The China Paradox

The International Herald-Tribune has an interesting piece on the growing unrest between rural and urban China. China’s economy grew at an incredible rate of nearly 10% last year, but that kind of rapid industrialization does not come easy. The Chinese economy may be growing, but that growth is not sustainable over the long term.

In the 1980s, US pundits worried that the “Japan, Inc.” model of capitalism would quickly overpass the United States. Japanese technology and industry were churning out consumer goods by the masses and Japanese investors were heavily investing in depecated American assets and buying large chunks of our national debt. Throughout the 1980s and early 1990s it was commonly believed that the Japanese economy would rapidly overtake the US economy. In 1992 none other than Michael Chricton published a book called Rising Sun that breathlessly warned in an afterward that:

Sooner or later, the United States must come to grips with the fact that Japan has become the leading industrial nation in the world. The Japanese have the longest lifespan. They have the highest employment, the highest literacy, the smallest gap between rich and poor. Their manufacturing products have the highest quality…

By 1998, the Japanese economy was approaching collapse. The Japanese banking system was nearing collapse, unemployment skyrocketed, public faith in the government fell. It has not been until recent years under the more reformist Junichiro Koizumi that the Japanese economy has once again gotten on its feet.

So what happened to Japan and could the same happen to China?

The Cato Institute’s Brink Lindsay takes a look at some of the factors behind the Japanese decline of the 1990s. The Japanese model of a heavily-subsidized industrialization, its rampant cronyism, and the fundamental inflexibility of the keiretsu model of mega-corporations all proved to be unsustainable over the long term. The fundamental error of the Japanese economy was assuming that a mixture of heavy state control could mix with crony capitalism to create a long-lasting basis for economic development. That mistake very nearly sent Japan into a major depression.

China is following much the same model. China’s growth is massive, but it is not sustainable. China is assuming that a strongly centralized system with inadequate protections under the rule of law will somehow sweep away the bedrock problems of living in a system that still stifles the creativity of its people. China is hoping that they can build an economy backwards – a sustainable capitalist economy is not built from the top down but from the bottom up. It requires the people to have a system that protects their life, liberty, and property. The Chinese state does neither. There is little to no real political freedom in China, and the basis for China’s economic growth is not sustainable over the long term.

While politicians are increasingly seeing China as a scapegoat or warning about China’s imiment economic superiority, the reality of the situation is much different. The US should do what it can to encourage China to liberalize its economy and provide more political and economic freedoms for its people. If China falls into recession it could have disastrous consequences for East Asia and the world.

All the fearmongering about China is eerily similar to the fearmongering over Japan – with the results quite likely to be similar. China’s economic growth may be impressive today, but the chances of China being able to integrate hundreds of millions of peasants into their economy and maintain their rates of growth are slim to none without significant economic and political reform. China’s authoritarian government, lack of human rights, and cronyism are all going to catch up to them sooner or later. The big question is how hard that fall will be and how it will effect the rest of the world.