared.

Within this ‘no-model model’ approach, we have the seeds of other ways of thinking. In defining the model, different people tend to focus on different aspects that reinforce their pre-existing thinking.

For example, for those who focus on regime continuity, the model is sometimes reduced to rapid economic growth combined with strong state authoritarian politics. For at least some within China, such understandings focus only on the positives of what has happened, and ignore the myriad social and economic challenges that exist alongside the ‘miracles’.

Similarly, for those who focus on the lack of liberalisation and the state’s dominance, the importance of early stages of marketisation and the relative retreat of the state are often under-emphasised.

Many also focus on the managed process of integration with the global economy and globalisation that China is carrying out on its own terms -- understandings which do not sit easily with earlier studies of how the process of opening up had much to do with acceding to the interests of global finance and production.

This is partly explained by the dualistic nature of China’s international economic relations. While liberalisation has been promoted to encourage investment to produce exports, key domestic actors and sectors have remained relatively protected and supported by the state. And here there seem to be commonalities between what is happening in China today and what has happened in developmental states previously -- not just in terms of trade, but in the state’s organisation of capitalism more generally. Of course there are many country- and context-specific differences, but there are at least some characteristics that link China, not just with the East Asian developmental states of the post-World War II era, but with the renaissance of the post-Meiji Japanese economy and Germany’s Bismarkian development in the 19th century.

In some respects, it does not matter if the Chinese model is indeed a new and discrete entity; if people think there is a China model and act accordingly, the model exists. But debating the genealogy of models is more important than just an exercise in semantics. If the China model is thought of as new and different, this suggests it represents a distinctive deviation from the ‘norm’. But rather than being abnormal, China seems to provide the latest example in a relatively long line of cases of strong state developmentalism that have been ‘successful’ in generating GDP growth (in early stages of industrialisation and national infrastructure construction at least). In this respect, rather than thinking in terms of a China model, it is perhaps more correct to talk of 有中國特色的新李斯特式發展型國家 -- a strong state developmentalism developmental state with Chinese characteristics -- and to rethink what is normal and what is a deviation.

Professor Shaun Breslin is the Director at the Centre for the Study of Globalisation and Regionalisation, Department of Politics and International Studies, University of Warwick, and Associate Fellow at the Chatham House Asia Programme, Royal Institute of International Affairs.

http://www.eastasiaforum.org/2011/12/29/rethinking-the-china-model/

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Will China stay on course?《中國往何處去？ - F. Zakaria》一文可與拙作《辛亥革命與中國的發展》一文對照。 

中共中央需要立刻就民眾「受夠了」的情緒研擬對策。高壓政策在過去或許曾收「長治」的效果，但它從來不是「久安」之道。在目前資訊科技發達，互通聲氣和呼朋引伴只需按鍵的時代；加上「有為者亦若是！」效應；中共中央如果不改弦易轍有如坐在火山口。不要到時候連自己怎麼死的都不知道。

表相超日趕美 真相矛盾深化

黃季寬 (中央社), 06/25/11

巨龍崛起專題--大陸矛盾篇（中央社記者黃季寬北京特稿）

「土地所有權是國家的，政府批地看誰出價高，很多開發商和政府有關係，銀行又是國有的，房價上漲不就是政府把錢從左口袋放到右口袋嗎？」一位民眾邊比手勢邊說。 

在北京虎坊橋臘竹胡同裡開小吃店的王女士邊招呼客人邊說，「20年前，胡同裡居民的最大夢想，就是晉升『萬元戶』（全戶總存款達人民幣1萬元），如今，1萬元在北京，還買不到1平方公尺（0.3坪）的房子。」 

北京房價這兩年一路扶搖直上，三環以內的房子從1平方公尺人民幣1萬多元，三級跳漲到3、4萬元。房價上漲，不就代表房市利多，但大部分北京有房的民眾都不認為自己獲利，因為「賣了我住哪兒去？」 

沒房子的民眾則可能買不起房了，因為薪水漲幅跟不上物價漲幅，王女士說，「現在的錢不值錢，現在人民幣100元，相當於20年前的１元，當年5塊錢能買到東西，現在花500塊還不見得買得到。」 

