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ONE
A Dragon on Steroids
Two bets are on the table. One has been placed by the Washington policymaking establishment; the other, by the leadership of the Chinese Communist Party
Analyzing China’s prospects in terms of the currently fashionable globalist ideology the Washington establishment is betting that a rich China will be a free one.
The theory is that the only way China can continue to grow is by embracing Western democracy and capitalism. Moreover, the very process of China’s enrichment is supposedly serving to undermine the Beijing government’s authoritarianism. Thus a feedback effect is said to be at work: more wealth means more freedom means more wealth....
This view has been championed by many American political figures in the last fifteen years. Here, for instance, is how President George W. Bush put it in 2005: "As China reforms its economy, its leaders are finding that once the door to freedom is opened even a crack, it cannot be closed. As the people of China grow in prosperity their demands for political freedom will grow as well.... By meeting the legitimate demands of its citizens for freedom and openness, China’s leaders can help their country grow into a modern, prosperous and confident nation."
Similar optimism is poured forth daily by the American press, not least by the Wall Street Journal. Here is a typical Journal comment from 2006: "Sooner or later China’s economic progress will create the internal conditions for a more democratic regime that will be more stable, and less of a potential global rival.... China’s burgeoning middle class, created and buoyed by economic growth, will drive internal change."
Abroad too the Washington view is increasingly prevalent. In Britain, for instance, it has now been embraced not only by the media but by many top politicians. After visiting Chinese premier Wen Jiabao in 2005, then British Prime Minister Tony Blair, for instance, cited the rise of a huge Chinese middle class and the spread of the Internet as factors that had produced "an unstoppable momentum... towards greater political freedom [and] progress on human rights."
The Washington view’s prevalence probably owes something to its implicitly flattering regard for Western culture. After all, it is founded on the premise that Western philosophy constitutes universal truth.
Those who espouse it, moreover, often loudly claim to occupy the moral high ground. Skeptics are made to feel either that they do not fully comprehend the perfection and universal salience of Western values or that they are denying the Chinese people’s essential humanity
Claims to the moral high ground apart, however, the Washington view has also been propelled by something more reliably persuasive: money. The fact is that various powerful interests, most obviously countless multinational corporations, see profit in promoting the Washington view. Thus vast amounts of money have been pumped into a propaganda program to win over key opinion makers, not least elected officials, top editors, press pundits, government bureaucrats, and think-tank scholars.
As more and more money has been applied to the task, the Washington view has come to be accepted by more and more erstwhile skeptics. In particular many hawkish Sinologists from the cold war era have now reversed themselves. Up to the late 1990s they had generally held that China’s economy diverged too sharply from Western capitalism ever to amount to much. China’s continuing export surge in the new century has forced a total rethink—and corporate America’s lobbying money has sweetened this bitter ideological pill.
So widely accepted has the Washington view become that until recently almost no one had noticed there was another bet on the table. This second bet—that of the Chinese leadership—is on a disturbingly different proposition: that a future China can be both rich and authoritarian.
If the Washington view is right, the future is unclouded, and a fast-rising, fast-Westernizing China can readily be accommodated within the existing Western-defined world order. But what if it is wrong? What if—surprise!—China’s top leaders turn out to understand the Chinese character better than anyone in Washington? What if in, say, 2025 or 2030 the United States finds itself facing off against a China so rich that it has surpassed all other nations in military technology, yet a China that remains resolutely opposed to Western values? The implications are hard to exaggerate. Yet so far they have received remarkably little consideration. It is past time that this oversight was rectified.
New China: RichBecause It Is Authoritarian
In the great debate over China’s future, Chinese leaders have more at stake than most. After all, their jobs, if not their heads, are on the line. It is reasonable to conclude that they have considered their options carefully.
Moreover, they enjoy the priceless advantage of local knowledge. They read and speak the language. They have studied their nation’s history and know its mind.
By contrast, those on the other side, with virtually no exceptions, are pathetically uninformed. As they have never lived in China—or in any other part of the Confucian world for that matter—they have had no practice in the mental gymnastics often needed to make sense of the distinctly Confucian way modern China explains itself. Even worse, the fundamental ideological framework within which newcomers to the Confucian region try to understand China is completely wrong.
For a start, contrary to all conventional wisdom, the Chinese economic system is not capitalism, nor is it converging toward capitalism. Thus any deterministic Washington analysis based on the history of Western capitalism is doomed from the start.
The truth is that China is operating an adaptation of the so-called East Asian economic system. Launched in the then Japanese colony of Manchuria in the 1930s, this system was perfected in Japan proper in the 1950s and 1960s and has now been widely copied throughout East Asia.
