by Mario Deaglio, University of Torino
Introduction: economists don’t have GUTs
Up to a quarter of a century ago, economists were comparatively lucky. They could build their models and play with them, assuming that social, political and strategic dimensions of economic problems would remain roughly unchanged; this was a reasonable assumption, inherited from a world frozen by the Cold War and the results and forecasts they produced were satisfactory, often more than satisfactory.
Then the Berlin Wall went down and the Chinese GDP started to go up at the extraordinary yearly rate of 10 per cent or more; the Soviet Union disappeared and the euro appeared; the Baltic States left the Russian orbit and most of Eastern Europe entered the European Union. One might also add that in the West the middle class started contracting rapidly while in East Asia its numbers swelled. No wonder economic models went badly wrong, with economic forecasts having to be hurriedly modified, generally downwards, by the IMF and the OECD.
What is the reason of all this? To put it simply, social scientists, and economists in particular, don’t have GUTs. By GUTs I mean Grand Unified Theories, a term borrowed from physics to describe very complicated sets of interactions between different forces. In Social Sciences, a GUT would be a unified explanation of economic, social, political and strategic variables, something that Marx, Pareto and Schumpeter variously attempted.
In the last decades of the XX century, economists at the Chicago School tried bravely to unify these different forces under the banner of rational expectations and rational behavior (Robert Lucas); some of its main representatives developed an economic theory of politics (Gordon Tullock and James Buchanan) others went further, putting forward economic explanations of free time and of marriage (Gary Becker). All this floundered when largely irrational behavior brought about the so-called Great Recession; this serious worldwide economic setback brought about, as a side effect, the downfall of the extreme forms of rationality applied to human behavior. This has sent the reputation of economists to unexpected lows.
The need for a unified approach to the analysis of China
Which brings us to China. My argument is that, to properly understand present-day China, in the absence of a “Grand Unified Theory for the Social Sciences”, we must at least attempt a “unified approach”, precisely because the Chinese leadership uses a unified approach towards both internal and external problems.
The post-cultural revolution Chinese leadership had this unified approach very clearly in mind. They borrowed from traditional Chinese philosophy the concept of harmony. Their conception of the universe was, and still is, that the Chinese Communist Party (CCP) is at the center of China and China is at the center of the world. It is not by chance that the Mandarin word for China is “Middle Country”, or “Middle Kingdom”.
Chinese global strategy is like a Chinese puzzle ball, made up of several concentric spheres, enclosed one into the other, each rotating freely and hardly touching any other sphere. The Chinese concept of harmony, translated into social science, actually means that you must take China as a whole: ideology, strategy, society, and, of course, economics must all be coherent parts of this whole. Mere economic or political analysis is too one-sided and risks going badly wrong. To put it in other words, every economic problem has a political dimension, every political problem has an economic dimension and both economic and political problems interact with society and with the whole world. To guarantee peace and progress – and bolster China’s central role - all these variables must move in an integrated, coherent and harmonious way.
China and the birth of globalisation
To give but one example, harmony means that Communism and the profit motive may peacefully coexist, with the CCP throwing its doors open to businessmen as part of a highly complex compact. Having been granted a large degree of economic freedom, businessmen must recognize the “leadership” of the CCP and give up prospects both of a swift recognition of most Western-style individual liberties and of an equally swift transformation of China into a total market economy. Together, the CCP and business must oversee and engineer the transformation of the Chinese economy, which has implied an orderly mass migration of awe-inspiring proportions from agricultural to urban areas, providing both jobs and infrastructures for this structural change.
This interaction has had a powerful foreign policy angle with China accepting the implicit offer of the G-countries (at the time G-6, with Italy participating for the first time) at Rambouillet (France) in October 1975. The “capitalist” powers were in a difficult position after the American humiliating withdrawal from South Vietnam, earlier in the year; about a dozen Vietnamese-type guerrilla movements were threatening pro-Western governments in as many East Asian countries.
The G-6 offered free trade to China, as well as other Asian countries, regardless of their economic and political principles; Peking responded two and a half years later by setting up the first Special Economic Zone (SEZ) at Shenzhen, at the time a coastal township with 12,000 inhabitants, now a thriving urban area with considerably more than12 million inhabitants,
During the following thirty years a massive and orderly human wave of 10-15 million agricultural workers a year left the impoverished countryside (per capita income around $1,000-3,000) for the new “exploding” urban areas where “capitalists” were leading the way in building new factories and introducing new technologies, pushing average per capita income up to the $10,000-12,000, while the bulging middle classes managed to nearly double this figure.
The industrial scene witnessed one of the swiftest structural changes in history, fuelled by an incredible 45-50 per cent of GDP devoted to investment, while household consumption remained below 40 per cent and booming industrial production accounted for about 45 per cent of GDP.
This huge structural shift was supported by the formation of yet another equilibrium: spurred by SEZs, China ran a huge trade surplus and invested it mainly in US Treasuries. Thus a MAD (Mutual Assured Destruction) equilibrium – to use an appropriate Cold War term - arose: China must invest mainly in US Treasuries for lack of alternatives (the euro has been only a partial, and later, substitute) and the US depended, directly or indirectly, upon Chinese demand for Treasuries to keep the cost of money low.
“Capitalist” strategists thought that China would merely copy advanced countries’ production processes and master the simplest technologies. They vastly underrated the Chinese: China is now present in practically all technological fields, competes with the US not only for the title of largest national economy in the world but also for the amount of GDP spent on scientific research and on investment in the developing world. Massive exports to the rich countries started with low cost textiles and, in a couple of decades, moved to advanced technologies ranging from aerospace to oil, from cars to computers. Chinese companies set out to invest in Africa and South America and are buying into the capital of important companies in rich countries. The acquisition by Lenovo, a Chinese computer company, of IBM’s personal computer branch in 2005 is just one of a very long series of similar activities.
