The politics of adjustment

The past two years have seen a surprising amount of turmoil at the highest levels of the Chinese political establishment. We have seen political alliances re-shuffled, powerful business and political leaders arrested, factional disputes magnified, and an explosion of rumors of more to come. After twenty years of what seemed, on the surface at least, remarkable cohesion within China’s political elite, events of the past two years have come as a great surprise to many.

And yet the historical precedents suggest that none of this should have surprised us. After nearly thirty years of spectacular economic growth and impressive social and political advances, China has probably exhausted the growth model that had once served it so well. It now suffers from many of the internal imbalances that were the near-automatic and easily predictable consequences of the policies associated with the growth model it had pursued, and policymakers in Beijing are very aware of the urgent need to adopt a new set of policies that will allow China both to rebalance the economy so as to protect itself from the consequences of soaring debt and to lay the foundations for another thirty years of solid economic growth and social and political advancement.

China is not the first country to have experienced a long period of miraculous growth. But, as University of Chicago’s Robert Aliber implied in his Warholian quip about growth miracles (“in the future every country will grow rapidly for fifteen years”), the most difficult part of growth miracles has not been the growth miracle itself but rather the subsequent adjustment. Consider the most notable examples of growth miracles: the United States in the 1920s, Germany in the 1930s, the Soviet Union from the late 1940s to the early 1960s, Brazil from the late 1950s to the late 1970s, Japan in the 1980s, and many others.

In every one of these cases, and in many more involving smaller economies, economic growth powered ahead at astonishing rates (relative to the rest of the world in depression in the case of Germany) on the back of investment programs usually, but not always, centrally directed and turbo-charged by institutional distortions that forced up domestic savings rates to levels high enough not only to fund massive domestic investment (and, in many cases, extensive military expenditures) but also to export abroad, which of course is the converse of running large trade surpluses. In each case, too, growth for many years seemed almost unstoppable, to the point where, in the case of the Soviet Union by the early 1960s and Japan by the late 1980s, there was a near-unanimous consensus that it was just a matter of years, or one or two decades at most, before either country would overtake the United States as the world’s leading economic and even technological power.

There is, in other words, plenty of historical context within which to place China’s spectacular achievement, and it is clear from this context that the most difficult part of the process has always been the subsequent adjustment, during which time the imbalances generated by the spectacular growth were addressed and resolved. But they were not always resolved successfully.

In some cases, for example that of the United States and perhaps Brazil and South Korea, the adjustment was brutally difficult but the institutions that evolved during the adjustment period laid the groundwork for many more years of growth and stability (and a shift from military authoritarianism to a robust democracy in the latter two cases). In other cases, for example that of the Soviet Union, the adjustment period was long and protracted, and perhaps because during the adjustment period the country was unable to develop the right set of institutional reforms, it eventually collapsed into the kind of chaos from which it is still struggling to emerge. In still other cases, for example Japan, the adjustment seemed to leave the country locked into stagnation.

Three generalizations

Of course the differences in the ways each country experienced both the growth miracle and the subsequent adjustment make it very hard, and risky, to generalize, but it seems reasonably safe to make three assertions about the adjustment process. First, the investment-led growth miracle always culminated in a period during which debt began to grow at an unsustainable pace, and in every case the miracle was brought to a halt either because of a debt crisis or, most obviously in the cases of Japan and the Soviet Union, because extraordinarily high debt levels locked the country into a long period of stagnant growth during which the financial system struggled to bring debt levels under control.

Second, in every single case even the greatest of skeptics arguing against the sustainability of the growth miracle ended up wildly underestimating the difficulty of the subsequent adjustment. Had those who were most skeptical about the Japanese growth miracle been told in 1990 that Japan faced twenty years of growth under 1 percent, even they would not have believed it. Had any economist who questioned the sustainability of the Soviet economy been told in 1970 that within twenty years the Soviet economy would have collapsed, and with it the state itself, it is unlikely that he would have taken the claim seriously. Even the most pessimistic of Americans in 1929 or Brazilians in 1980 would not have included in their bearish forecasts the possibility that their countries would experience a decade of negative growth. In retrospect the adjustment period would be described as a middle-income trap, a debt trap, or any of a dozen other traps, but it’s virulence would have always come as a shock.

Third, the adjustment period was never just a period of difficult economic adjustment. It was also always a period of tremendous political difficulty, fractious political disputes and, more often than not, a period of radical political transformation. In fact excluding a few, very unique cases (Singapore, for example, whose small size and external orientation gave it a flexibility impossible in a larger country), the adjustment that followed a long period of miraculous growth has always been even more striking as a period of political change than as a period of economic change.

And it is not hard to see why this should be the case. It is a commonplace among historians, almost a truism, that when a country’s governance is structured in such a way that incentives for the political elite are aligned with the economic interests of the country, the country is likely to grow rapidly and in a healthy way. When they are misaligned, there are likely to be significant strains and pressures that resolve themselves through the political system.

How does this apply to China? In the early 1980s when China’s reforms began, the country was seriously underinvested and urgently needed to improve its infrastructure, its manufacturing capacity, and housing and education. As the country’s farsighted leaders engaged in a massive program of investment, there were many opportunities for the state and for the political and economic elite to benefit directly from transforming the country’s capital stock from one of the weakest in the world to one of the best. Among the consequences was that while the lives of ordinary Chinese improved at a pace perhaps unmatched in human history, the share of China’s GDP retained by the state sector and the political elite actually increased for thirty years as they benefited disproportionately from Chinese growth. China produced more billionaires more quickly than anyone in history.

But every country that has experienced a growth miracle has also developed imbalances that had to be reversed, and the adjustment process is simply the process by which these imbalances are reversed. China is no exception. In order to rebalance the Chinese economy we must move from a period during which the elite received a disproportionate share of growing Chinese wealth to one in which ordinary households and small businesses receive a disproportionate share. After thirty years during which Chinese households retained an ever smaller share of the rapidly growing Chinese economy, doing nonetheless very well in the process, we must shift to a period during which ordinary Chinese households receive an ever rising share of a more slowly growing Chinese economy, in fact this is almost the very definition of rebalancing in the Chinese context.

China’s economic adjustment necessarily involves, in other words, a sharp reduction in the rate at which the state and the political elite have been able to grow their assets during the past thirty years, and perhaps even an overall decline. It also requires significant changes in the ways in which the financial system funds economic activity, an increase in the role of small businesses and the service industry, a very different legal framework, and a number of institutional changes that represent a sharp break from the recent past.

Aligning incentives

None of these changes will be easy, and these changes will be all the harder to make by the fact that there must also be, as a necessary part of what it means for China to rebalance, a sharp reduction in the amount of assets and resources to be distributed among the various state and elite players. China’s old economic model, which rewarded both the country and the elite very handsomely, must now be transformed into a model that will reward the country, but at least partially at the expense of the elite. This was the challenge faced by every country as it adjusted from it’s period of rapid, investment-led growth, and it has always been a politically challenging process, whether that process involved the bitter political upheavals and the redistribution of wealth from the rich to the poor forced onto the United Sates by President Roosevelt’s reforms in the 1930s, or the Brazilian rejection of it’s military rulers in the 1980s as they painfully but surely built a robust democracy.