As James Fallows has pointed out, the Chinese version differs from the Japanese original in being more atomized; hitherto at least, the role of government in micromanaging outcomes is far less in evidence than in the mature version of the model seen in Japan. Nonetheless in its key elements it is the same system. As itemized by the authors Richard Bernstein and Ross Munro in their 1997 book The Coming Conflict with China, these are just some of the more obvious features of the Chinese version of the East Asian economic model:
A labyrinthine system of trade barriers
An artificially undervalued currency
An industrial policy that focuses on developing so-called pillar industries and uses export subsidies and other unfair tactics to give them a competitive advantage in world markets
Systematic pressure on foreign companies to transfer their most advanced production technologies to China
While the East Asian approach to economic development resembles capitalism in some ways (it makes extensive use of markets, for instance, particularly at the level of small business), its fundamental logic is quite different. A key difference is that whereas authoritarian political controls constitute a hindrance to the full efficacy of capitalism, such controls are really essential to the functioning of the East Asian system.
The ability of top officials to keep tabs on everything is greatly enhanced by the fact that, as James Fallows has pointed out, Confucian econo-political culture diverges fundamentally from the West in its approach to power. In his 1994 book Looking at the Sun: The Rise of the New East Asian Economic and Political System, Fallows wrote: "Anglo-American ideology views concentrated power as an evil (‘Power corrupts, and absolute power...’). Therefore it has developed elaborate schemes for dividing and breaking up power when it becomes concentrated. The Asian-style model views concentrated power as a fact of life. It has developed elaborate systems for ensuring that the power is used for the long-term national good."
One critical way in which power is deployed to economic advantage in China—as in other East Asian economies—is in savings policy. However counterintuitive this may seem to Westerners, China’s famously high savings rate is imposed on the nation from above. By dint of various authoritarian policies, vast savings surpluses have been generated. These have provided the principal driver of China’s rise, making possible a superfast rate of growth in investment not only in industry but in the sort of advanced infrastructure needed to maximize the nation’s exports.
Top Chinese leaders have been inspired by the now voluminous evidence that, in modernized form, authoritarian Confucianism almost effortlessly outperforms Western capitalism. The impact of the East Asian system on the world economy has already been massive. Based on figures cited by the Berkeley-based political scientist T. J. Pempel, between 1960 and the early 1990s alone, East Asia’s share of the world economy multiplied sixfold—rocketing from less than 5 percent of total world output to about 30 percent. For several decades to come we can expect East Asia’s share to continue to rise as China rapidly catches up with earlier Confucian industrializes in deploying the most advanced production technologies.
Understanding Why We Misunderstand . . .
As we will see in detail in chapter 2, the West faces special difficulties in understanding the Confucian world.
Part of the problem is ideological. Almost without exception, American opinion leaders hold as a matter of high ideology that Western logic is universal and thus is destined to sweep the world.
It is an assumption that repeatedly down the centuries has led to disastrous miscalculations. In our own time only the most obvious instance has been the tragic quagmire in Iraq. It is a striking fact that many of the top neoconservative commentators who so insistently sold the Iraq war to the American people have been similarly insistent in promoting the Washington view of China. They include the New York Times’s chief foreign affairs commentator, Thomas Friedman; the Economist magazine’s erstwhile editor in chief Bill Emmott; and both Paul Gigot and the late Robert Bartley of the Wall Street Journal. Perhaps the most remarkable instance of the "invade Iraq / appease China" syndrome was Francis Fukuyama. In his famous essay "The End of History" in 1989, he was one of the earliest proponents of the view that China was converging with American values. In late September 2001—just days after the September 11 attacks—he called for the United States to invade Iraq even if no evidence existed to link Saddam Hussein "directly" to the atrocities. It is also striking that the main architects of the Iraq disaster, George W. Bush and Tony Blair, are, as we have noted, leading proponents of the Washington view.
(Conversely, many prescient opponents of the war have been outspokenly critical also of the Bush administration’s China strategy. They include James Fallows, Pat Choate, Patrick Buchanan, Paul Craig Roberts, Chalmers Johnson, and Ralph Nader. They also for that matter include me. In the International Herald Tribune two days before the war started, I wrote: "Whatever the merits of America’s case for going to war, one aspect of its Iraq strategy seems badly misconstrued: the assumption that the reform of post-Saddam Iraq will run as smoothly as the U.S. Army’s occupation of Japan after World War II.... Even in the unlikely event that Iraqis forbear from settling old scores among themselves, their mutual jealousies will make it tough to work together in restoring order to a devastated nation.")
