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An immense amount has been written and said about the prospects of China. It seems less than useful to once again rehash the issues of whether China will grow fast or very fast, and review the internal transitions that it will have to make. Our considered view offers two conclusions to this debate:
China is enjoying "decompression" growth after generation of totalitarian rule, and it is a credit to the elite that they are able to keep the country on course. However, these institutions are not up to the challenge of managing an industrial country of a billion people, and it is not possible for them to scale up to meet this challenge. A transition to something alien to China's culture will be needed if this is to be achieved, and without such a change, growth will be suppressed.
At least on element that may contribute to slower growth is social unrest, which is growing as inequalities increase. It is worth noting that around a fifth of the world's poor people live in China in 2005. The rewards of change have gone to relatively few hands, and the burdens of change are born an many shoulders. There were around 50,000 civil disturbances scattered across China in 2004 - and nearer to 65,000 in 2005 - all of them easily managed and contained, but most stemming from the breaking of old social norms without their replacement by new balances. The nation is still run for the Party, not the people, and individuals who are not members of the elite - the commercial classes, for example - have no say whatsoever in how their country is to be run. This is less an issue of justice than of how good policy is to be made: Beijing central minds cannot concoct good solutions to technical issues about which they know nothing.
Finally, demographics are against China in the medium term, a consequence of Mao's one child policy. There is a twenty year window in which China has to propel at least a part of its population to a state from which they can cause younger nations to work for them.
China has many other problems to resolve, of course, many of them with major implications for the outside world. Its foreseeable energy needs are great, and its current demand has doubled world oil prices. If it modernises on coal, the pollution from this will have global consequences. Already, the additional emissions from China on a particularly cold day are easily detectable in Europe a week later, as the air sweeps East in the jet stream. Current expectations of energy demand suggest that China wil have to build a new power station every week to keep up with demand for electricity.
This paper builds from this foundation and takes a somewhat different slant on the importance of China. Whilst internal events - the evolution of institutions, the pursuit of social consensus - will govern China's fundamental growth rate, it is also increasingly coupled to the outside world. That is to say, what it does and how it does it will influence the external world, and how the various agents in the external world see and react to it will greatly influence its own evolution.
Those who recall the impact of Japan on the Western economies during the 1960-80 period will also remember the mercantilist response of many industries and countries to this. Vehicle manufacture, textiles, ship building and consumer goods were all affects. People were put out of work, and who areas of some countries de-industrialised. The British seaboard was particularly affected, as nineteenth century shipyards and foundries, smelters and ports were bankrupted.
Seen from today's perspective, however, we now know that Japan gave the Western economies an immense present. It enabled Western consumers to have more and better goods than they would otherwise have been able to buy. Japan maintained an exchange rate which meant that it exported cheap, well-made goods to the Western economies for three decades at far below the prices which they could have commanded. In essence, the Japanese people were used by the elite to buy a place in the world at the expense of a generation's hard work.
Additionally, the Japanese onslaught proved immensely healthy for the fossilised industries which it impacted. One should contrast one of today's consumer goods with the wobbly, flimsy offerings of the 1960s, or a car. What has changed is not the technology, cost or materials - although all of those have undergone radical alteration - but rather the attitude to the customer. Nobody can doubt the consumer-centric ethos which dominates any industry that intends to survive.
China has been described as a fast-forward replay of 1960s Japan: larger, quicker, leapfrogging over rather than recapitulating obsolete technologies and work practices. At present, it is certainly following the Japanese pattern of exchange rate management, effectively using its work force to buy influence and the ability to finance external activities. Its 'leapfrogging' appears to some to be closer to theft, with internal markets dominated by faked brands and technical capabilities on which its firms do not pay royalties. For example, one Unilever brand has a huge market share - around 70% - but only 5% of that is actually made by or under license to the company: the rest is fake.
Such things are an irritant when confined to a developing economy, but a running sore when employed by a major exporter. The figure shows Transparency International's index of probity, where 10 is scored by a country with totally honest business and state practice; and 1 implies total corruption. This is plotted against income per capita. China is where it would be expected to be for its level of income, lost in the pack. However, this is not acceptable in a major trading partner.