As a result of a massive educational drive (with every high school student being taught English, and most University education being given in English) in little more than a decade, according to some extrapolations, there might be more English-speakers in China than in the US.
The price of expansion
All this has fundamentally altered the global economic structure and pushed the world’s economic center of gravity sharply East, where, according to the work of Angus Maddison, it had firmly rested until the Industrial Revolution. It has been a Long March, a triumphant march in many ways. There is, however, another side to the coin.
China has paid a considerable price for its economic buoyancy. First, in economic terms, it has overshot its targets. It concentrated its investments to a large extent in heavy industry; this is probably a necessary step for large countries, but the production of cement and steel, as well as of coal-generated electricity to power new factories, has just been too much. With industry as a whole accounting, in certain years, for nearly 50 per cent of GDP, China had to find steel markets abroad while at the same time suffering an unprecedented air and water pollution.
At the same time, starting in the eighties-nineties, there were signs that once enthusiastic popular consensus for the change was now waning. Factory workers started demanding higher wages and huge – scantily reported – strike waves swept industrial areas. With production costs rising, the balance of payments stopped being robustly positive.
The Chinese discovered that they were not one people: the Tibetan minorities were spread in many areas of Southern China, while the Turkish speaking Uyghurs were a majority in the strategically important Xinjiang province; the semi-autonomous Hong Kong area resented Peking’s imposition that the Peking version of Mandarin Chinese be used in the former British colony for administrative and political purposes. The Falun Gong sect resisted a crackdown in 1999 and Christian minorities pressured for more freedom.
Social problems were caused or heightened by China’s very success: peasants had turned blue-collars and their children had received an education. However, insistence on heavy industry meant that it was difficult for the educated young to find suitable jobs, i.e. jobs that matched their ambitions and expectations. While their unrest became evident, also the local political élites attracted criticism for their involvement in profiteering and corruption.
Success, strains and stresses
The time was ripe for a change of leadership. The era of pragmatism inaugurated by Jiang Zemin, who took upon himself the task of reuniting the country after the 1989 Tiananmen revolt, was marked by the opening of the Shanghai and Shentzen Stock Exchanges in that very year, followed in 1992 by renewed economic and political ties with Russia.
China fully entered the world political and economic arena in the new century: in November 2001 it joined the WTO, in February 2002 it hosted the visit of the US President George W Bush. In 2003, Jiang Zemin handed power over to Hu Jintao, after a decade of expansion and enrichment, a thoroughly peaceful passage. The launch of China’s first manned spacecraft in October 2003, the signing of a trade agreement with 12 South East Asian countries in November 2004, the first China-Africa conference in Peking in November 2006 epitomized the slow, sure Chinese rise on the world stage, with politics, the economy and society apparently marching in step, or in harmony, as the Chinese would prefer to say.
The 2007 world financial crisis, which in 2008 overcame the boundaries of finance, hit the world economy as a whole and turned into a more general phenomenon - often referred to as the Great Recession - enhanced China’s world standing. The People’s Republic experienced a mere temporary dip in its growth rate and indeed became one of the few “economic engines” of a globalized world. During the Recession, its share of the main world economic indicators increased considerably and so did its weight both in the world economy and in world politics. But China was feeling the strains and stresses, as shown in the above paragraph.
New leadership, new plans
Hu Jintao’s team ten year period expired in 2013, and time was appropriate for another change in leadership. Xi Jinping took over as President of the People’s Republic of China on March 14th 2013. He came from a “political family”: his father, a high-ranking CCP member, “fell in disgrace” during the Cultural Revolution but was later the man behind the setting up of the ZES.
Xi’s action appears to be three-fold:
1) Redress the income distribution imbalances which are threatening Chinese consensus, a fundamental ingredient of China’s economic success. To do this, the new administration
• has used a strong hand against corruption, including bringing to trial well known components of the CCP élite. In this process, the hold of Peking on regional governments has strengthened considerably;
• has increased state finance for huge infrastructural plans including the building of a 35,000 kilometers high speed railway system, an impressive way to unite the country;
• moved to speed up the implementation of a national health network, giving more room to state (and basically free) hospitals and other installations which is meant to give relief to tens of millions family budgets.
2) Counter the danger of a financial crisis through strong intervention and rule changing in the financial markets, while accepting a physiological slow down of the GDP growth rate. This has implied a stronger hand in telling large public or semi-public concerns what to do and not to do in financial markets.
3) Follow a “double-path” foreign policy, bent, on the one hand upon strongly asserting China’s influence and territorial supremacy in neighbouring Asia (including the commercially vital South China Sea) and on the other favouring internal consolidation to further large presence on the larger global scene.
In implementing point 3), China has been the driving force behind the BRICS Development Bank (headquartered in Shanghai), with an authorized capital of $100bn. This has been largely seen as a move to bypass the World Bank, that China has always considered as a “rich country preserve”. China has also actively sponsored the Asian Infrastructure Investment Bank (AIIB) which has attracted European, as well as Asia attention. Here again the authorized capital is $100bn.
Will they succeed? Too early to tell. The world, and the world economy in particular, is an unstable place and while everybody seems to be worrying about China’s slowdown, they should perhaps be worrying that, for structural reasons, China’s continuous growth will probably be less stimulating. The Chinese can themselves build most of the high tech products they would have imported five, or perhaps ten years ago. And it is perhaps appropriate to end with a quote by Confucius: “It does not matter how slowly you go, as long as you do not stop”. The Chinese are expecting to go a bit (but only a bit) more slowly but certainly have no intention to stop.