History will record that the major problem with the Bush administration’s Iraq strategy has been that ideology was allowed to overrule common sense. The same is true, if for the moment less obviously, of its China strategy
Another key problem is that few interpreters of today’s China have had any experience in analyzing the rise of the earlier East Asian "miracle" economies. Anyone familiar with the Japanese economy in particular has a major advantage because Beijing is now so clearly copying policies pioneered decades ago by the Japanese. For the most part, however, today’s China watchers have paid little attention to Japan. The result is an American approach in China that, to long-term observers of the Confucian world, seems distinctly Sisyphean. This point has been made in particular by Ivan Hall, author of Bamboozled! How America Loses the Intellectual Game with Japan and Its Implications for Our Future in Asia. A Harvard-educated cultural diplomat and Japan historian who lived most of his professional life in Tokyo, Hall comments: "We seem to go on repeating with China all the mistakes we made with Japan, having learned nothing from them."
That said, the West’s comprehension problems do not spring primarily from ignorance or feeblemindedness. Rather, they reflect a remarkable policy of obfuscation—and sometimes outright deception—by East Asian leaders, and even more so by their many stooges in the Western expatriate communities of the Confucian world.
Some of these stooges have clearly succumbed to illegitimate blandishments or pressures. Others have been confused by the Confucian world’s aptitude for Potemkin village–style dramatics. Not only have East Asian leaders not explained how their economic model works but they have often gone to extraordinary lengths to keep Western policymakers and commentators misinformed about it. For good reason. If this model were more widely understood, it would long ago have been comprehensively opposed in the West. The point is that, like the Soviet system before it, the East Asian model is incompatible with Western capitalism. In fact, precisely because the East Asian model is so much more successful than Soviet Communism, it entails an even greater problem of political and economic incompatibility for the West.
Seen from a Western point of view, the most immediately obvious problem with the East Asian economic system is its mercantilist approach to trade. To that subject we now turn.
Closed Markets and Tall Stories
The fact that East Asian markets are largely closed is, of course, hardly news to American labor activists, let alone to American industrial exporters. Nonetheless, the elites who set American foreign policy have long chosen to pretend otherwise. Every step of the way as the United States has unilaterally opened its markets to East Asia’s concept of "one-way free trade," these elites have argued that continuing East Asian protectionism does not represent a failure of intent by East Asian policymakers, let alone a fundamental philosophical divergence. Rather, it supposedly reflects temporary political glitches that East Asian policymakers have been sincerely trying to rectify. The principal problem has allegedly been that petty vested interests in East Asia—"backwoodsmen" in the jargon—have been obstructing their more enlightened fellow citizens’ efforts to embrace Western economic ideals. In the long run there is no doubt that enlightened leadership will prevail. Thus the right thing for the West to do is simply to be patient, considerate, and statesmanlike while the East Asians work to remove remaining obstacles to free trade.
In reality as this book will show, this train of logic is disastrously wrong. Opposition to Western-style free trade in East Asia is hardly confined to a few self-serving "backwoodsmen." On the contrary, it is all-pervasive and is quietly led by the very top officials who are assumed to be the West’s greatest allies in bringing Western economic ideas to the region.
Faced with evidence that top leaders in Beijing are backsliding on their commitments to open the Chinese market, advocates of the Washington view tend to urge yet more patience. The evidence from America’s previous experience with other mercantilist East Asian nations, however, is not encouraging. Take, for instance, Japan. As the first Confucian nation to become rich, Japan was also the first to profess a commitment to Western-style open markets. That was more than forty years ago. Yet all the evidence is that even today Japan continues, in so-called targeted industries at least, to pursue a comprehensively protectionist trade policy. True, in some product categories, foreigners in recent years have been permitted a share—usually a small share—of the Japanese market. But in many others foreigners find the door slammed in their face.
The Japanese car market, as we will see in chapter 7, provides a particularly chastening insight into Japan’s true trade policies. Thirty-five years after Japan’s trade lobbyists first proclaimed the Japanese market "one of the world’s most open," carmakers on three continents agree that it is still one of the world’s most tightly closed. Even Paris-based Renault has never been able to sell in Japan though it ostensibly controls, through a major stake in Nissan, Japan’s second largest car distribution network.
It may be that China will prove more sincere in its commitment to free trade than Japan—but a close look at the logic of China’s economic strategy suggests otherwise.
In any case, from the point of view of the Western-defined world economic order, there is, as we will now see, another crucial problem—the system’s parasitical approach to technology
Technology: Heads We Win, Tails You Lose
Throughout the East Asian region, governments pursue remarkably similar technology policies. On the one hand, they avidly suck in advanced technologies from all over the world. On the other hand, they allow few homegrown advanced technologies to leak abroad.