The internal imperatives of China are, plainly, to disturb as few factors as possible in a society which is already harried by change. The elite are in a hurry to get over the demographic pass before the gray winter snows of age begin to fall. There is a strong sense that China needs to recover the weight and dignity that it lost during the Nineteenth century. Many of the concerns of the outside world are, therefore, not readily perceived from within. There are efforts to manage corruption, to be sure, but achieving the levels of transparency that are commonly expected in the wealthy world would imply a level of over-government that would blunt entrepreneurship, slow growth and make China feel like a client to those who owned intellectual property and other capabilities a that it needed.
Readers may recall the map which was circulated during the Reagan presidency as "Ron's World". California and Washington dominated the scene, and Europe was a little squiggle in the upper right, squashed by the nevertheless-small Soviet Union. Asia featured as a dot, labelled Japan-'Nam. Now consider what Beijing's World might look like on the same scale. The US is admired and resented for the admiration that it creates. Japan is disliked, but seen as senile and a convenient punch bag on which to work off nationalistic adrenaline. Europe is - well - a squiggle, and everything else is broadly a dot, unless classified as a useful dot, containing oil, cheap hands or the likes of copper or bauxite.
There is, therefore, a mutual insensitivity between the major agencies which could easily lead to difficulties. We began this essay by saying that China had a series of internal issues to resolve. We now add a foreign policy concern, which is that internal success could, if managed badly, lead to problems in external relations. However, whilst the internal issues are affected almost exclusively by Chinese people and institutions, the external issues are not. It takes two to tango.
The vertical axis of the figure which is shown below offers a measure of the complexity of an industrial activity. The figure is derived from the number of things that need to 'fan in' in order to deliver a finished good. If one want to make a metal spear, one needs iron ore, a furnace and anvil, fuel and wood for the shaft of it. If one wants to build a wide-bodied passenger aircraft, one needs a very much longer list, under headings as various as metals and legal support, project management software and human resource development. Complex infrastructures can support complex activities, but simple ones cannot.
This means that the low income band on the left of the chart compete with each other, but not with those higher up the income per capita scale. The wealth nations have increasing ceded the simpler things - including the production of intermediates, wholly specified and tightly defined, to the poorer economies. There is, therefore, an intensification of competition in each of these bands as the economies of scale express themselves.
China is exporting goods and intermediates - in particular - to the industrial world, and selling finished articles such as clothing and tools to the world as a whole. It is, therefore, frequently eating the lunch of the poor nations. Sri Lanka once had a thriving export-oriented textile industry based in its Southern tax-free zone. Chinese exports have brought it to near-collapse. In Latin America, many semi-craft industries have been rendered insolvent in much the same way.
Why has China been able to achieve this? There are, perhaps, two primary reasons: first, because China has extremely high savings rates, and so projects have had ready access to capital. Second, because China has adopted much of the US approach to business, which is that of the immediate pursuit of scale economies. Both nations think through their industry and construct for the scale economy plateau, and both are able to do because of their immense internal marketplace. (This confidence in scale is one of the striking differences between EU-based and US industries. Europe prefers to wet a toe, see how things develop, expand 'organically' and lose its initiative to those who come in with an engineering-economic eye.)
There is a gradual process by which an economy becomes wealthy, skills become scarce and highly paid, and in which productivity lessens as issues such as safety and welfare increase costs. Korean wages in the vehicle industry now approach those of the UK, and productivity levels in some cases actually lag newer EU plant. Korea has a car industry because Japan outsourced more and more of its manufacturing to it as its own costs rose. Korea is now looking for clients to undertake its manual work: perhaps the Indonesia, perhaps India.
This will happen to China as much as to any other country. The current monolithic investments will be obsolete in ten or so years, and it will be economic to replace some and to build other replacements in the lower wage areas. Transport economics, resource costs - particularly associated with energy - and external relations will define whether this happens primarily within rural China or in the poor nations of Asia. This process may be a fraught one, not least as China will be likely to enter these economies with less experience than current multinational companies, with attitudes perhaps less schooled towards partnership than are now typical of Western governance and with considerable impacts on existing relationships which the MNCs of the industrial world may have struck. China is attempting a process in which the West had a relatively free hand, but where critics now abound and where competitors are already established. China's attitude to this situation can be one of fitting in and making do, or of aggressively changing the rules. These stances are not without their implications.
