But the longer-term danger is this: China, and to a lesser extent India, is becoming awfully dependent on a lot of unstable countries without having the global military footprint of a great power—you know, like somebody building a very large house made of straw nowhere near a fire station. When bad things happen—like, say, that one afternoon nine Chinese oil workers were killed by rebels in eastern Ethiopia—China can’t respond like a military power you should fear, because it needs that oil. Once that reality sinks in with local bad actors, expect them to start squeezing Beijing for their own slice of protection money. You know that Thomas Friedman bit about America funding both sides of the “war on terror”? Well, this is how that sort of thing starts. Today, China might get along simply by buying off every dictator it can. But that won’t work in a future world defined by hyperconnectivity, where every customer and shareholder can witness the human implications of China’s deal-making. Nor will it work in a future world defined by hyperinterdependency, a world China is creating whether it realizes it or not.
In many ways, China is following the classic path of Western economies by moving up the production ladder from commodities to labor-intensive manufactures to higher-tech manufactures and finally to the service sector and intellectual property. India, on the other hand, is leapfrogging right up to the service and IP sectors without really going through any widespread industrialization. According to longtime observer Edward Luce, within India’s total labor pool of about 500 million potential workers, only about 10 percent find jobs in the formal sector, the rest making do in agriculture and India’s vast informal sector of temp jobs, like driving an unlicensed taxi. Of those roughly 35 to 40 million workers in the formal sector, about half work for the government and the rest work in the private sector. Of those 15 to 20 million in the private sector, about half (7 to 10 million) work in manufacturing and roughly one-tenth (1 to 2 million) work in India’s booming service sector. By comparison, China has over 100 million people working in its formal manufacturing sector.
So you’d have to say that Deng also chose wisely by first marketizing China’s agricultural sector and, through boosting production there, triggering the rural-to-urban movement of labor that made China’s rapid industrialization possible. By staying attached to its Gandhian ideal of the village as the center of national identity, India takes the slower Jeffersonian route, befitting its democratic tradition, while China embraces the more vigorous, Hamiltonian path of directing rapid national economic development from above. Although India may be more like America in its messy democracy and competitive religious landscape, China is far closer to America in terms of its socioeconomic development.
Impossible, you say! Ruled by Communists, China’s civilization bears no resemblance to our own! But China’s true Communist period was just three decades out of a 5,000-year history, the rest of which featured a natural tendency toward markets in general (the Chinese are inveterate gamblers, for example) and past periods of serious global trade connectivity (recall the Silk Road of yore). Add in the strong focus on family ties and a deep spiritual history that has long featured calm competition among various faiths and we’re not exactly talking about some brother from another planet. So forget trying to figure out today’s China through its recent history. Instead, simply stipulate that China’s last extended period of civil strife (1927-76)—which did not spin to a complete stop until the murderous Mao Zedong departed—deposited China somewhere in the historical vicinity of “rising America” circa 1880, meaning Deng’s China is only about thirty years old. Once you realize that, depending on where you go around China, you can locate yourself somewhere in the last 125 years of America’s own ascendancy.
Foreign policy-wise, you’re looking at a mild-mannered Teddy Roosevelt: China still prefers to speak softly, but it carries a pretty big stick, with which it mostly threatens small island nations off its coast (bully!). The nation is likewise undergoing a construction and investment boom that’s right out of 1920s America, and frankly, that should give pause to anyone concerned with global economic instability. China’s banking and financial industries are about as regulated as ours were prior to the Crash of 1929. But there’s no sign of a slowdown. Shanghai already has twice as many skyscrapers as New York—4,000—and plans another thousand.
Check out China’s space program, which just put its first man in orbit. Beijing now speaks openly of repeating our 1960s quest for the moon. Groovy! When the Chinese pull off that miracle, their space program will only be about a decade behind our own, which seems perpetually stuck in the 1970s, thanks to the breakthrough technology (still!) called the Space Shuttle. As for the Chinese military’s demonstrated shoot-down of their own space satellite, that just says China’s mode of signaling its desire for arms control is also right out of our 1960s.
There’s also a sexual revolution brewing inside China, where urban professionals are taking one great leap forward from Father Knows Best to Sex and the City. This revolution won’t be televised, but it’s being compulsively blogged. When the Chinese celebrate the Lunar New Year nowadays, more than 10 billion text messages rocket around China’s wireless networks—the biggest in the world. As the writer and political scientist Ian Bremmer says, imagine a rerun of the Tiananmen crisis today, with today’s level of interpersonal connectivity, not to mention all those camera phones!
In terms of corruption, Beijing remains stuck somewhere prior to our Progressive Era of the late nineteenth century, and that’s not good. China’s political system needs to be able to process all this social and economic pressure with more flexibility. Citizens are simply growing angrier and more demanding with each passing year, and it’s not just peasants staging tens of thousands of violent protests annually, but an emerging middle class increasingly protesting government decisions on issues like where to locate the next commuter rail line connecting downtown Shanghai to the suburbs. The Sichuan earthquake of 2008 ignited plenty of social rage in this regard, triggering a domestic reform impulse that the Communist Party scrambled to accommodate. Again, this process should strike Americans as eminently familiar: Show me any section in the U.S. legal code and I’ll show you some preceding historical tragedy that (1) mobilized the national government to prove its responsiveness to popular anger and (2) triggered a “suddenly” imperative set of new regulations.