物價、房價飆漲，許多大城市出現「蟻族」、「鼠族」，大部分民眾一談起房價就忍不住怒火中燒。 

不只是房價問題，大陸車滿為患，也讓民眾忍不住想要大吐苦水。 

「2002年那會兒，經濟還沒上去，政府鼓勵大家買車，可我買了車，現在卻一會兒說交通壅堵要限行，一會兒說停車費太便宜要漲價，好傢伙，一下子從一次2塊錢，漲到1小時10塊錢、15塊錢，這不是坑人嗎？那麼多的錢，還不是都從老百姓的手裡進了政府的口袋？這幫官兒們，早為什麼沒看到車多有問題？」 

仲春時節，小俞開著小轎車，與友人聊到大陸汽車產銷量高居世界第1，多麼讓中國人自豪。孰料他話鋒一轉，對北京從4月1日開始調漲停車費大表不滿。 

為避免車滿為患，北京市「治堵措施」還包括2011年起，每月新車上市額度控制在2萬台，車牌採「搖號」形式發放。4月起，更大幅調高停車費。 

既然有房有車都還有這麼多不滿，那這種情緒是不是會反映在政治層面呢？ 

答案是肯定的。一位不願具名的學者就指出，「錦濤明年就要交班，接下來這1年多肯定不會做什麼，維持不出事兒就好。」 

談到中共總書記胡錦濤提拔李克強，話就更辛辣了，「為什麼非共青團的人不可？李克強有什麼政績？國家拿幾個億給他在遼寧搞棚戶 (簡陋的住處)改造，我要有幾個億我也能幹，誰不能幹？」 

中國共產黨第18次全國代表大會（18大）預定2012年登場，屆時胡錦濤將交卸總書記職務。 

外界盛傳胡錦濤原先屬意曾任共青團第一書記的李克強接班，後來在前任總書記江澤民強力支援習近平下，才改為內定李克強接溫家寶出任國務院總理。 

顯然，在大陸經濟發展「超日趕美」的表相下，政治、經濟、社會矛盾並不少。 

這幾年，西藏、新疆、內蒙先後發生大規模群眾騷亂；廣東增城、汕尾、潮州，重慶酉陽，浙江嵊州，廣西博白，湖南永州等地也出現過聚眾抗議場面；前上海市委書記陳良宇、前鐵道部長劉志軍等高官貪腐；異議人士劉曉波等被關押，在在都說明大陸內部不平靜。 

對於有關問題，中共領導人應是心知肚明。 

大陸雖然經濟總量世界第2，外匯存底世界第1，出口總額世界第1，儲蓄世界第1，持有美國國債世界第1，高鐵建設速度世界第1，但人口也是世界第1，以致人均國內生產毛額僅居全球百名左右。 

所以自胡錦濤以下的各級官員，常把「中國仍處於並將長期處於社會主義初級階段」的話掛在嘴邊。 

對於國際社會希望大陸多負擔點責任，中共中央機關報人民日報也在今年2月發表特約評論員文章表示，「中國仍不是老二」、「中國也當不了老二」。 

而胡錦濤則在中共中央黨校指出，當前大陸社會的主要矛盾仍是「人民日益增長的物質文化需要同落後的社會生產之間的矛盾。」 

然而，關鍵的考驗在於，面對這些疑難雜症，中共當局的對策是進一步改革呢，還是壓制不同聲浪以「維穩」呢？從胡錦濤今年初提出「加強社會管理」，可見中南海當權者更看重的是防堵而非疏浚。 

在這樣的政策選項下，大陸經濟「超日趕美」的光環就免不了減色幾分。未來社會內部湧動的暗潮是否會衝出檯面，中共又能否順利解決重重挑戰？都讓人關注。1000625

http://news.chinatimes.com/mainland/130505/132011062500596.html

Is the 'China Model' Failing?

The country's economic growth, long thought to ensure Communist Party rule, has done little to curb the protests and violence that have erupted across the country in recent weeks

Max Fisher, 06/21/11

China's great compromise, an implicit deal in which the government promises steady rule and consistent economic growth in exchange for total control over the world's largest autocracy, may be losing its appeal. In several of China's provinces, protests are spiraling into a cycle of self-perpetuating violence: civil demonstrations are almost immediately met with overwhelming force from riot police, sparking a more violent backlash from protesters, inspiring an even tougher crackdown, and so on. It's difficult to see either side backing down. When it comes to internal dissent, China's government has long chosen suppression over compromise categorically. The protesters will be unable to achieve their goals of freedom from repression while security forces are treating them so brutally, and that brutal treatment will only raise the protesters' desire to break free.