China may or may not make a success of its internal adjustments, and growth may be slower than reported today, or significantly slower. Either way, the political and economic entity which will exist in 2030 will be a formidable one. We do not see any way short of a natural catastrophe by which China will be in play as anything but a single, still very centralised political entity and as a large economic power. However, although this is a deeply important axis for anyone contemplating China as a market or manufactuary, military power or centre of ideas, there remains one which is still more important. That is the outcome of the two-way tango between the outside world and China.
One can see two generic kinds of dialogue developing. First, a successful China blasts its way towards economic and geopolitical power, and set off a train of explosions by doing so. Second, China is slower, more tentative and more cast as a partner than a competitor in economic matters. Some of this distinction is down to purely economic matters - a slow performing West, a rampant China - whilst much is attributable to the tone with which things are done. Both sides have a role to play in this.
An emollient China is characterised by three virtues. First and foremost, its economic interactions with the industrial economies is that of an efficient partner, taking in a (significant) part of the supply chain for them, and perhaps managing sub-outsourcing to the poor economies as time progresses. It does not attempt to brand its own vehicles, consumer goods and so forth for Western markets, but rather uses established marques as 'containers' for what it delivers to their owners. Nonetheless, significant value added sticks to China in the process. Intellectual property is respected, the more egregious corruption is curtailed, and contracts are respected.
Second, China manages its relations with the rest of the world with alight hand. Environmental issues and their strong link to energy are addressed. The issue of Taiwan is not shelved, but less emphasised; Japan is not stigmatised and China is helpful in regularising the administrations of awkward neighbouring states. It enters international forums with the clear intention of fulfilling whatever obligations it accepts; and sets out equally clear guidelines about what it will not accept. Its relations with poorer countries are economically tough-minded, but in line with the international guide lines which it has accepted. There is sweat in factories run by Chinese companies in Indonesia, but no sweat shops; and the overall contribution to the region is seen as giving as much as it takes.
Third, China mitigates nationalism as much as it has communism, presenting itself as a pragmatic country that is merely trying to establish a legitimate place for itself. There is no triumphalism, at least in public, and due deference is given to the self-importance of the existing powers.
These components for successful external relations can easily be soured. To turn each on its head: first, China presents itself, or allows itself to be presented as a fierce and predatory competitor, exploiting its people to the glory of a political elite and the enrichment of a corrupt few. Its companies enter Western markets much as did the Japanese in the 1955-65 period: with near or under cost pricing, supported by an artificially low exchange rate, using other people's ideas without license and seeing corrupt practice as just another business tool.
Second, China asserts its status as aggressively as possible, and propagates a shrill form of triumphant nationalism. Few attempts are made to regulate the environment or resource needs, and imports of energy and exports of air and seaborn pollution both soar. High energy and resource prices impact on all other economies except the exporters themselves, leading to further economic imbalances and to a general slowing down. At the same time, it is extremely difficult to invest usefully in China, as the inner workings of the economy are far from transparent and sharp failures are mixed with inexplicable subsidy from the state. China makes harsh demands on its neighbours, and uses international forums to raise its voice. It does not honour agreements struck at these. Its relations with poor countries are poisonous, as its exports undermine their attempts at development, whilst ist companies are harshly exploitative.
Third, already touched upon, these irritants are trumpeted as intentional, as the direct consequence of who and what China wants to be, and that others had best adjust their minds to a new reality.
Readers may feel that neither of these extremes are at all likely in the form stated; and we have tabled them in order to give structure to this dimension. The mixed reality of 2030 will have contained elements drawn from history which included all of these flavours. Nevertheless, the tendency to develop a vicious or virtuous cycle with other powers is self-evident, and which of these flavours predominate with depend on these interchanges.
How will this axis interact with the internal questions which we posed earlier? A wildly successful China - in the sense of having resolved all existing internal problems as regards internal growth, and socio-political management of the country - could, in fact, slip either way. It could be triumphalist or it could be emollient. A less successful China, perhaps riven by institutional inefficiencies and social unrest, will be more isolationist than not, more inclined to blame outsiders than welcome them, certainly more sensitive to imagined slights. China is a foreign policy adolescent, with all of the moodiness and instability of outlook that this implies. Poor results at home will exacerbate this, whilst a background that is just as it might wish will at least open the door to a positive stance, make a career path for thoughtful diplomats and create an appetite for debate about the outside world amongst the educated Chinese. Linkage with the Chinese diaspora in Asia is similarly more feasible when 'foreign' and 'devil' are not linked.
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