China’s legal system also needs to clean up its act, because the more China’s economy opens up, the more the global business community is going to demand greater transparency and better avenues for legal redress. A couple of decades ago, China’s courts handled several hundred thousand cases a year. Today that demand is running at more than 5 million cases a year. Corruption already consumes upward of 5 percent of China’s gross domestic product. In a hypercompetitive world, such inefficiency eventually can cost a single-party state its popular legitimacy. The 2008 Beijing Olympics was an inadvertent milestone in this regard, pushing Beijing’s rulers to crack down on the piracy of video coverage they had sold to foreign broadcasters. You want a responsible “stakeholder”? Put some foreign shareholders on the case!
Still, these are all better problems for China to have today than the ones they faced during Mao’s Cultural Revolution. In thirty-five years, China has gone from the world’s political basket case to the world’s economic powerhouse, matching America’s stunning recovery from the Civil War to the start of Theodore Roosevelt’s administration. Ronald Reagan, Margaret Thatcher, and Pope John Paul II all stand tall in the Western tale of “How the Cold War Was Won,” but the truth is, thanks to Richard Nixon, Deng Xiaoping’s decision to reform China is more important by far. As sociologist Juan Enriquez writes of Deng, “No other world leader, ever, has gotten so many people out of poverty as quickly.” But the diminutive Deng did more than that, standing head and shoulders above a battered Chinese party leadership that overwhelmingly wanted nothing more than the status quo ante Maoism: He said simply, “To get rich is glorious,” and at that moment our current world, in al
l its promise and peril, was born.
Now, whether or not America prefers today’s global problems to what came earlier, we have little choice but to become complicit in these 3 billion new capitalists’ quest for a good life. We built this liberal trade order and they came—en masse! Much as America’s unbridled capitalism was in danger of permanently trashing our environment a century ago, triggering the first great political responses from Theodore Roosevelt, the clock is ticking on the world’s collective response to the planetary dangers triggered by globalization’s seemingly insatiable demands.
As always, it’s not when you fail that’s scary, but when you succeed.
THE NEW RULES: CHINA BREAKS THE MOLD OR MERELY RECASTS IT?
Western powers today fear that China’s stunning rise signals a real challenge to the notion that economic growth triggers democracy. While I understand such fears, let me tell you why they’re unfounded: China’s economy increasingly mirrors our own.
As business academics William Baumol, Robert Litan, and Carl Schramm argue in their 2007 book Good Capitalism, Bad Capitalism, there are basically four types of capitalism operating today. First, there’s the family-style oligarchic capitalism found throughout much of Latin America, Africa, the Middle East, and Central Asia. In these low-trust social environments, blood ties trump contracts for getting business done. Second, there is state-guided capitalism that features heavy government protection of national flagship companies that seek to dominate home markets while fueling export-driven growth. In decades past, this was the type of capitalism employed by Japan and South Korea during their rise. Today, we’re talking ascending powers like China and Russia. Third is the big-firm capitalism that marked America’s corporate heyday of the mid-twentieth century and now characterizes Europe and Japan. These are mature markets, where major players dominate most industries, giving the economy a lot of stability even as these larger entities don’t adapt themselves quickly to new markets, while labor tends to be rigid.
Finally, there’s the wide-open entrepreneurial capitalism that America always strives for, but which waxes and wanes through our history. For example, most big firms that dominated our economy in recent decades actually began as far smaller start-ups around the start of the twentieth century, when America’s regional markets were being knit together into a larger whole that rewarded economies of scale. An entrepreneurial economy features lots of small firms constantly generating new products and technologies. Globally, the purest examples of highly entrepreneurial economies tend to be small “island” economies like Israel and Taiwan, nations for whom an almost nonstop “go global” strategy is the only way to achieve economies of scale in their high-technology products. Both are tumultuously democratic.
In their book, Baumol et al. argue that the current U.S. economy has located its happy historical medium: leading industries dominated by big firms, but continuously invigorated by small, entrepreneurial start-ups that are regularly gobbled up by the big firms once their innovations mature. Good examples can be found in the information technology and pharmaceutical sectors, where a handful of giants represent the vast majority of go-to-market outcomes for start-up firms. The authors single out this mixed model as any nation’s best choice for sustained “smart” growth through continuous innovation, meaning America is basically there in terms of market evolution. Is democracy required for this premium category? Entrepreneurs tend to be notoriously independent characters. If you don’t give them the freedom they need, they tend to leave.
What does this tell us about China’s “challenge”? Here’s where I think we locate an underlying theory of market evolution lurking behind these categories (as in, from oligarchic to state-directed to big firm to entrepreneurial), for China’s rise has actually mirrored the American model more than we realize. Because China started with a dominant state-run sector and refused to bite the bullet of shock therapy, its leaders adopted a strategy of gradually cannibalizing the economy by encouraging the development of big firms, rising from either the growing private-sector or state-owned entities, whose funding is obtained largely from government-controlled banks. Here’s the key part: These big firms are augmented by a growing constellation of private-sector entrepreneurial firms, who get their investment funds from foreign sources. Provincial governments, municipal governments, and individuals can launch these firms.
