Will Hutton
Meghnad Desai
Will Hutton is author of “The Writing on the Wall: China and the West in the 21st Century,” published in January by Little, Brown
Meghnad Desai is a former director of the Centre for Global Governance and an emeritus professor of economics at the LSE. He is also a Labour peer
Dear Meghnad
29th November 2006
It is a commonplace to observe that the rise of China is transforming the world. Extrapolate from current growth rates and China will be the world's largest economy by the middle of this century, if not before. If it remains communist, the impact on the world system will be enormous and very damaging. Britain and the US are, for all their faults, democracies that accept the rule of law. This is not true of China. If an unreformed China takes its place at the top table, the global order will be kinder to despotism; the fragile emergence of an international system of governance based on the rule of law will be set back and the relations between states will depend even more nakedly on their relative power.
All that, however, is predicated on two very big "ifs"—if the current Chinese growth rate continues, and if the country remains communist. I think there are substantial doubts about each proposition. What is certain is that both cannot hold. China is reaching the limits of the sustainability of its current model, and to extrapolate from the past into the future as if nothing needs to change is a first-order mistake.
Our concern in the west should be to help China face its enormous challenges without damaging us in the process. If Chinese communism can transform itself, then China could, like Japan before it, smoothly integrate into the world power system. If not, severe convulsions lie ahead.
China's economic growth is based on the state channelling vast under-priced savings into huge investment projects driven by cheap labour. Some 200m of China's 760m workforce are migrant peasants employed in factories, construction sites and offices in its new towns and cities—the biggest migration in history. The Communist party has permitted free movement of prices, encourages profit-seeking and has sharply lowered tariffs on imports and obstacles to inward investment. Its success in creating annual growth of some 9.5 per cent for a generation, lifting 400m people out of poverty, is widely acknowledged. But the party keeps firm control of ownership, wages and company strategies—and of the state. In other words, China occupies an uneasy halfway house between socialism and capitalism; its private sector, although growing, is still puny. It is a system of Leninist corporatism—and it is this that is breaking down.
The breaches in the model are all around. How much longer can China's state-owned banks carry on directing billions of dollars of savings into investments that produce tiny or even negative returns and on which interest is irregularly paid? Poor peasants' ability to create the savings needed to fuel growth is reaching its limits. And in any case, for how long can a $2 trillion economy save at more than 40 per cent of GDP? It is reaching the limit of its capacity to increase exports (which in 2007 will surpass $1 trillion) by 25 per cent a year; at this rate of growth they will reach $5 trillion by 2020 or sooner, representing more than half of today's world trade. Is that likely? Are there sufficient ships and ports to move such volumes—and will western markets stay open without real reciprocity on trade? Every year China acquires $200bn of foreign exchange reserves, mainly dollars, as it rigs its currency to keep its exports competitive. It is absurd for a poor country like China to be lending to a rich one like the US; in fact, it is unsustainable, and the financial markets seem to agree.
China would like to lower the current feverish growth rates, but the tools available in the west—raising taxes, cutting spending and lifting interest rates—are not available to China. The party dare not trigger protests by raising taxes; officials in state enterprises and provincial governments ignore orders to lower spending because their careers depend on generating growth and jobs. And raising interest rates could create a credit crunch as loans go sour.
Nor are the limits solely economic. The 200m migrants resent seeing others grow rich as they languish in poverty. Inequality is soaring and corruption is endemic, infecting chief executives of banks, provincial governors and judges. About 400,000 people a year die of respiratory diseases caused by polluted air. China's GDP is a fifth of America's, but it releases nearly as much carbon dioxide into the air. To cap it all, the Communist party is in ideological crisis: it says the class war is over even while claiming monopoly power as the trustee of the 1949 revolution. Without continued economic growth, the party's legitimacy would be in question.
Behind all these problems lies China's only partial conversion to capitalism. Everything in China is subject to the party. Yet capitalism is much more than the profit motive and the freedom to set prices that China's reforms have permitted. The effective use of resources also depends upon a network of independent processes of scrutiny and accountability, undertaken by people in multiple centres of power and backed by rights and private property. A democratic election system is but the coping stone of this structure.
Judges who rule on evidence to deliver justice, newspapers reporting events and even corporate whistleblowers are crucial to the operation of western capitalism. It is the interaction of these hard and soft processes—what I call an "Enlightenment infrastructure"—that allows technological progress to be exploited efficiently and relatively honestly. China had markets, property and technology in the 18th century; it fell behind because it didn't have Enlightenment structures. It lacked the "trinity" of pluralism (multiple centres of political and economic power), capabilities (rights, education, private ownership) and justification (accountability, scrutiny, free expression).
The Chinese Communist party, despite local piecemeal experimentation, is repeating the mistake of the Confucian imperial system. It is the lack of independent scrutiny and accountability that lies behind the massive waste of investment and China's destruction of its environment. The reason so few people can name a great Chinese brand or company, despite the country's export success, is that there are none. China needs to build them, but doing that in an authoritarian state is impossible. In any case, more than 55 per cent of China's exports, especially high-tech ones, are made by foreign firms—another sign of China's weakness.
China needs to become a more normal economy. Chinese consumers need to save less and spend more, but people without property rights or state welfare are understandably cautious. Giving them more confidence would require secure property rights and taxation to fund a welfare system. That would mean creating an empowered middle class that would want to know how its taxes are spent. This is a political impossibility.
If this argument is right, the terms of debate about China must change. Instead of frightening ourselves about China's rise, we need to recognise our own strengths and its weaknesses. We need to be confident about so-called western values and processes—and strengthen them at home and abroad. The best way to meet the China challenge is not to close our markets and build our armies—a strong impulse in the US. It is to stay open, confident that China will only be able to truly compete with the west if it becomes more like us.
Yours
Will