Over the last few weeks I’ve been reading books by some of the smarter members of the international elite. One thing they all seem to agree on is how amazing and unprecedented China’s economic rise was.
It wasn’t.
China industrialized and modernized the way almost all nations have:
- Through mercantalist policies. In China’s case, keeping the value of the currency low, taking advantage of low wages, and starting with the oldest parts of industrial value chains.
- By exporting to large external economies which let them: the US and Europe.
- By grabbing as much intellectual property as possible.
This is how America did it in the 19th century. This is how Japan did it twice (Meiji, post WWII, Taiwan and South Korea did it. This is how virtually everyone did it.
Americans got greedy and stupid, from a geopolitical point of view. They believed the nonsense “End of History” bullshit about how capitalism and democracy are intertwined and capitalism inevitably leads to democracy and they were salivating over the profits they could make in China. So they traded and they let China into the WTO.
Contrary to the idea that democracy and industrialization/modernization are intertwined; Japan and Germany did most of it under authoritarian governments and with massive government direction. Even post-WWII, Japan was a one-party state, not a real democracy. Germany’s industrialization was based on Prussia’s command economy, and the great companies were practically state organs even if they were nominally civilian.
Japan didn’t become a nominal democracy because “capitalism” it became one because it lost WWII. The Kaiser had a parliament, but still a great deal of power and he didn’t step down voluntarily, he lost power because the Germans lost WWI.
But the emphasis on authoritarianism misses what is actually interesting and almost unique about China: it has the most decentralized government spending of any major country, with over 70% of spending decisions made below the Federal government. As a rule, the center made and makes goals and guidelines, but leaves it up to regional and municipal governments to figure out how to achieve them. China has a dynamic government, and there is a lot of competition between governments, as much as between firms.
It is also easier and cheaper to start a new business in most of China (free in Beijing to incorporate) than it is in most of America or Europe.
Meanwhile, the great danger to capitalism is capitalists being too successful, and buying the system, and then getting rid of necessary oversight and regulation. China has largely avoided that (though real-estate wealth is still a problem) and Xi Jingping has cracked down repeatedly those he considers bad actors. In one recent example he forced delivery app companies to treat their employees much better (better than in America). In another he got rid of the College prep industry almost entirely, which a lot of western observers thought was bad, but the industry was a pure “Red Queen’s Race” situation, because it existed everyone had to do it, and as with all such college prep industries it favored those with money over those without. Xi was entirely right to end it.
Democracy used to serve this purpose in the West. Almost everything FDR did, economically, was to stop capitalism from destroying itself.
Further, all evidence I have seen indicates that contrary to what I thought in the past, the Chinese Communist Party (CCP) goes out of its way to recruit smart, competent people and has thus, so far, been able to avoid the generational nepotism and degradation cycle.
To bring this back to Western elites, a lot of the mistakes come from drinking their own Kool-aid. While virtually no country larger than a city state has ever modernized without mercantalist policies, the orthodox economic position of the West for decades was laissez-faire, and that’s what the World Bank and IMF made most countries do. Those policies are vastly destructive and don’t work IF you want a country to modernize, but if you really want it to become a helpless satellite state they work well. (Bad Samaritans, by Ha-Joon Chang covers this well.)
“Free” trade is not what America did, Germany did, France did, Japan did or even England did to industrialize, and it’s not what China did.
What it is truly unique about China’s industrialization is its size: it’s a subcontinental power with a huge population. Japan was never really a threat to the US, for all the screaming in the 80s, because of its population size and limited geographic extent. China is by some measures already a larger economy, and the only thing might stop it from becoming the world’s greatest power and eclipsing the United States is that climate change will hit it hard somewhat earlier than it will hit the US, as best I can tell.
So, what matters about China is just that it’s not Western, and poised to become the first Eastern hegemonic power in about 200 years. Of course the US doesn’t like that, and of course Europe (still an American satrapy) is uneasy.