Thus, China’s strategy seems clear enough: “Let the seedlings of new enterprise grow while tending to the forest of the existing [state entities], with the hope that the new ventures eventually will become more important to the economy than the [state outfits].” As Baumol and his colleagues argue, “This is exactly what has happened, apparently with great success.” The state-firm share of the national economy has dropped from virtually 100 percent in the early 1980s to approximately one-third of China’s gross domestic product today. Point being, China’s model of development constitutes more an endorsement of American-style capitalism than an improvement on it—much less a rejection of it. This strategy of “incremental change, or entrepreneurial capitalism at the margin,” allows China to gradually shift its economy toward the U.S. blend of big firms surrounded by entrepreneurial small firms.
What comes next? More and more freedom, if China hopes to hold on to those entrepreneurs.
And when should we really get scared? As Fareed Zakaria notes in The Post-American World, the historical threshold for democracies lies somewhere between $5,000 and $10,000 per capita annual income. As China’s income still stands well below that range and won’t reach it for another two decades or more, “it cannot be argued that the country has defied this trend.” In other words, stay tuned and stay patient.
THE NEW NORMAL: DEFAULTING TO THE BEIJING CONSENSUS
Neo-Marxists have long argued that America represents capitalism’s last stand, historically speaking, having artificially benefited from the collapse of Europe and Japan’s imperial systems and turned itself into a Keynesian military superpower financed by budget deficits over the course of the Cold War. As for Reagan’s revival? That was mere market sophistry, as Wall Street constantly comes up with new ways to float debt. Money markets thus become the “final refuge” of our bankrupt capitalist system. Annoyingly enough, whenever there’s a true imbalance in the system, such as the dominant reserve currency, the U.S. dollar, being out of whack from its perceived true value, those damned capitalist giants get together and make some accord to correct the situation, putting off capitalism’s “death throes” for another global boom or two.
Curses!
Thus the Plaza Accord of 1985 (also known as the Baker Plan, for then U.S. Secretary of Treasury James Baker), which allowed the overvalued dollar to slowly deflate, set off America’s manufacturing recovery, triggering in turn a revival of the American economy and a global boom that lasted many years. When that accord had finally run out of steam (or punished Japan sufficiently for having the temerity to be “rising,” as the neo-Marxists contend), a subsequent “reverse Plaza Accord” similarly rescued Japan’s depressed yen, thus reviving its crisis-ridden manufacturing sector somewhat and facilitating yet more global boom. That accord in turn released a flood of Asian and European money into U.S. stock markets, eventually helping to trigger the Tech Crash of 2000, which in turn revealed the corporate malfeasance of Enron, WorldCom, and others, and somehow, after America put in place a slew of new rules, the global boom continued. Now America reruns the entire drama of the 1980s all over again, as the overvalued dollar’s inevitable drop triggers the subprime housing crisis (or vice versa). Once again, our leftist critics agree, “imperial” America is slated for the dustbin of history! Toss in the imperial overreach on Afghanistan and Iraq and this turkey is cooked . . . except those damned sovereign wealth funds kept showing up to rescue Wall Street, pumping tons of cash into the system! Was it enough in the end? No, but recognizing the global economy’s survival instinct here is instructive.
It’s almost as if America, which is clearly now too large an
d too far gone for the IMF to save it, somehow knew in advance that it needed to create a global liberal trade order in which, somewhere beyond the foreseeable future, those very same “oppressed” economies, which had long suffered America’s privileged domination of global markets, would somehow decide that it’s in their own interest to rescue this financial “monstrosity” before its collapse destroys them all! How can this be?
The global economy today represents decades of effort by America in an unstated grand strategy of replicating the wonderfully distributed American System of development and finance on the global stage. Since Nixon took us off the gold standard in 1971, America has basically walked the high wire as the global reserve currency—with no apparent net. Our economic preeminence was such that we could manage that trick and free our system—and thus the global economy—from the artificial growth limitations of remaining somehow proportional to the stock of gold. The dollar thus stopped representing some commodity’s value and started representing the world’s “full faith and credit” in the American System, which, in its modern form, has the world’s only financial markets that directly connect savers with entrepreneurs needing investment. In the rest of the world, commercial banks largely fulfill that function, creating a cautious intermediary in the process. With the American System—for better and worse—it’s something far closer to peer-to-peer lending, a socialization of investment risk that’s necessarily more subject to collective euphoria even as it taps the wisdom of crowds. Judging by the rise of P2P activity on the Internet, I expect to see more of this in coming years. In fact, the hot new item in foreign aid is P2P systems like Kiva.org, where individuals in advanced countries can pool together money for loans to people living in less developed Gap countries (“You need a micro-loan. Well, here’s my micro-savings!”). I encourage my blog readers in this way, hosting a mini-portal to Kiva on my weblog (www.thomaspmbarnett.com/weblog).
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