The historical precedents are fairly clear. Every country that has emerged from many years of “miraculous” investment-led growth has either embarked willingly, or been forced by debt, into an adjustment process that turned out to be economically far more painful than anyone had expected. In every case among the greatest challenges has been a very fractious and difficult political environment. China is now beginning it’s own adjustment process and we should be prepared for both tougher economic conditions and a more difficult political environment.

History has a lot to teach us about this process, and it has a lot to teach us about which countries were able to manage the difficult adjustment in ways that created a basis for long term success and which countries were not able to do so. China’s leaders have already demonstrated sufficient foresight and ability to have managed the growth period successfully, and we have every reason to hope that they will manage the adjustment process equally well. But there should be little doubt that thirty years of astonishing growth was the relatively easier part, and that President Xi Jinping and Premier Li Keqiang face a greater challenge than that faced by their predecessors. And there should also be little doubt that the recent political turmoil in China is not an accident. History makes it very clear that the next ten years will be a political challenge for China even more than it will be an economic one.

And how will things evolve politically in China? Of course it is a little foolhardy to make predictions, but work that I have already cited many times before by Daron Acemoglu and James Robinson suggest that most cases of successful adjustment have occurred either in countries with highly competitive political structures (democracies, for example) or in countries with highly centralized decision-making (China under Deng Xiaoping, perhaps). Authoritarian countries in which political decision-making is widely dispersed, like China today, have historically found it difficult to make a successful transition.

So which way should China move? There is a widespread belief that only political reforms that impose rule of law and democratize the political decision-making process will allow China to reform successfully. For example a recent editorial in the Financial Times argues:

Much of this is difficult, for one important reason. It requires the Communist party to loosen its grip. Yet it has little choice. Unless meaningful reform can be implemented, the chances of China’s economy running out of steam are high. 

This may be true, but it also may be true that a successful adjustment in China actually requires that China move temporarily “backwards” towards greater centralization of power and a tighter grip on decision-making by President Xi and his allies. After all it took Deng Xiaoping to unleash the radical reforms of the 1980s, and it is an open question as to whether he would have been able to do so had political power in China been as dispersed in the 1980s as it is today. In that sense what seems like an attempt by President Xi to consolidate power more tightly within a small group is perhaps not a step “backwards” in political liberalization but more of a temporary retreat in order to ensure a successful adjustment, which itself might be a precondition to further political liberalization some time in the future.

 

 

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62 Comments

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  1. I concur that there is a need for the Chinese leadership to consolidate power to effect reform. Is the expansion of the air defense zones a part of that strategy; i.e., having a foreign bogeyman to rally support for the central leadership?

    • While that might be a factor, in reality China is hell bent on establishing itself as the next great empire and would have done something like this whether or not they have looming economic problems. In fact in that regard they have quite a lot in common with Germany under the unfortunate reign of Wilhelm II. East Asia today very much resembles Europe in that period and unfortunately has 1914 written all over it. The next economic crisis might well end up being the spark that sets this powder keg off.

      • I agree. Living in China I am constantly astonished by how rabidly nationalistic a large segment of the population is. I have endless anecdotes including random strangers coming up to my wife trying to convince her to divorce me because “foreigners are bad”…but I think none better illustrate this than my experiences during the 2012 London Olympics. At first, everybody (students, co-workers, random strangers) would constantly bring up the medal count. On the elevator, subway, bus, during lunch. Everywhere. “Did you see the medal count? China is #1. We have ___ gold medals and the US only has ___”. But when the US surpassed the Chinese medal count in the final days of the Olympics, the mood turned instantly. Suddenly everyone was complaining. The judges cheated. It’s a foreign conspiracy. It was ubiquitous, even among seemingly moderate Chinese.

        I suspect we’ll have a lot more of this kind of delusional nationalism to look forward to, very possibly resulting in an Asian version of WWI

        • Your experience is real but probably does not indicate a change in the status of nationalism. Most of young people in China cared about the gold medal count 30 years ago. If you read China’s history, you may find people were more nationalistic than the young generation.

          You sound like living in very rural area in China where people do not like their children to marry foreigners because they cannot communicate with them. Many people choose to marry someone of same ethnic group or similar culture. It has nothing to do with nationalism.

          • Here’s another anecdote for you: In 2008 I was at a university in China. One evening I heard really loud, periodic cheering. It was about half a kilometer away in the cafeteria, so I walked over to investigate. In the cafeteria, students were packed, standing room only, with their eyes glued to the television. On TV was the military parade, and the cheering came every time some new weapons system came rolling across the screen. In terms of genuine enthusiasm I’ve never seen anything like that except in newsreels of Nazi Germany military parades. Seeing as to how the educated elite are firm militants I really don’t hold much hope for the rest of the country.

            The reality of China is that not everything is quite what it appears. Most of them will not express their feelings openly most of the time, but every once in a while, like in the example above, they will show their true selves. There is a very strong under current of militant nationalism at all levels of Chinese society today, they genuinely want a war to prove that their are the ultimate power again. The China Threat is very real.

            They also view any and all attempts at “reconciliation” or accommodation on our part as a sign of weakness. It’s no accident that this latest provocation came about soon after the Iran nuclear “suckers” deal. “Let’s all get along” foreign policy is just going to make that coming war inevitable.

            “You sound like living in very rural area in China where people do not like their children to marry foreigners because they cannot communicate with them.”

            No, they don’t want their children to marry foreigners because they are racists, period. I’m always amazed at how everyone seems to think that only white people can possibly have any racist sentiment, so as a result people like the Chinese get a free pass for blatant racism.

    • While I agree that there are many people in China who exhibit a kind of nationalism that makes many people, especially their neighbors, feel uncomfortable, I think we have to be careful about our conclusions. First of all, there are many other countries about which you can say the same, and certainly while most Japanese, for example, are good global citizens, it isn’t hard to find expressions of Japanese nationalism that are as nasty and worrying as anything coming out of China. Idiotic nationalism, unfortunately, is a disease that one finds not just in China but in every large country and most small countries, and I myself was very unhappy with the idiotic things some Americans said during the Iraq invasion.

      Even the very extensive racism that one finds in China is, I think, less than meets the eye. I know that I have many times been dismayed by what even my educated Chinese friends might say — for example I am still shocked by the very condescending attitude to Indians — but remember that China was a very closed country until quite recently, and most of China is still desperately poor. It shouldn’t be surprising, then, that many Chinese are suspicious and even uncomfortable with outsiders. I hate to say it but I think xenophobia is the natural state for human societies, and it takes real effort and a great deal of socialization to eliminate or reduce it. As a large, multi-ethnic country whose people are increasingly engaged with the rest of the world, I expect that over time the Chinese will become more accepting of other groups and races, and we should not impose on them higher standards than we would on other similar countries.

      I should also add that one of the things that seems to drive some of the nastiest expressions of Chinese nationalism is the very low self-confidence that many Chinese have about their country — including, ironically and even if they don’t realize it, most ultra-nationalists. I wanted to cite here an article I read yesterday (but I couldn’t find it) in which a very prominent Chinese complains that when he goes abroad he finds far more confidence in China than he does at home. He is not the only person to have noticed this. Two weeks ago, for example, I had dinner in HK with seven of my former students from PKU and Tsinghua, and we had a long and vibrant discussion about China’s future. By the end of the dinner the half-joking conclusion was that I was the only real Chinese patriot at the table. It turns out that I was the only one who expressed strong confidence in China’s future, and I had to argue hard to encourage my students not to turn their backs on their country. They are all elite students with great career prospects, but they were extremely pessimistic about the outlook for their own country.