China's unspoken promise to its citizens -- stay in line, and we'll maintain economic growth -- has long convinced many people in and outside of China that it would guarantee regime stability. The Chinese people will be happy (or at least not so unhappy as to rise up), the reasoning goes, so long as the economy is strong. Watching China's economy buoy as our own sank, some U.S. columnists have even expressed envy for the Chinese model, though such opinions represent only a minority. The mainstream U.S. view seems to be this: China's model might not be very moral or ethical, but it works, and the country's rise will inevitably continue, with an autocratic but wealthy China playing a large (and possibly dominant) role on the world stage.

This may very well be the world's future, with China, and perhaps other state-run societies, becoming an undeniably definitive feature of the global system. But few of the theories predicting the Chinese model's successful endurance anticipated the protests currently racking China's outer provinces -- and even some inner provinces. It began long before the Arab Spring; in the large, Northwestern province of Xinjiang, where the mostly Muslim, ethnic Uighur population rose up against a government that had long oppressed it. The protests were violently suppressed, but have rekindled several times, including recently.

More recently, protests have marked the semi-autonomous region of Inner Mongolia. Like Xinjiang, Inner Mongolia is remote; few photos or videos of the violence made their way into the rest of the world, and the two regions' grievances have attracted little discussion in either the West or in the major coastal cities that dominate Chinese society. They are remote, consist of ethnic minorities rather than ethnic Han, economically unimportant, and socially disconnected from the rest of the country. China, and the world, had every reason to ignore the protests. Until they spread.

Last week, riots broke out in Guangdong province, the country's most populous as well as its industrial base. Coastal, ethnic Han, and economically essential, Guangdong province matters for China. In the violence end ensuing crackdown, protesters burned out cars, ransacked shops, and rained bricks on police. CNN's Eunice Yoon, arriving here not long after the protesters, wrote, "for the first time since I started reporting in China years ago, workers approached us unfazed by our cameras. They were unafraid to vent their grievances to foreign TV journalists even as the police looked on." Police soon commanded her to leave.

According to the theory of the Chinese model, this dissent should have been prompted by economic matters, such as stagnating growth or lack of employment opportunities. But a report from Guangdong by McClatchy newspapers' Tom Lassetter found grievances based not on money but on justice, on political participation, and on the arbitrary rule inherent to a police society.

Public discussion about the causes of the violence in Zengcheng [a city in Guangdong province] has followed a familiar line: low wages and bad working conditions for migrant laborers -- who make up more than half of Zengcheng's 818,000 residents -- possibly whipped up by criminal gangs.

But interviews here show that the chaos was stoked by anger that had been building for years at the bullying tactics of both the "chengguan," (城管) meter maid-like guards who're charged with enforcing municipal ordinances, and the "public security teams," (公安隊) ad hoc officers cobbled together by neighborhood or village committees.

The trigger for last weekend's rioting was the news that a pregnant migrant had been pushed to the ground -- initial rumors said killed -- during an altercation with security. It was a report with which migrants could easily identify.

Whether or not that rumor is true, it clearly resonated with Chinese in Guangdong. And it should sound familiar -- it is remarkably similar to the story of Mohammed Bouazizi, the Tunisian fruit seller who, after abuse at the hands of his country's notoriously abusive police, set himself on fire on December 17, 2010, almost immediately sparking the Arab uprisings that are currently overturning some of the region's most entrenched regimes. As in Tunisia, people in Guangdong are clearly fed up with repression (Tunisia's rapid economic growth also gave it a reputation for impregnable stability). And they're not alone.

In late May in Jiangxi province, a businessman whose house had been leveled by the government to make room for new development (a common practice in the country), but who had never received his long-promised compensation, set off three car bombs next to government buildings. Last week in Hubei province, protesters and paramilitary police clashed after a local official, popular for his reputation of fighting government corruption, was detained and possibly tortured to death by police. In Tianjin, one of China's officially designated "National Central Cities" and a hub of the prosperity and development supposedly at the heart of the country's stability, at least one bomb went off outside government offices.

