December 2, 2008

China Crisis Part 1: Background

Will the 21st century belong to China?

The current financial crisis aside, is China an economic threat to US economic power? There are myriad reasons that the can succeed or fail, and an even greater number of opinions.

According to Will Hutton,
"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."

Further, he states;

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.

There are different scenarios that could develop. It would seem that China cannot continue at 9.5% growth rates for another generation given that the capitalism it has been relying upon is a state capitalism that cannot persist indefinitely. Alternately, the communist government could falter, giving reign to a free-for-all capitalism.

And there a countless factors that can play into shaping it's future, both anticipated and unanticipated. There's the question of inter-dependence on the US economy. There's the issue of social engineering policy and it's impact on society. There's the issue of growing income disparity. There's an issue with the air quality and pollution.

There's also issues of lower (but still good) literacy rates, and a 1.9% of GDP education expenditures versus 5.3% in the US. And according to the CIA world fact book;

Measured on a purchasing power parity (PPP) basis, China in 2007 stood as the
second-largest economy in the world after the US, although in per capita terms
the country is still lower middle-income. Annual inflows of foreign direct
investment in 2007 rose to $75 billion. By the end of 2007, more than 5,000
domestic Chinese enterprises had established direct investments in 172 countries
and regions around the world. The Chinese government faces several economic
development challenges: (a) to sustain adequate job growth for tens of millions
of workers laid off from state-owned enterprises, migrants, and new entrants to
the work force; (b) to reduce corruption and other economic crimes; and (c) to
contain environmental damage and social strife related to the economy's rapid
transformation. Economic development has been more rapid in coastal provinces
than in the interior, and approximately 200 million rural laborers have
relocated to urban areas to find work. One demographic consequence of the "one
child" policy is that China is now one of the most rapidly aging countries in
the world.

Other factors that are worth noting, it has double the irrigated land that the United States does, and roughly the same amount of water usage, despite having over triple the population. And China is not immune to the global economic crisis or unemployment tensions, particularly in urban centers. So to summarily doom the rest of the world to Chinese economic domination or to discount the possibility are both foolish propositions.

In a subsequent posting, I will look at what possible outcomes exist and try to assign some probabilities to them.

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