      I think under those conditions, it may be natural that some Chinese feel very frustrated with their own country and express very strong and at times angrily nationalistic feelings about the rest of the world. In fact I would guess that at least part of the ugly behavior of the nationalists is a frustrated reaction to their own very low opinions about China, and their anger is likely to be as much anger at themselves as it is anger at foreigners. The kind of bitterness they express (like that, by the way, of nationalists in many other countries) almost never comes from self-confidence.

      I myself have been the object of some rather silly attacks by Chinese nationalists, who believe that anyone who warns about the economic risks China faces must be an enemy of China (although they never explain why an enemy of China would spend so much effort to understand and warn about these risks), but the majority of Chinese with whom I am in contact directly or indirectly have no such hostile feelings. In fact I have been told many times, even by people in the government, that they are grateful for my work.

      The problem of course is that the nationalist idiots talk very loudly and the rest don’t, but this is true in most countries and we shouldn’t read too much into it.

      • Hi, this is my first time so I have to thank you to sharing your knowledge with us.
        On racism, i’m black and because of a long story i ended sleeping on the street(lost in Nanjing) my second night in China…. Without the help of the average citizens, i still would be in this mess. This story is so full of good samaritans that i won’t go on but I’m also french and i travelled around Europe. I’m not sure that i could be so lucky there.
        Second story, friend’s of mine worked for a french agence who help chineese to escap…LEAVE the country. She was teaching french. She ask her studients what do you dislike in life. They answered japaneese people. I won’t tell racism doesn’t exist but the most imporant part is not where i thought.

        I agree with you on centralisation i think it’s necessary. But will Xi do the job..? I think internet can help a lot of countries to raise a class of non corrupt entreprenors. Because when you sell on Alibaba, it’s more private that if you have to pay for a real store and face adminitration. We should also take a look at telco juggernaut like China Telecom. They are threat by weibo and others. It will be very interesting to see if goverment start to act.

        You said free trade is about to collapse or reducing. But when you look at all the bitcoin and stuff. There is plenty of internet-wall-mart guy who desperatly need cheep labor, cheep money and hudge consumer class. I think when household consuption was a small part of global industrial/manufacturing output like in the beginning of the XX you have the point but now it’s different. These people still want to consume even if this not made in china.
        I think chineese will have two choices, to feed people the US way with household debt or stop delocalisation. And the last one mean less reforms, as poeple will put all the blame on foreigners and lose their energy “protecting” failling businesses(has you can see in many country in Europe but also in US). But has we know chineese household debt is very low. So they just have to manage to have a “good” banking sector.
        If so Africa will benefit from delocalisation. I think chineese could do better business in Vietnam or Indonesia. But with tensions we see these days, chineese official will push to put chineese assets far from potential ennemy zone.

        I think a collapse in consumption in US and EU can really make us live bad days. But I don’t believe in hard landing in US or in EU untill the end of of the QE. And when you look at Japan, you know your son might not see the end of this.
        Japan to me is the real threat. Because their 3D printer is being old and Abenomics look like a sucide. Who can seriously bet on wedge growth in Japan? I don’t t know what could be the size of a Japan faillure. You should take care of that in your model because these two economies are too weak to survive at the other one death.

        • Cedric, yes they liked you as long as you dont want to marry their daughter…. :) That would be much easier and socially acceprable in Europe.
          I think racism is clearly present in East Asia, but its different. Its more like Xenophobia and kind of not recognizing we are the same species. I had a very good friend in Japan, he was trully friendly, I got to know Japanese people very well, so I can say he was really a friend. However when I talked to him about how similar we are at the genetics, he was clearly surprised. I think he considered me as a firendly alien, like ET or Chewbacka.
          I had a Chinese girlfriend and she openly said she would never marry me. Her parents would never accept. Dog with dog, cat with cat she said.
          Another thing that I was surprised at a dinner with phD students (from Malaysia, Japan, China, Phillipines, etc) they thought it was obvious white people wanted to exterminate them- that was really shocking to hear. Especially that I am from Central Europe and have nothing to do with colonization, etc.
          The nationalism thing is very real. All Chinese are ever met were crazy nationalists. I think they are brainwashed by the media. They have 2 arch enemies #1 Japan, #2 USA.
          Somewhat similar are the British who still to this date loathe Germans although they have no personal experience from the war. British media is full of content about WWII and how bad asses the Germans were. I guess China is the same.

          And yes this is all understandable, but it is up to no good. There is a real chance of war if things turn bad in economics and in politics.

          • @Lemmiwinks
            You are right saying that marrying a chineese girl is not so easy specialy when you are black. But you would agree with me, that’s not a easy thing to do in US for example.
            Nationnalism is very hot in asia. Japan fear in China is motsly due to horrific act during ww specialy in Nanjing. I don’t think thing will go better with the time because there is no real wish to act this way in both sides.

            I have to told my story here is because prof said Pettis said that racism is an uneducated people problems. I don’t agree with that totally.

            I also think it could be a war and i take this very seriously.

            Chewbaca is awsome, you should be proud to be a part of it!

      • Your comment is holistic. Your former students are pessimistic about their own country because, I think, their perspectives are inevitably influenced by their personal experience.

      • Another indicator of lack of confidence in China, by the Chinese. I teach Chinese students in the UK ( having taught for many years in China)..there is a large influx of students here (at uni level- Russell Group) fleeing it almost seems, the education system, but probably with an eye (their parents eye) on getting out of China for good. These are not the ‘brightest and best’ beloved of govt ministers. Most are mediocre, many are unsuited to further education in English (but almost anybody is let in these days, there are many back doors) many are fleeing educational failure, some are just ‘dumped’ abroad by parents who don’t know how, or can’t be bothered to deal with their wayward offspring (many are clearly very spoiled) The recent statement to the effect that the UK is only good for unis (and football) seems to indicate that the Chinese govt is happy for these students to leave and isn’t about to invest heavily in improving the education system to keep them at home, as part of any rebalancing policy. It keeps me and many others in work, but the standards are just getting lower and lower now regarding the level of English required to get into uni. At times I almost feel ashamed to be working in a sector which takes ‘rejects’ from 2nd rate Chinese unis, gives them 6 months of English and then says ‘welcome to the Russell Group….we accept the following forms of payment’. It’s not just Chinese finances that need rebalancing…

        Sigh….

        • I do not think Chinese government is happy for them to stimulate other country’s economy. These kids come from elites’ families. The parents make way more money than a typical citizen and you can guess why. The ongoing anti-corruption campaign is going to stop some families from sending their children to foreign colleges.

      • “No, they don’t want their children to marry foreigners because they are racists, period. I’m always amazed at how everyone seems to think that only white people can possibly have any racist sentiment, so as a result people like the Chinese get a free pass for blatant racism.”

        Michael, your reply re: Chinese nationalism is useful on those terms, but your reply does nothing to establish that:

        “Even the very extensive racism that one finds in China is, I think, less than meets the eye.”