This could have been avoided easily enough, though it probably shouldn’t have been, simply by refusing to cooperate with Chinese mercantalist policies and certainly, if the US didn’t want a rival who would probably eclipse it, letting China into the WTO was insanity. (This was clear at the time, and many people objected.)
The other issue is that the West no longer has a veto on who gets to industrialize. For various reasons Japan, South Korea and Taiwan couldn’t serve as the necessary markets for mercantalist expansion, but China can and that’s what they’re offering many other nations the West never let develop. The European/US monopoly is broken.
The lesson is not to believe your own lies and bullshit. Fukuyama was obviously full of shit about “The End of History” and developed world suggested “development” policies in the last half of the 20th century were meant to stop nations from developing, which was their record, and anyone with sense who spent a few hours examining the policies of countries which actually industrialized, could know it.
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Willy
Yeah, I think of Carnegie/Frick. Hire some German experts and fire them after stealing their technologies. Maybe future American versions of those two will steal Chinese technologies?
Still, had you told me back in high school world history class that the descendants of those people I saw in the world history textbook picture, the one where thousands of green suited Chinese were trying to build a dam with handheld buckets, would overtake the USA technologically, I might’ve just moved there. Had I looked Chinese.
But since history wants to repeat even China will get theirs eventually. Somebody here (can’t remember exactly) offered up the ideas of the Iron Law of Oligarchy and anacyclosis. In my little world, it’s obvious that Dark Triad types always undermine any system regardless of the ethicality, because that’s what they’re wired to compulsively do, to where it all trickles down culturally until the everyday common wisdom is that ethicality is a fools game. Then the system hits bottom and then we all get to repeat the process.
Plague Species
Yes, it has been a tragedy and tragedy is certainly normal. China would have been better off remaining a largely agrarian society with the basics provided. Instead, the CCP has turned China into a concrete jungle in the name of profit and power and don ‘t give me that bull about prosperity. Rampant consumerism is not prosperity. The Chinese people are not happy any more than the American people are happy.
Mark Pontin
Ian: “What it is truly unique about China’s industrialization is its size: it’s a subcontinental power with a huge population. ”
Yup. That’s the singular, unprecedented feature of China’s rise. Agreed with everything you say here. Although this part ….
“As a rule, the center made and makes goals and guidelines, but leaves it up to regional and municipal governments to figure out how to achieve them.”
… can’t be stressed enough.
From what I hear and read, the managers of provinces and significant municipalities have significant clout to experiment with new tactics and methods that then, if successful, may be adopted and promulgated elsewhere in China. It’s precisely by this route that an ambitious local Party secretary can rise to become one of the 25-member Politburo of the CCP, who are China’s ruling council.
Lex
And those mercantilist policies, combined with American capital chasing quick returns have on going ripple effects. China hasn’t stopped smelting magnesium, they’ve just reduced capacity to reduce emissions. But everyone else quit smelting magnesium and let the Chinese do it. So now it manages 87% of world supply and nearly 100% of European supply. It’s currently being reported that aluminum production in the EU will stop by the end of Nov and will be at least so constrained in the US that auto manufacturing will mostly halt. Which is somehow leading to the “west” demanding that China increase production of magnesium while also claiming that China is a grave threat that has to militarily contained. If we had stuck with mostly mercantilist policy this wouldn’t be an issue.
different clue
@Ian Welsh,
I think you are too generous in ascribing some kind of good faith to the elites who make up the International Free Trade Conspiracy and its American branch managers, our Free Trade Occupation Regime. De-industrializing America was their deliberate goal right from the start. Exterminating industry was their way of exterminating Industrial Unions.
The poverty all over America was one of their deliberate goals.