The protests, and violent government reactions they have provoked, reveal a less-discussed aspect of the Chinese model: the threat of force. Much has changed in China's violent, tumultuous 1970s and '80s. The country has indeed seen incredible growth, gradual liberalization that has surprised many analysts for its apparent sincerity, and greater stability in a society that only two generations ago was in turmoil.

But China is still a military dictatorship. It is still the China of June 4, 1989, when the military killed an unknown number of peaceful demonstrators gathered at Tiananmen Square. Since that day, the dynamics in China have changed, but the underlying system has not. As it has demonstrated in its reaction to this recent spate of protests, the Chinese model is still based, more than anything else, on the threat of overwhelming force by the government against the people.

Such is the nature of autocracy, even the most benign. The China model may have shown some success at curbing dissent, but the underlying causes of that dissent -- arbitrary rule, lack of political participation, coercion -- remain, for the simple reason that they are inherent to any society where a small group rules over a large group by the use of force. Those grievances can be temporarily mollified by economic growth, but money can never solve them. And though China's unrest appears unlinked to the uprisings in the Arab world, they are both enabled by similar factors: the rise of social media as a tool to organize and to broadcast images of government abuse, the influx of liberal democratic ideas, and a worldwide opening that shows Chinese and Arab subjects alike that life doesn't have to be this way.

This conflict and unrest are inherent to the Chinese model. The regime in Beijing, like every ruling party in every autocracy throughout history and around the world, can deploy violence to address the symptoms, but not the cause: themselves.

http://www.theatlantic.com/international/archive/2011/06/is-the-china-model-failing/240773/

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China’s Humbling Lessons for Russia and the West

Pankaj Mishra, 12/19/11

More than a century ago, China’s foremost modern intellectual, Liang Qichao, declared that his country, struggling for modern nationhood, didn’t need a socialist revolution.

Liang was convinced that socialist ideas, emerging in industrialized nations with working-class populations, were poorly suited to a peasant country like China.

Liang recognized that laissez-faire economics produced terrible inequalities -- a visit to New York’s tenements in 1904 moved him to quote the Tang dynasty poet Du Fu:

“Crimson mansions reek of wine and meat while on the road lie frozen bones. Rich and poor but a foot apart; sorrows too hard to relate.”

But as he saw it, what China needed, in the age of fierce international competition, was industrial production through capitalist methods carefully regulated by a powerful state, which also worked to mitigate the resulting inequalities, and check exploitation of the laboring poor.

After a long and bloody revolutionary interlude, China has arguably come close to this model -- state-regulated capitalism with a social-welfare component. The apparent success of the “Beijing Consensus,” and relative weakness of the West’s free- market economies, is now beginning to encourage much ambitious and contradictory rhetoric (including from Newt Gingrich, who admires China’s state-funded high-speed rail network even as he rails against public spending in the U.S.). And it would seem to offer something of a lesson to China’s neighbor, and erstwhile socialist bedfellow, Russia.

The Chinese Way

Last week, a widely read columnist on a Chinese government English-language website, China.org.cn, exhorted Russian Communists, who managed to come in second with 20 percent of the national vote in Russia’s blatantly rigged parliamentary elections, to learn from China’s example. “China has proven,” Heiko Khoo wrote, “that a Communist Party in power can continuously develop the economy, modernise infrastructure and improve real living standards.”

“If,” he added, “the Communists are seen to be more democratic, closer to the masses, and capable of emulating Chinese rates of economic growth, their support will rise and a modern and successful Soviet Russia can be born.”

There are too many piquant ironies here for an educated Russian. One is surely that China, considered a backward country by even Stalin, has something to teach the West. Another is that Russia since 1991 has offered a cautionary tale to the world’s only communist superpower. There are few instances in recent history of such large-scale criminality, impoverishment and misery as occurred when Russia, stumbling out of a dysfunctional planned economy, was shock-therapied into free-market capitalism.

The admirer of the Chinese Communist Party (CCP) is not exaggerating when he writes that Russia suffered “the world’s worst peacetime mortality crisis in the past 50 years, resulting in millions of additional male deaths in the 1990s. To this day, life expectancy in Russia is below that of 1961.”