        Reading your response, the reasonable conclusion is:

        “Yes, the Chinese are every bit as racist as Illumined claims. That doesn’t mean everyone will be cruel and aggressively racist, because people are also taught competing values that foster decency. It also doesn’t mean that the country can’t become a good world citizen. Still, racism is quite real in China, and often personally unpleasant.”

        As for nationalism being motivated by feelings of insecurity and inferiority, and statements that “…the nationalist idiots talk very loudly and the rest don’t, but… we shouldn’t read too much into it” – I think this ignores history.

        You can pick Rwanda, Serbia, or Germany as examples, and they all fit this template to a “T”. Malaysia also fits, but it’s less virulent and has killed far fewer people (still isn’t fun to be Chinese there).

        It remains reasonable to make distinctions, therefore, but hand-waving it off is a very, very bad idea.

        • Any American who says Chinese are racists should be taken to task. I have noted serious racism in the USA far worse than any non-Chinese would experience in America.

          When I was a student and staying in a dorm, during parents visit day, I saw a white couple looking at disgust when they saw a white girl and a black boy walking together. An Indian (from India) friend who joined a fraternity was treated ok until he hooked up with a white girl at which the entire fraternity was speaking behind his back. Only the Australians can claim top prize for racism.

      • You have a very well thought out response Michael, as usual. There are some points that need some responding to:

        Idiotic nationalism in other countries – Yes, you are quite right. I remember not too fondly the outpouring of such sentiment about Iraq, but I would argue that was much more of an aberration. It was less than 2 years from the most devastating attack to happen to the US since Pearl Harbor. There were feelings of vulnerability that were taken advantage of by an unscrupulous presidency and if it wasn’t for that the Iraq invasion wouldn’t have happened, at least not under those circumstances. Something else to consider about the US is that we have a deeply divided electorate with a very vocal leftist element that genuinely hates that we are more successful than more other nations. We are also taught in our schools to hate ourselves, that where ever there is something wrong in the world America/The West MUST be responsible somehow. That’s a very different environment from China where they are taught that foreign nations are out to get them, that every war they have ever fought was defensive, that China was once a great empire and should be again. Time and again the Chinese have shown how remarkably easy it is to be whipped up into nationalist group think. When that final, fatal crisis gets under way you will find yourself quite alone in a sea of angry people. I wouldn’t want to be in such a position.

        Add to all that mentioned above, there’s also another key difference that should be mentioned in that the US government has separation of powers and clearly defined limits on what it can and can’t do. Again, in this regard the Iraq war was an aberration. George W. Bush had the lowest number of vetoes of any two term president since the early 19th century, in fact he had no vetoes at all in his first 6 years. The reason is because every bit of legislation passed by Congress was his legislation. This was without precedent in American history, and I really doubt it could happen again. In China there is no such system, the government has almost unlimited power and is really only checked by the military. This is a recipe for disaster, as Germany demonstrated.

        Another point that tends to get lost is that the Japanese government also has a check on its power – the US. There is a limit to what we will allow them to do, and that was to ensure we would never have to fight them again like we did in World War 2.

        Chinese xenophobia – I would like to agree, but Japan and South Korea don’t give me much reason for hope. Those are countries with first world incomes, but behind that are third world societies that wouldn’t have been too out of place in the 1950’s. Prosperity alone doesn’t always cause social change unfortunately.

        Lack of self confidence – Sometimes I ran across this as well, but realistically that’s not really a deterrent. It could just as easily push them towards pursuing yet more militaristic policies so they can hope to prove something to themselves. Interestingly enough, when I talk to people in America I find a lot less self confidence than I do in China. Many that I have spoken to genuinely don’t think we could win a conventional war against China. This will simply embolden the Chinese regime.

        Bitterness – Wilhelmine Germany very much resented it’s late start and felt cheated. Germany wanted a place in the sun and sought to build an empire at the expense of its neighbors. To that end they provoked a number of crises, such as the Agadir Crisis, that would theoretically enhance it’s standing in the world. While these crises did not in and of themselves cause World War 1, they did set the stage by dividing Europe into 2 opposing armed camps which would eventually explode in a spark. This is happening today with China provoking a few crises of its own, largely with the same objectives. The stage is being set once again.

        • I’d like to add one point. There is no excuse for what happened in Iraq. That was just flat out stupid. It was a total waste of money, lives, and resources. I don’t think we’re taught to hate ourselves; I just think that we had an idiot/crook in charge who saw opportunities open for political gain and he went for them. As far as I’m concerned, politics is just a game of petty BS and there is absolutely no excuse for starting random wars against random countries who never came close to attacking us. Also, there’s a difference between finding the bad guys and wiping them out vs nation-building. Nation-building is a completely different ball game than wiping out the bad guys. War is just a complete waste in every sense of the word. We shouldn’t try to defend it because we can’t defend it. Lives and dollars were wasted for the most useless purpose possible.

          By the way, I don’t think the leftist movement advocates hatred for us being successful and I think they do have a point about the level of corporatism that’s developed since Reagan. Collapses can happen quickly, very quickly and corporatism can get you to the point of no return. The neo-cons were really the most dangerous group and these conservatives were the ones running up budget deficits to finance wars. They’re not real conservatives; they’re liars and frauds. They’re just trying to help their cronies in the oil companies and their crony friends in the military industrial complex. The left was actually advocating using the budget surpluses to pay down debt, which is definitely a better decision than running larger deficits to finance wars. It was Dick Cheney that said deficits don’t matter. Is this some kind of a joke? These guys are “conservatives” that think deficits don’t matter. As far as I’m concerned, they’re liars, frauds, and crooks. Anyone with some semblance of rational thought could realize this.

          • “We shouldn’t try to defend it because we can’t defend it. Lives and dollars were wasted for the most useless purpose possible.”

            I wasn’t defending Iraq, I was stating that the environment was exploited by an unscrupulous President.

            “By the way, I don’t think the leftist movement advocates hatred for us being successful and I think they do have a point about the level of corporatism that’s developed since Reagan. ”

            And the corporatism of that came before Reagan was somehow better?

          • I’m not a leftist by any stretch of the imagination, but I’m going to use bank failures/bailouts as a pretty good proxy. Pre-Reagan, we had a lot of bank failures, even in the 60s. We didn’t have the same incentives for corporatism that we have today. The campaign finance reform in the 70s actually increased the money that went into politics. There were other similar mechanisms that basically had the same effect. I’m not saying that the reforms we had in the 30s were good by the way (I don’t think most of them were).

        • @illumined:

          I must say your knowledge about China is superfacial and your comments are oversimplistic. It is laughable you compare China to Wilhelmine Germany. In your eyes everything different from America(ns) is bad.

          It has always been a debate over the range of the power by each branch. It is NOT clearly defined. There are some high profile supreme court law suits you can read.

          It is true the US two-party system was designed for check and balance. But you cannot say this is the only system that can do that. There are different ways to get same result. Thirty years ago people said only America-like system could make the economic miracle.

          It is wrong that “they are taught that foreign nations are out to get them”. It is your imagination. It is paranoid and chinaphobic.

          • “I must say your knowledge about China is superfacial and your comments are oversimplistic. It is laughable you compare China to Wilhelmine Germany. In your eyes everything different from America(ns) is bad.”

            Strawman. Classic relativism though, everyone’s values must be equal even when they aren’t.

