Friday, June 24, 2005

China as a Long-Term Play

China as a long-term play

In a previous post I explored the possibility (which I think likely) that China is an overheated economy due for a major correction. It is overbuilt and has property speculation that looks like a lot of bubbles we have seen in the past. But history is replete with examples of rapidly industrializing nations that suffered major economic crashes only to rebound smartly and continue to grow. One need only think of the U.S. in the second half of the 1800s or even Thailand and Korea after the 1997 crash. In those cases major economic corrections were followed by cleaning out of the late-boom rot and resumption of solid growth after a period of time. In principle even a major Chinese adjustment crash – one in which the most egregiously politicized and excessive investment projects were messily excised – could be followed by a period of many more high-growth years.

But must it be so? Start from the premise that the change from pre-industrial to industrial or even substantially post-industrial society is a relatively consistent process. The same changes – e.g., mass urbanization, increasing acquisition of physical and human capital – happen every time, whether it is Britain in the 1800s or Taiwan in the 1960s. Can a nation start down this road and then have it all collapse as a mirage? There are no historical examples of which I am aware of nations getting halfway to the modernization transformation through significant reliance on market processes and then stopping. (If anyone knows otherwise I would appreciate hearing about it.) Of the nations that suffered in 1997 in East Asia Indonesia appears to have had the weakest recovery, and so may yet serve as an example of modernization being brought up short, but that remains to be seen.

But just because something hasn’t happened doesn’t mean it can’t happen. There are some reasons to be skeptical of China’s long-term prospects. Civil conflict and public protest in China is apparently on the rise. The RAND corporation, crunching official Chinese data (which probably underestimates the problem) reports that 58,000 protests involving over three million people occurred in 2003. South Korea's YTN television network has video of the violent suppression of a smaller protest. Press reports have it that these protests are often caused by seizure of farmers’ land to be converted into commercial space, excessive tax obligations, and the other petty indignities of a very corrupt state undergoing rapid growth. The trick for China is to keep the economy growing fast enough to continue to outpace the growth of civil unrest. If enough migrants to the cities and farmers thrown off their land can find work, then violent social conflict can be avoided. That western China has the potential for unrest among non-Han minorities resentful of the economic success in the east and continued impoverishment in the west adds to the pressure. This is why a short-term popping of the current Chinese bubble would be such a threat, and why the government appears desperate to slow growth enough to avoid overheating leading to a crash, without lowering growth so much that unemployment and the resulting discontent increases. The recent opportunistic whipping up of nationalist fervor against Japan (with huge, seemingly manipulated protests against Japanese textbook sections on World War II occurring not just in Beijing but throughout much of the country) can also be seen in this light. The angrier people are at perfidious Nippon, the less time they have to be angry about corruption, unemployment and the like.

Also on the negative side of the long-term ledger lies the astonishing imbalance in sex ratios. The ratio of boys to girls 0-4 years old is already about 1.2:1 nationwide, and perhaps as high as 1.3:1 or 1.4:1 in rural areas. (In the U.S. it is not quite 1.05:1 nationwide.) This is not a recipe for a stable society. For every girl not allowed to be born or to grow up, there is one frustrated man who will never marry. Valerie M. Hudson’s and Andrea M. den Boer’s Bare Branches: The Security Implications of Asia's Surplus Male Population speculates, based on anecdotal reading of history, that China is due for immense social instability – crime and military adventurism, e.g. – because of the growing tendency of parents in these societies under tremendous population-control pressure to weed out fetal or newborn girls.

On the other hand such demographic patterns are not cast in stone. The full totalitarian apparatus of the Chinese state is apparently being brought to bear on those who would facilitate or engage in the aborting of girls, and as China gets wealthier its population pressures may abate in any event.

On the bright side is the tremendous progress China has made in instituting the rule of law. At first blush, in light of China’s tremendous corruption, its vast array of substantially unaccountable prison factories and other legal atrocities, this seems like a preposterous characterization. But the proper comparison to 2005 China is not 2005 Sweden or Singapore but 1976 China. Compared to the era of the Maoist personality cult and the madness that accompanied it, the average Chinese finds himself with many more legal rights, and is much more in charge of his own life. He is certainly vulnerable to the depredations of powerful officials, but at least locally he has recourse to the courts to correct the worst abuses, and will benefit from the pressure that global investors demand for better governance. China has a long way to travel in this respect, but so too has it come a long way.

In addition there is the question of Chinese culture. Development economists, like economists generally, historically have not much liked to think about culture as a determinant of successful modernization, because culture has not lent itself easily to the standard economic model of preferences, scarce resources and available production technology. But there does seem to be something to the idea that some groups have a cultural tendency (and, obviously, a cultural tendency is not genetic determinism) toward commercial dynamism. The economist Thomas Sowell has noted that emigrants from Japan after 1868 went all over the Western hemisphere – not just the U.S. but Canada, Brazil, Peru and elsewhere. Invariably, they began work at the most menial levels, often in backbreaking agriculture, and invariably within two generations were economically one of the most successful tribal groups. So too expatriate Chinese have not just had tremendous success in the U.S. and Canada but have powered economic activity throughout Southeast Asia, often incurring the resentment of other tribal groups in the process. If one believes that culture can be a productive (or destructive) input to economic growth, then from observation of their success in other societies the Chinese seem, like the Indians and the Lebanese, to be well-suited to quick modernization once the obstacles to their entrepreneurial energies are removed.

It is my view, in which I do not have inordinate confidence, that these positives outweigh the threats. Whatever its short-term difficulties, China appears to be arriving as Japan, Korea and Taiwan arrived before it. The modern sector of the world will in twenty years time probably include China, and therefore the world will have to make its peace with the demands that China, like all rising powers before it, will make.


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