There are many Chinese who, though severely critical of the CCP, harbor no wish to replace it with a multiparty democracy. They speak of the party’s continuing ability to stave off chaos of the kind that engulfed Russia after 1991, and that eventually turned a former KGB operative, Vladimir Putin, into Russia’s most popular leader. Inverting Friedrich Hayek’s argument in “The Road to Serfdom” -- that state intervention in market relationships leads inexorably to dictatorship -- they argue that the chaos and mass suffering unleashed by unregulated markets pave the way to the brutal authoritarianism embodied today by Putin.

The Stability Argument

Not surprisingly, Putin and his cronies also insist that a country as large as Russia can only be controlled by a heavily centralized state. This argument for “stability” sounds suspiciously like an argument against democracy and human rights. We have heard different versions of it from besieged dictators -- most recently, Libya’s Muammar Qaddafi and Syria’s Bashar al-Assad. On the other hand, the liberal-democratic West has yet to put forth a compelling solution to the plight of ordinary Russians.

Last week, the excesses of Putin provoked the Economist into some unexpected praise for the Soviet era, when leaders “had values, not just interests” and “took themselves and their words seriously.” The Communist Party, it added, “was not called ’a party of thieves and crooks.’”

This may be news to many who lived under the Soviet system. Nevertheless, the Economist broadly agrees with China.org.cn that Putin became Russia’s most popular leader because Russians “longed for order and stability, which they associated with the army and security services rather than with politicians.” Putin also revived the hoary paranoia about “Russia as a great power surrounded by enemies.”

Still, this line of thinking only partly explains how so many Russians ended up loving Putin, and doesn’t say how they can get away from him. The Economist blames something called “Soviet mental software,” which apparently “has proved much more durable than the ideology itself,” and created the “Soviet Man, an artificial construct of doublethink, paternalism, suspicion and isolationism,” which has acquired in the Putin era “new characteristics such as cynicism and aggression.”

This theory is somewhat plausible. However, broad-brush culturalist explanations like these -- remember the one about Arab societies not being hard-wired for freedom? -- are interesting more for what they conceal than for what they reveal. What’s missing here is an adequate historical reckoning with the years after 1991 when Russia, assisted by its vanquishers in the Cold War, underwent a traumatic utopian experiment in free-market capitalism: living standards collapsed, the crime rate skyrocketed -- a series of disasters that culminated in the destruction of the ruble and bankruptcy in 1998.

The Western Role

Whether bombarding Russia’s parliament, rigging elections or imposing a quasi-imperial presidential system, the country’s buffoonish leader in the 1990s, Boris Yeltsin, didn’t lose his many friends and allies in the West. But his abject dependence on them came to be despised by the vast nationalist majority of Russians.

Many Western writers and journalists also participated in this ideological project to turn Russia into a free-market economy overnight. Less than a year before Russia’s financial implosion in August 1998, the Economist was praising Anatoly Chubais, a man Russians revile for organizing the fire sale of their country to oligarchs, for his “dynamism, guile and vision.”

Failure, especially on a catastrophic human scale as Russia’s, has few fathers. And when revolutions go badly wrong, their ideologues tend to blame the unfitness of the “people” rather than their own fanatical zeal. The conventional Western narrative about Russia today sounds no more persuasive than the unsolicited advice of those Chinese who think that, as China.org.cn puts it, Russian communists should learn from “Chinese state enterprises and local and national government bodies,” leading to a “comprehensive Sino-Russian plan of collaboration, development and progress.”

There is no doubt that rebuilding Russia’s industrial base (or, weaning its economy from an unhealthy reliance on export of raw materials), restoring social welfare provisions or diminishing the country’s dangerously big nuclear stockpile would require an interventionist Russian state along the lines of what Liang Qichao advocated for China.

But it needn’t be autocratic, as Putin’s own creation -- the Russian middle class -- seemed to say last weekend in the country’s biggest demonstrations in two decades. And this time foreigners, Chinese or Westerners, can help by maintaining a discreet distance from Russia’s internal affairs. For “the ways by which people advance toward dignity and enlightenment in government are things that constitute the deepest and most intimate processes of national life. There is nothing less understandable to foreigners, nothing in which foreign interference can do less good.”

George Kennan, America’s wisest Russia Hand, wrote those words in 1951. They are more resonant in this tumultuous year as despots once considered immovable are overthrown right and left, elected governments emerge where they were least expected, and, finally, the Russian people, too, find their voice against their brutal and venal masters.