            “It has always been a debate over the range of the power by each branch. It is NOT clearly defined. There are some high profile supreme court law suits you can read.”

            Ok, what’s your explanation for Bush’s record low veto count?

            “It is true the US two-party system was designed for check and balance. But you cannot say this is the only system that can do that. There are different ways to get same result. ”

            No, there are not different ways. The Chinese economy is little more than a massive patronage machine designed to keep the Party in power, leading to stunning amounts of corruption.

            “Thirty years ago people said only America-like system could make the economic miracle.”

            I don’t think too many people did say that. Latin America had a lot of economic miracles, almost all of which occurred under authoritarian regimes. But they all collapsed in on themselves both economically and politically.

            “It is wrong that “they are taught that foreign nations are out to get them”. It is your imagination. It is paranoid and chinaphobic.”

            Evidently you’re not familiar with China’s “Patriotic Education”, which actually does foster xenophobia and the belief that foreign nations are out to get them. I’ve seen what they’re taught for myself, it’s real and it’s not pretty.

          • @ Illumined:
            Bush administration is a terrible example. Here I quote from one article (you can easily find more articles like this):

            “Recklessly and audaciously, George W. Bush is driving the nation whose laws he swore to uphold into a constitutional crisis. He has claimed the powers of a medieval monarch and defied the other two branches of government to deny him. Eventually, despite his party’s monopoly of power, he may force the nation to choose between his continuing degradation of basic national values and the terrible remedy of impeachment.” (http://observer.com/2005/12/bushs-abuse-of-power-deserves-impeachment/#ixzz2nyjC3SIq

            Why did he get record low veto count? Anybody in disagreement would be labeled as unpatriotic or supporting terrorists. Get it?

            How do you think about Singapore? It is one-party government, and its economy has been great for so many years. It has made economic miracle too. Also the government corruption is very low, perhaps the lowest in the world.

            Corruption is a problem for China to resolve. I never deny it. Now Xi Jinping is fighting it seriously and some businesses are affected.

            Any governing party works hard to stay in power. CCP is no exception. CCP lifted tens of millions of people out of poverty within very short period of time which is unparalleled by any other governments.

            What have you seen about “Patriotic education” in China? Give me a specific example, please. Have you really read any Patriotic education text book or attended any classes, in country side and big cities?

            Let’s go back to your complaint about marriage. I see more Chinese-white couples than black-white ones in US. I met many people from around the world having Chinese blood. Regarding inter-ethnic marriage, Chinese people are more open than many other ethnic groups. In Philly, I met a taxi driver who came from Kenya and married Chinese women with four children. I visited a company, the CEO, CTO and CFO are all white and all married with Chinese. Do you know who General Clark’s current wife is? You may be denied by Chinese girl, and many people from US get Chinese parents in law.

          • Vincent,
            Not to take anything away from illumined’s insights, but comparisons of modern China to Kaiser Germany are nothing new. Coincidentally on December 3, the Financial Times ran an article “China Must Not Copy the Kaiser’s Mistakes”.

            Is this fair? Who’s to say. Here in the West, we are fond of saying “History repeats itself” and “Those who cannot learn from history are doomed to repeat it”. We study the causes of WorId War I quite a bit in school. If anything we can learn from the rise of Germany and WWI, in that we do not want small disputes like Senkaku to blow up into wider conflicts. We do not want to accidentally step on each other’s toes (aspirations, esteem, etc.) I have to say the complexity of the so-called Asian “face” and “losing face” makes me think this will be more difficult in settling issues like Senkaku.

            The other area similarity to pre-WWI Europe is the interlocking defense treaties between the U.S., Japan, South Korea and other Asian countries. This hopefully will not escalate disputes. The difference with Germany, is that China has not pursued countervailing defense treaties with anyone in the region. Perhaps one could say China has a de facto treaty with North Korea. This has always been discerning. Could a U.S. and/or South Korean military response to an aggressive act by North Korea bring a rapid counter response from China? We all know North Korea has and will probably continue to commit stupidly aggressive acts.

            Depending on your viewpoint, people’s comments here regarding military issues and risks in Asia are either moderately on-point or way off-point. I am not sure myself. Some historians have analyzed that WWI was triggered as much by the economic ascendancy of Germany and trade competition as it was Germany’s military ascendancy and the old empires of Europe breathing one last breathe of glory. Not every time in history is an exact repeat of another, but it is certainly wise to for all nations to error on the side of caution in international relations.

          • Phil,

            Your are right about some similarities. But predicting the future based on these symptoms is far less reliable. One critical factor you did not take into consideration–nuclear weapon. Any country initiating a war would face disastrous consequences. China knows it, Japan knows it. China’s objective is to overtake US in every aspects which needs another decades of growth. The seemingly aggressiveness is nothing but a stance. What North Korea is doing is nothing but bluffs. What North Korea leader wants is a guarantee from US not to attack it. North dared to attack South last century because Russia was behind it. No country is behind it now.

            Most of the economic and political predictions about China have been wrong and are going to be so if people stay within Western or Anglo-Saxon framework of thinking. In the past several decades, few economists predicted China correctly. Steven N.S. Cheung (张五常) is one of the few. He knows Chinese culture. Economics and politics are about how people behave.

      • I am quite familiar with your works and have read quite a few of your postings. In all your posting, a common refrain runs through it and that is, the consumer must takes the lead in economic development. After all you produce only what you consume. Furthermore, you said the market should determine the price and quantity of the goods consumed. The vehicle to facilitate this should be the banks and they should be allowed to set their own interest rates in the interest of the market. Am I correct so far?
        Now the question is
        1. Where is the money for infra development to come from?
        2. Would you built schools, colleges and universities with poor ROI?
        3. You think a bank that focused on ever increasing profits would loan you the money?
        4. Money is a scare resource and the private sector would only allocate it to here it
        makes the most profit at the least risk.
        5. When you are a poor country, how could you build a factory to supply to your poor
        consumers?
        6. If you produce for exports, which private banks would loan you the money knowing the
        risk is high.
        There are a lot more on my chest but I think this would suffice. is it true that you are infatuated with market romanticism as opposed to a socialist market whereby the state takes the lead in investment. To do that the State needs to control the banks and financial institutions. Otherwise how it get its source of funds? Now you know vey well, everyone wants to borrow at the least cost, China is no exception. The price is paid for by the Chinese depositors or consumers. When the State borrowed all the money it needs, needlessly to say the private sector is starved of funds and need to resort to “shadow banking”. It is this conundrum that China have to resolve to get ahead. I don’t think China would ever fall into a Middle Income Trap. That is a personal observation. The Chinese are just too smart for that to happen to them. Ditto the Germans.

    • It may be nothing more than a co-incidence, but the biggest beneficiary of the ADIZ weirdness has been Sinopec.

      The ADIZ and subsequent inevitable defiance by the Americans and their allies gave the state media a bigger story than the fatal incompetence and criminal negligence of that state-owned oil firm. Therefore, instead of having to lead the news with mealy-mouthed whitewashing of details such as the pipe had passed an inspection two weeks previously, the engineers knowing of the leak hours before the explosion and precisely how many people were maimed or killed, they can just crank up the xenophobia propaganda machine again.

