By: Jacek Popiel
No nation or power has done as much to profit from globalization as Communist China. And profit it did: witness the “Chinese economic miracle” that was on every front page in the 1990’s and early 2000’s. During that period the Chinese economy went from virtually nowhere to global second place. Wealth, technology and know-how flowed from the rest of the world to China, allowing its government (and its armed forces) to reach a status that could only be dreamed of when Mao passed away.
Whether the Chinese economy today grows at 4 or 7% annually, the consensus view is that China will remain a major economic power far into the future, and little thought is being given to the opposite possibility: that the “economic miracle” could unwind as fast, or even faster, than it was built-up, leaving an enormous hole in the now fully globalized world economy.
Yet that second outcome is entirely plausible in the light of how the “miracle” was created and handled, and of the cyclical nature of China’s power throughout history.
First, what happened in the last thirty years or so?
At Mao’s passing, China’s economy was backward, inefficient and hobbled by the leader’s simplistic Marxist analysis. There was no hope it could ever catch up with Japan, let alone the U.S. It did, however, have several key assets:
- A gigantic pool of cheap labor
- An authoritarian government which could “get things done”
- An extensive international financial network based on the Chinese diaspora
- A hard-working people weary of Maoism and its recurring “revolutionary” crises
So Deng Hsiao Ping proclaimed that “getting rich is glorious” and laid the (highly protectionist) foundation for China to become the manufacturing and export hub of the globalized earth, offering low production prices without environmental or labor restraints, and waving the promise of a billion-person market. Western multinational CEO’s piled in, with Bill Clinton leading and clearing the way. The boom was on.
Everyone thought (and many still think) it would last forever. It was, in fact, definitely a “one-off” thing. As Chinese manufacturing plants replaced Western and Japanese ones China’s customers saw their own high-paying jobs (meaning their national household incomes) go away. The standard-of living differentials were such that the wealth accumulated in China was less than the income and assets disappearing in its export customers’ territory. China was growing richer, but the rest of the world was becoming poorer by a larger amount. Increasing supply was being met with falling demand, the recipe for a global crash.
Western monetary authorities – the Fed et alt. – saw it coming, and managed to postpone the crisis by substituting cheap credit for falling household income. The crash was delayed until 2007, but was all the harder for the delay. American consumers clamped down on purchases, and China’ export income tanked.
Japan had faced the same problem when Ronald Reagan, in 1985, threatened to put a tariff on their automotive imports into the U.S. The Japanese CEO’s got the point: they built production plants in the U.S., easing the trade imbalances. The Chinese Communist Party hierarchy, however, were not capitalists, but the new rulers of the Middle Kingdom. To make work for the masses they ordered their subjects to borrow-and build, and then build some more, using money provided by compliant bankers. The subjects, who understood authority (if not financial efficiency), obeyed. The result was a hugely overbuilt infrastructure producing few returns, the highest debt load of any country on earth, and hopeless overcapacity in industries employing millions, whom no one dared to lay off, for fear of a worker uprising.
Here the historical background weighs in: China has always been a fully authoritarian country, one hundred percent top down. There were good emperors and bad ones, but the emperor’s word was always law, whether it made sense or not. When it didn’t, the people obeyed anyway, and the consequence often was disaster, when the country backed itself into a corner and suffered a huge economic, political and social upheaval. The last such crisis – the Taiping Rebellion in the mid-1800’s – wiped out up to 30% of the population and rendered China powerless in the face of European imperialism.
A “good” emperor could have avoided such disaster, and changed China’s direction. The problem today is that there are rulers, but no emperor. After Mao’s passing his successors, weary of his “permanent revolution” ideology, were keen to prevent the rising of another all-powerful leader. They set up a “semi-dictatorial” regime with a ten-year rotation at the top – preventing anyone from gathering all the reins of power before he has to retire. This offers a degree of personal safety for the members of the ruling circle, but also works against the development of a true long-term policy, which is China’ greatest unmet need.
The country still has abundant currency reserves, but its export trade is steadily falling. It must keep together a vast territory, much of which is mountain or desert – together with its additional, artificial claim to the whole China Sea. The land, water and air are badly polluted, and many industries – especially the state-owned enterprises – are deep in debt, money-losing, overstaffed and shackled with huge excess capacity. Capital is fleeing the country. Yet China is now key to the economies of East Asia, and a major pillar of the globalized world.
How stable and solid is that pillar? China is in big trouble, and led by an entrenched bureaucracy lacking the initiative, willingness and competence needed to change direction. Will it reach a sustainable course or collapse into chaos?
The lack of a reliable answer shows how ridden with risk the current global set-up is. And as far as risk goes, China is far from alone.
Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.