(Pankaj Mishra, the author of “Temptations of the West: How to be Modern in India, Pakistan, Tibet and Beyond,” is a Bloomberg View columnist based in Mashobra, India. The opinions expressed are his own.)

To contact the writer of this column: Pankaj Mishra at pmashobra@gmail.com.

To contact the editor responsible for this story: James Gibney at jgibney5@bloomberg.net

http://www.bloomberg.com/news/2011-12-19/china-s-humbling-lessons-for-russia-and-the-west-pankaj-mishra.html

China's Superior Economic Model 

The free-market fundamentalist economic model is being thrown onto the trash heap of history.

Andy Stern, 12/01/11

Andy Grove, the founder and chairman of Intel, provocatively wrote in Businessweek last year that, "Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best of all economic systems—the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better."

The past few weeks have proven Mr. Grove's point, as our relations with China, and that country's impact on America's future, came to the forefront of American politics. Our inert Senate, while preparing for the super committee to fail, crossed the normally insurmountable political divide to pass legislation to address China's currency manipulation. Secretary of State Hillary Clinton, former Gov. Mitt Romney and President Barack Obama all weighed in with their views—ranging from warnings that China must "end unfair discrimination" (Mrs. Clinton) to complaints that the U.S. has "been played like a fiddle" (Mr. Romney) and that China needs to stop "gaming" the international system (Mr. Obama).

As this was happening, I was part of a U.S.-China dialogue—a trip organized by the China-United States Exchange Foundation and the Center for American Progress—with high-ranking Chinese government officials, both past and present. For me, the tension resulting from the chorus of American criticism paled in significance compared to reading the emerging outline of China's 12th five-year plan. The aims: a 7% annual economic growth rate; a $640 billion investment in renewable energy; construction of six million homes; and expanding next-generation IT, clean-energy vehicles, biotechnology, high-end manufacturing and environmental protection—all while promoting social equity and rural development.

Some Americans are drawing lessons from this. Last month, the China Daily quoted Orville Schell, who directs the Center on U.S.-China Relations at the Asia Society, as saying: "I think we have come to realize the ability to plan is exactly what is missing in America." The article also noted that Robert Engle, who won a Nobel Prize in 2003 for economics, has said that while China is making five-year plans for the next generation, Americans are planning only for the next election.

The world has been made "flat" by the technological miracles of Andy Grove, Steve Jobs and Bill Gates. This has forced all institutions to confront what is clearly the third economic revolution in world history. The Agricultural Revolution was a roughly 3,000-year transition, the Industrial Revolution lasted 300 years, and this technology-led Global Revolution will take only 30-odd years. No single generation has witnessed so much change in a single lifetime.

The current debates about China's currency, the trade imbalance, our debt and China's excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping's government-led, growth-oriented reforms—has created the planet's second-largest economy. It's on a clear trajectory to knock America off its perch by 2025.

As Andy Grove so presciently articulated in the July 1, 2010, issue of Businessweek, the economies of China, Singapore, Germany, Brazil and India have demonstrated "that a plan for job creation must be the number-one objective of state economic policy; and that the government must play a strategic role in setting the priorities and arraying the forces of organization necessary to achieve this goal."

The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA's results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic.

This should motivate leaders to rethink, rather than double down on an empirically failing free-market extremism. As painful and humbling as it may be, America needs to do what a once-dominant business or sports team would do when the tide turns: study the ingredients of its competitors' success.

While we debate, Team China rolls on. Our delegation witnessed China's people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

For those of us who love this country and believe America has every asset it needs to remain the No. 1 economic engine of the world, it is troubling that we have no plan—and substitute a demonization of government and worship of the free market at a historical moment that requires a rethinking of both those beliefs.

America needs to embrace a plan for growth and innovation, with a streamlined government as a partner with the private sector. Economic revolutions require institutions to change and maybe make history, because if they stick to the status quo they soon become history. Our great country, which sparked and wants to lead this global revolution, needs a forward looking, long-term economic plan.

The imperative for change is simple. As Andy Grove pointed out: "If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us."

Mr. Stern was president of the Service Employees International Union (SEIU) and is now a senior fellow at Columbia University's Richman Center.

http://online.wsj.com/article/SB10001424052970204630904577056490023451980.html