  2. The last paragraph is the most important one, and exactly the reason why I don’t understand everyone trying to pigeon-hole Xi as a reformer or a hardliner. No one knows. He could be taking a step back to consolidate power before taking two steps forward. Or he could be a natural hardliner. Or he could be constrained by the other 6 members of the politburo, who collectively disagree with him on some key issues.

    Frankly it’s far too soon to make any sort of inferences. But no one likes to say that because “we don’t know anything about Xi” is a lousy book title.

    • I agree, Andao. I think much of what the leadership is doing may be necessary, whether or not their ultimate goal is more or less democracy, and it is too early to draw conclusions about where this will end up. Whatever they do must be affected by their political constraints, and we need to understand these constraints.

  3. Hi michael,

    As usual, thanks for your insightful article. I am an avid follower of your blog and was inspired to purchased your book -the great rebalancing.
    Great read i must say. Since you mentioned Singapore in this article, would you think that singapore has a export model like china and its people are also subjected to financial repression etc. Looking forward to your insight

    • I don’t think China follows an export model so much as an investment model, and because the differences between China and Singapore are huge I don’t think there is much about Singapore than helps us understand the Chinese growth model. Obviously China can never be a trading entrepot like Singapore, and Singapora’s government is much less likely to suffer from the agency problem than China’s.

      • 25 years ago, couldn’t we have said that China was following an export model? Of course, now the enormous wealth that has generated appears to have morphed into an intensive investment model. I presume many export models share the same characteristics of an investment model. Export models where investment does not follow would be nations where they suppressed consumption to fund exports sometimes in a draconian fashion.

  4. What a great post. Clear, compelling, well-structured, with numerous examples and extensive historical analysis. It is so unfortunate that your sort of writing is rare in this world. One might think it wouldn’t be so, but it is. This was my favorite post in a while and reminded me why I liked The Volatility Machine so much.

  5. Thanks – great site!

  6. Great balance! Very pleased to find this. Idiots are always childish as in nationalist, racist monotheist and such. We are all idiots for the child is always in us. At any moment, too many are only idiots. It has never been otherwise. The most important matter is whether the governing and and intellectual classes are or not. They are deeply influenced and formed over the long run by the cultural dispensation. While the sage always has to hold his tongue he must to his greatest ability avoid collapsing into childishness himself for bad news sticks like glue because good news is uncomfortable for the idiotically envious. That is why this site and its kind are essential.
    Thankyou

  7. Excuse my eagerness.
    Fascinated by this post. Pettis studiously avoids reference to the USA today. I would like to add that war is the collapse of culture. It is the politics of adjustment of the child who, if it happens to be of adult age, a dangerous brute. But for brief moments the USA has either been preparing for war, fomenting war or at war since the 1st World War.

  8. Prof.,

    ” It turns out that I was the only one who expressed strong confidence in China’s future, and I had to argue hard to encourage my students not to turn their backs on their country. ”

    Wow.

    You are?

    Been reading your blog and books for forever now and never realized that.

    About:
    “or in countries with highly centralized decision-making (China under Deng Xiaoping, perhaps).”

    Well, you wrote just before that:

    “when a country’s governance is structured in such a way that incentives for the political elite are aligned with the economic interests of the country, the country is likely to grow rapidly and in a healthy way.”

    Well, obviously the elite benefited from his decisions and many probably have realized that at the time. Plenty of state owned companies moved to individuals and the elite got MORE.

    Now?

    Could you give any other example than this specific example for a successfull economic adjustment by a highly centralized decision-making, in modern times?

    Last but not least, surely there’s another phase that the highly centralized decision making group releases its power, otherwise the cycle repeat itself.

    Anyhow, a very thought provoking post. Thank you!

    • Pettis
      “when a country’s governance is structured in such a way that incentives for the political elite are aligned with the economic interests of the country, the country is likely to grow rapidly and in a healthy way.”
      John
      “Now?”

      While this exchange is reasonable enough and attractive to me and others but it will lead nowhere because Pettis’ statement is futile and the question is consequently worthless.
      Pettis makes the mistake of the Enlightenment by presuming cause and effect of modern science applies to human affairs. This may be so with the undead but it is a pointless perspective with which to view human affairs even if it appears to be useful. There is not enough space to argue this here but in short people play the game, particularly if it is so transparent and it is a bad game leading to disaster and poverty. Poverty is also the bedfellow of the rich. The relationship is distinctly S&M
      Yet relationship is the only ground on which wealth flourishes. Goodwill, trust, honour or honesty, wisdom, kindness are necessities of any relationship that produces wealth. In truth these qualities are wealth, much to the chagrin of Monetarists. No country or economy survives without relationship that has these qualities.
      Belief systems such as monotheism are attempts to impose relationship as the ground. They always fail and result in war. This is for such obvious reasons and with such historical precedence that it is a waste of time to say why here.
      The understanding of my reply is that of daodejing also known as laozi.

  9. Prof. Pettis,

    I found out about you around a six months ago. Since then, I’ve found your analysis to be the best out there. I’ve watched every single one of your videos, interviews, talks, and all that stuff I could find. I’ve read most of your books and the only one I didn’t read is your newest one, which I soon will. I also found various pages that list a lot of your older articles and some that even list the history of your old blog posts after your blog got deleted. I tried to read as many of those as possible too.

    Anyways, my question is about how a student like me can have the same depth and level of understanding about balance sheets, economics, history, and everything else? My primary background is in mathematics, mainly probability theory. Most of the stuff I’ve learned about economics/finance has come from my own study, but my learning of the topic is very fragmented and all over the place. Basically, I didn’t learn economics in a very structured way. I took the basic economics classes, but I find that the way economics is taught today is kinda BS.

    In some of your previous blog posts, I know you mention that it’s important to read the classics like Keynes, Minksy, Hayek, Fisher, Kindleberger, etc and I’ve read most of them. However, that can only take someone so far. I feel like the part that they pass over the most in school is the most important part: balance sheets. What’s the best way to learn about all of this stuff. A huge problem in economics/finance is that we’re dealing with evolving capital markets, which means that a lot of the classical stuff will have to be adapted to the world we’re dealing with today.

    I also took a Money and Banking class that was offered online on Coursera taught by the Post-Keynesian economist Perry Mehrling. It really helped me understand balance sheets and how the payments and clearing system worked, but there’s a lot more that I need to know and understand. Where is the best place to begin? As I said before, my understanding is extremely fragmented and there isn’t a whole lot of formality to it.

  10. Some Random Thoughts in response to some of the comments above:

    – When I was in Hong Kong two years ago, there was much more optimism and elation about China’s future, its role in the world economy and its pending claim to soon be the world’s largest economy. However, business professionals would talk about the inherent problems of doing business in China (i.e. corruption, lax accounting, reactionary politics), but everyone was looking to invest more.

    On a recent trip to HK, the mood was more subdued and cautious. The inherent problems seem to be more looming given the deceleration. There was some hope with reservation over the government’s growth and investment plans for the Western provinces and secondary cities.

    I think it’s natural for the Chinese to be pessimistic (as opposed to Mr. Pettis’ optimism) when so much has come so quickly (and maybe easy) for a generation of educated Chinese. Young Chinese MBAs that worked for me in the U.S. seemed to have been showered with opportunities here by Western companies involved in China and back home in China. Contrary to popular belief and for some their own self-perception, they were not all superstars. Here in the West, we call this malaise. I remember my Father and many of his friends raised in the Depression did very well in the 50s and 60s experiencing this feeling by the late 70s when U.S. growth slowed. By the way, the U.S. is experiencing a malaise right now.