Again Japan, as by far the region’s richest economy, has hitherto been the most important exemplar. The Japanese economy has been built largely on foreign technologies, particularly American ones. Yet Japan strictly prohibits its own companies from transferring their most advanced technologies abroad. In the electronics industry, for instance, Japan now monopolizes the manufacture of many of the sophisticated materials and production machinery that have made possible the unparalleled miniaturization of today’s electronic gadgets.
The techniques for making such products are regarded as national secrets that must not be allowed to leave the country
For now China has few technological secrets to guard. But it is already benefiting handsomely from the other side of East Asian technological policy in that, even more than nations like Japan and Korea before it, it has been expertly winkling key technologies out of the United States and Europe.
How Big Might China Become?
One thing that is indisputable is that the East Asian economic system is palpably far more effective in building wealth—and, by extension, national power—than the American system. As we will see, the experiences of South Korea and Taiwan offer strong hints of China’s future trajectory. Both nations adopted versions of the East Asian system in the early 1960s, at a time when they ranked roughly as low as China does today in the world per capita income league. They proceeded in subsequent decades to enjoy some of the fastest sustained growth in world history
As the scholar Robert Wade has documented, in both cases per capita income measured in current U.S. dollars (that is, before adjustment for dollar inflation) increased by more than 20 times between 1962 and 1986. This compares with a rise of a mere 5.6 times in the United States in the period. Moreover, except for a brief interruption during the East Asian financial crisis of 1997–1998, both South Korea and Taiwan have continued to outperform dramatically. Thus as of 2006 South Korea’s per capita income at market exchange rates was $18,400—making it a fully accredited member of the First World. By comparison in 1962, with a per capita income of a mere $110 a year, it ranked below Sudan in ninety-ninth place in the world income league.
That said, if South Korea’s performance seems impressive, it pales by comparison with that of Japan, which by 2006 had reached a per capita income of $38,500, up from just $610 in 1962.
The ultimate geopolitical point here is that if the Chinese economy were merely to match South Korea’s current income level, it would already be by far the world’s largest economy with roughly twice America’s total output. Were it to match Japan’s, it would boast four times America’s output.
Even with merely a Korea-level per capita income, the Beijing regime would have little difficulty outspending all other nations in military technology, and thus displacing the United States as the world’s premier military power. To say the least we in the West are not prepared for the scale of the geopolitical adjustments entailed by such an eventuality
Chinese Savings: Inexhaustible Wellspring
Asked to identify the secret of China’s supergrowth, the best Western economists can do is reflexively point to China’s high savings rate. But this is hardly more helpful than positing cloudy skies as the reason why it rains in London. We have to ask why the Chinese save; more important, why do they save so much more now than they did in the past?
These are momentous questions, yet they have gone almost entirely unaddressed in previous studies of the Chinese economy. Indeed the word "saving" is notable for its absence in the most widely read accounts of East Asia’s rise. It does not appear in the index of Thomas Friedman’s best-selling The World Is Flat, for instance. Nor does it even in Nicholas Lardy’s much more scholarly Integrating China into the Global Economy.
That said, China’s savings rate is hard to ignore. Described by the Economist as "the world’s highest by far," it is certainly one of the most geopolitically significant phenomena of our time.
Western economic commentators such as London-based Will Hutton argue that the key to modern China’s high savings rate is that the Chinese social security safety net is inadequate to look after people in their old age. But this explains little. After all, most nations lack an adequate social security safety net, yet their savings rates remain dismally low.
In trying to explain the Chinese savings phenomenon, Westerners suffer a crucial blind spot in that they assume that a nation’s savings rate is determined merely as the aggregate of millions of freely made decisions by individual savers. This, of course, is how things work in the West. In the case of China, however, in typical groupist East Asian fashion, the key factor is government policy
As this book will show, in their utterly un-Western approach to savings and consumption, Chinese leaders boast a devastating secret weapon. Following in the footsteps of other high-growth Confucian nations, they have established a highly ingenious, almost invisible, administrative ability to force society to save. The adoption by one East Asian nation after another of a policy of forced saving ranks as one of the great turning points in world history. It is a fair bet that
Excerpted from In the Jaws of the Dragon by Eamonn Fingleton.
Copyright 2008 by Eamonn Fingleton.
Published in August 2009 by St. Martin s Press.
All rights reserved. This work is protected under copyright laws and reproduction is strictly prohibited. Permission to reproduce the material in any manner or medium must be secured from the Publisher.