    – Nothing anyone has said, convinces me China is aching for a military conflict to flex its muscle and validate its status. Nor has anything said including Mr. Pettis, convinced me that China is not aggressive. The Chinese political elite, diplomacy and time will give us the answer.

    Many wars and conflicts are mostly supported by the uneducated and unsophisticated of the society led by political elites who manipulate them for their own needs. I bet if you went to Iran and had private and confidential discussions with the university educated Iranians you would find no support for the nuclear program and State-sponsored terrorism. However in societies such as Iran (and China), dissent can be dangerous and unpopular particularly if a military conflict erupts.

    The Senkaku (Daioyu) Islands seem like a small footnote and loose end from the post-WWII aftermath and the end of Japanese aggression. However, it appears that China has a point. Japan’s claim seems to have most of its basis from the aggression of 1895.

    In Kissinger’s book “On China”, he emphasizes that China has never strived to impose national goals and influence across the globe. Even at the height of Imperial China, the Emperors had no interest in exporting Chinese influence far beyond its neighbors (in contrast to the Europeans later). He reasoned that China’s invasion of Tibet and its skirmishes with Vietnam and India were all in its efforts to reclaim and protect the former empire’s claims. Now with Senkaku, it’s possible that this falls into the same category not to mention that gas & oil reserves make these rocks more valuable. My only concern is that this seemed to be Germany’s argument when it started annexing Austria, Czechoslovakia and Poland at the beginning of WWII.

    Kissinger went on to say that China’s interest in far away conflicts was a way to keep the U.S. preoccupied and draining resources exercising power abroad. In contrast to the former Soviet Union, they have never been interested in exporting their own brand of communism or their culture.

    – What scares me is that I have been reading that the Chinese government and Chinese companies are targeting foreign companies in various disputes. In an economy with ever expanding opportunities, foreign investment was welcome or at least tolerated. Now with the economy coming back to earth, it seems only natural that a closed economy with a different standard of law would display more of its nationalistic tendencies in economic affairs. It was always my opinion that Western companies had underestimated the political risks inherent with Chinese investment. Only time will tell if all this investment will prove to be fruitful in the long-run.

    • ‘—-targeting foreign companies in various disputes’
      Without being specific, just as Phil is not, it seems clear that the USA works assiduously to gain advantage by fair means and foul. China’s response has been to do like (with Chinese characteristics) to like. This is fully justified and has given the USA a big fright.

      • I would not argue with you that the USA and its corporations work to gain advantage in the world economy. In fact, I would argue every nation does. That’s why I always say there is no such thing as “free trade”. It’s all managed trade.

        Where we might disagree is where governments are more involved in the economy, the more likely the economic nationalism. From experience, foreign investment in China is highly regulated and controlled and begins the moment a company contemplates sending capital into China. The freest investment flow is between the U.S. and Western Europe.

        It shouldn’t concern you, me or anyone that China is regulating their economy. This is their prerogative and the implicit contract that foreign companies enter when they invest in China. It should concern you if you live within China that Western companies choose not to go to court the dispute actions and fines. When companies do not choose or have court as an option, it leaves the perception of bullying (coercion). Anticipating your next comment, I assure you U.S. courts do rule in favor of foreign companies in disputes with our government.

        I have not left specifics because their has been several headline cases in 2013 where China has taken action against foreign companies.

  11. Michael

    I enjoyed the historical context of the adjustments. I also agree that the regime must get more controlling and more centralized. It’s really a repeat of what Deng did. Maintain absolute control politically and socially while you tinker with the economy. Too risky to liberalize society with more personal freedom and individual thought as you try to restructure the economy. Xi now has the fall back card to play which is to use militarism/nationalism to take people’s attention away from an adjustment that will be painful for many.

    Simply put, there are 3 priorities for the CPC. 1. Stay in power. 2. Continue economic growth which is the most effective protection against regime change. 3. Continue reforms to give people more freedoms and happiness.

    You can’t achieve goal 1 without goal 2. Goal 2 requires change and turmoil. Goal 3 (if it is a goal) can’t happen while goal 2 is under redux.

    • HuaQiao,

      Why does the CPC (a group of people) want to remain in power? (I’m throwing it out there to perhaps get one of your fantastic insights)? Is the CPC really the one in power? I hear now and than from people coming from China that behind the CPC top elite there are 11 families which have the true power, is that true?

      • @ John,
        The notion of the Communist Party being in power is inviolate and so ingrained in Party writings that any sharing of power is completely unthinkable. Officially, The Party is the only path to achieve the great Marxist/Maoist ideals. Unofficially, just like any political organ, the attainment and retention of power is that entity’s principal goal. Indeed, I suppose the CPC has the added concern that if it lost power, there would be significant reprisals against its members for its historically bad behavior.

        As to who is really in power, the factions within the Party have bases that include the various families that trace their roots back to Mao and the Long March. These families clearly have powerful influence but it is not correct to presume they all act in concert as a unified block to rule the Party. Indeed, the various power brokers are not unified and instead have many agendas. They are perhaps unified only in the common goal of rent seeking activities.

    • Point 2 can contradict point 1. Already we’re seeing a lot of outspoken real estate developers, internet entrepreneurs, etc. Back before the 90s there were no wealthy businesspeople who could challenge the state.

      Nowadays we have Sina and Tencent…if those internet bosses get angry enough, they have tremendous ability to reach every Chinese person and publicly denounce government policies. So far the state’s goals and the entrepreneurs’ goals have been roughly in sync, but it won’t stay that way forever.

      This is why the North Korea model is superior in keeping power. Keep everyone extremely poor so they can’t rise up and monopolize all generation and distribution of wealth.

  12. @ Andao,

    So you seriously think the CPC would allow a few outspoken entrepreneurs on their i phones to bring down the Communist Party?

    • My meaning is that the CPC has never had to deal with rich potential adversaries before. I don’t think anyone knows how they will react if the business lobby gets behind a particular initiative that the CPC doesn’t like.

      The rich people could pull money and jobs away from China and ship them overseas. Or they could entice local government officials with promises of local jobs and goodies. Then you’ve got local governments arguing with the center. They are more influential and powerful than any other demographic the CPC has faced.

      Actually, I think that’s the only way the party could lose power. It isn’t going to happen by some peasant uprising, it needs to be led by people with money and power. Could be the military I guess, or the business community.

      When you’ve got SOHO CEO Zhang Xin on 60 Minutes saying that every Chinese wants democracy more than anything in the world, I would think the CPC would be concerned.

  13. There is a very remote, alternative wildcard possibility. That completely anonymous form of currency similar to but significantly improved from Bitcoin runs roughshod over China’s capital controls and deposes the existing political system into chaos.

    If these words end up prophetic it won’t be coincidence but rather from sitting in the driver’s seat and changing the world from thy keyboard.

  14. CCP saw how Gorbachev’s reform caused the collapse of the soviet union, Xi Jinping does not want to be another Gorbachev, so do not expect any radical reform.

  15. @Andao,

    But look what they did to Charles Xue. He gets a little uppity on Weibo and the arrest him on trumped charges of soliciting prostitution and voila! A 10 minute mea culpa on cctv that was better theater than any Korean soap opera.

    I agree with morse.

  16. To the countries with GDP that grew miraculously for 15 years, please add Greece 1992-2007. What followed? We all know.

    • You compare apple with pear. Greece bankrupted because of the government debt. Its GDP growth was not backed by manufacture or export. As clearly stated by Micheal, the problem China faces is how to re-balance its economy.

      • There’s no good reason to expect China to be less indebted than Greece. Greece has the benefit of a free press and a tough central banker to expose these sorts of things. It’s possible that the bulk of Chinese debt is very opaque, and journalists aren’t allowed to investigate it.

        And why is manufacturing and export necessary for successful growth? China’s economy isn’t backed by manufacturing and export either, it’s backed by investment.

        • Another difference is Greece spent more than they could afford. China consumed less than it could afford.

          Why German economy is strongest in Europe? Manufacture and exports. Japan and Germany could have risen to strong economy quickly after WWII mainly due to their strong manufacture and export. It is also true to US. In recent years US from industry to government are worried about losing manufacture edge.

          If you do not agree, say a country that has sustained a strong economy (growth) without manufacture or export.

          • I meant to say “Japan and Germany have risen to strong economy quickly after WWII mainly due to their strong manufacture and export.”

          • Germany may be the strongest economy in Europe today but in the 1990s it was considered the “sick man” of Europe, which is why it put downward pressure on wages that have allowed it to grow since 2000-01, but remember that almost all of German’s growth can be explained by its surplus against the rest of Europe. There was almost no productivity growth, which is the only “healthy” growth. We have to be careful about considering events today as somehow being permanent.
            As for the post-War success of Japan and germany, I do not think this had to do with “manufacture and exports”. I need to check but I do not think either of them were big exporters right after the war when they began their rapid recovery. What is a far more likely explanation is that advanced countries that have been destroyed by war nearly always recover their former level fairly quickly as long as their basic social institutions are in place. We have seen this many times, including in the US after the Civil War, and Belgium, Germany and several others after WW1.
            As for the role of exports in sustaining economic growth, there are many countries that have been successful without a major role for exports and some without a major role for manufacturing. The most obvious of the former is the US in the 19th century, a minor exporter that ran deficits for most of the 19th Century. The Netherlands got rich mainly on trade, not on manufacturing or exports. Germany’s recovery in the 1930s was not based on exports at all.
            Instead of asking the question as you did, you might want to ask how many countries went from poor to rich on the back of both manufacturing and exports, and it turns out that really only two did: South Korea and Taiwan. The history of successful countries, if by success you mean making the transition from backward to advanced, is pretty limited. Besides those two in the 20th Century you can really only cite HK and Singapore (trading) and some of the OPEC sheikdoms (oil) as going from poor to rich, although it is hard to call the latter “advanced” as their wealth is based mainly on commodities.

  17. The last comment by professor Pettis is worth further examination. Two hundred some years passed since the industrial revolution. Yet, today, only a handful of countries/states reached semi-Western economic levels. Capital sloshes across boarders with ease, seeking a profit anywhere. Technology and know how is, often times, freely downloadable from the internet. Yet, many countries mire still in miserable pre-industrial levels of poverty. Why is it that failure is still the norm and success so rare?

  18. @Suvy

    “We didn’t have the same incentives for corporatism that we have today. ”

    I would actually argue that we did simply because that’s what the regulatory structure at the time did. People forget that the extreme and unnecessary we had until the end of the 70’s actively favored already established companies by suffocating upstart competition in red tape. The classic example was the airlines, where government regulations were designed explicitly to prevent any competition between them. Prices were deliberately kept high by regulation and they even went so far as to regulate the size of sandwiches with the aim of preventing competition. People never seem to realize that unnecessary regulation and/or outright socialism actually is corporatism because it almost always favors politically connected big companies.

    • Ahhh the 70’s era airline regulation in the U.S. Don’t forget in the era of airline price regulation that some regional airlines competed by raising the hemlines of their flight attendants. Many U.S. businessmen considered that the golden era of aviation.

  19. @ Vincent

    “Why did he get record low veto count? Anybody in disagreement would be labeled as unpatriotic or supporting terrorists. Get it?”

    I wonder how you can complain about Bush’s authoritarianism while simultaneously stating that another country’s authoritarianism is “just another way of doing the same thing”. Why the double standard?

    “How do you think about Singapore? It is one-party government, and its economy has been great for so many years. It has made economic miracle too. Also the government corruption is very low, perhaps the lowest in the world.”

    First of all Singapore is not China, not even close. Singapore is a tiny city-state while China has a landmass about equal to the US. But even with that in mind I will say there are always significant costs associated with even soft authoritarian states like Singapore or Japan. Whenever you empower big bureaucracies at the expense of the individual the nation might seem ok for a while, but it inevitably leads to overall economic decay. The US discovered this in the 70’s, most of the world discovered it in the 80’s, and Japan is discovering it now.

    “What have you seen about “Patriotic education” in China? Give me a specific example, please. Have you really read any Patriotic education text book or attended any classes, in country side and big cities?”

    I’m trying to determine whether or not you are being sarcastic or you really do have a superficial understanding of China. The Patriotic Education Campaign is not a particular class, it’s the educational policy. http://www.ft.com/cms/s/0/66430e4e-4cb0-11e2-986e-00144feab49a.html#axzz2otAjB2ef

    And yes, I have seen it in the city. You would be shocked at the nonsense they teach.

    “You may be denied by Chinese girl, and many people from US get Chinese parents in law.”

    Another Ad Hom and a free pass. How efficient.

  20. In lieu of the last comment made by professor Pettis, is it reasonable from a popular perspective to think of economic growth in terms of the material expectations people have from their lives ? I say this specifically because of the point made about post-war Europe. I cant see any institution surviving that kind of cataclysm. It seems that a certain level of economic prosperity can be generated if the people simply know that they can own homes, cars, washing machines, flat screen tvs and so forth. Provided there is some level of political stability, they try to acquire these goods with their own initiative leading to economic growth.

    In such a scenario, we no longer have to adhere to a particular template for economic growth nor identify it with ‘cultural values’. People, once conscious of their economic potential will find their own way to growth, provided the politics is stable.

  21. Guy .. Beautiful .. Wonderful ..

  22. Political Competition and Economic Growth

    Although the two ends of Eurasia achieved radically different political equilibria, the dominant underlying political economy analysis used to explain both is remarkably similar. For Europe, scholars have emphasized the importance of institutions of parliamentary representation and inter-state competition for growth. Conversely, for China, and despotic governments more generally, scholars have found only economic stagnation. In Europe the advent of good institutions was thought to be responsible for the onset of sustained growth, while in China the stifling oppression of the omnipotent emperor led to a population living near the Malthusian minimum. As the reader has discovered, our thesis is rather different. At the aggregate level, inter-state competition was quite costly and it certainly had a negative impact on the size of the market, while we see emperors surviving in part because they cared about their subjects’ welfare. Nevertheless, the superiority of a particular form of governance should not be overstated because well into the nineteenth century massive variation in political structure remained within Europe and massive variation in levels of well-being characterized life both within China and within Europe.

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