Clinton achieved the Republican Party dream of Forcey Free-Trade for personal after-office rewards of millions of dollars for himself no doubt, but also to satisfy his burning hatred of America’s working class and his desire to destroy their lives. He pursued his same hateful policies against other countries as well. For example, he worked his hardest to take advantage of storms in Haiti to exterminate Haitian rice growing in order to turn Haiti into a profitable dumping ground for Arkansas rice growers. And NAFTA was partly designed to turn Mexico into a profitable dumping ground for subsidised petrochemical GMO shit-corn from the Midwest while turning America into a profitable dumping ground for semi-slave-labor high pollution low standards vegetables from Mexicon, grown on land taken away from feeding Mexicans in order to feed corporate profiteers.
Silly fools like Fukuyama were not makers of policy or even contributors to it. They were just Disney Animatronic talking Little Lawn Jockeys in front of the various branch offices of the IFTC ( International Free Trade Conspiracy).
President Jeffrey Epstein’s friend was an actual part of that conspiracy, and an economic traitor against America’s existence and survival.
Mark Pontin
“Clinton …(did what he did) … to satisfy his burning hatred of America’s working class and his desire to destroy their lives.”
Sometimes a psychopath is only a psychopath. You make it sound like it was personal, and I doubt it was.
Hugh
I remember a professor who was lecturing on Boccaccio and what he called the literature of truancy. In the US, we have an economics of truancy. The same people who shipped industries to China were the same people who set up the 2007 housing bubble and the 2008 financial meltdown. It wasn’t like they didn’t know or weren’t told what would happen. They didn’t care. And why should they? None of them paid a price, any price, for their decisions. Indeed they were bailed out and made out like bandits, which of course they were.
I am a bit of a broken record on this, but the Chinese have an imperial system and imperial bureaucracy. The directives come from the top down, but their execution is left to the local bureaucrats. That allows for a certain flexibility, but it also encourages the bottom layers not to report problems to the top and for the top to ignore problems until it can’t anymore. Think covid and the real estate sector as examples. I would add to this climate change. There is a reason that Xi is not going to Cop26 in Glasgow. Countries are running around talking about the need for deep cuts in greenhouse gases by 2030. China is not even going to stop increasing its greenhouse gases until after 2030. And while countries are talking about being carbon neutral by 2050, for China, it’s 2060. The difference between China’s much slower timetable addressing climate change would hardly go unnoticed at a venue like Glasgow. So Xi does a duck and cover.
As I said in an earlier comment, Glasgow is shaping up as a bust. Biden’s agenda is still up in the air. India still wants to use coal. Xi is AWOL. Putin can’t be bothered. Macron is more interested in post-Brexit spats with the UK. The rest is promises nobody believes or should believe.
elkern
Ian – Typo in fourth-from-last paragraph? Second use of word “Western” should be “Eastern” or “non-Western”?
Great piece, sorry for nit-picking, just just hoping to fix a little thing to make it more quotable!
Ian Welsh
Thanks Elkern, not at all, I appreciate the note. I find it hard to edit my own pieces, especially soon after writing them: I see what I think I wrote, rather than what’s actually there!
different clue
@Mark Pontin,
You may be correct. I remember reading once, but I can’t find where it was, that in 1972 , Clinton and Rodham were young campaign volunteers for McGovern. McGovern was heavily voted against by the Unionised worker class. I read that this McGovern defeat just “broke Clinton’s heart”. So I decided that part of what drove Clinton for all those decades from “then” to “now” was a burning desire to get revenge on the Unionised workers who “broke Clinton’s heart” by voting for Nixon. And Free Trade was Clinton’s way of getting revenge on them and destroying their lives for all time. That was the very first thought that occurred to me. But I could be wrong.
It could have been all about the money. And the Theory. And access to all the beautiful people that the Jeffrey Epstein’s of this world could gain Clinton access to, if Clinton made them enough money to be worth their time and kind attention.
different clue
Hugh,
The ChinaGov is playing a long-term game of Skycarbon Chicken with non-China. China will keep flooding the sky with carbon dioxide until non-China agrees that China will be the only country allowed to have advanced industry, or until we all die of planetary heat-death together.
There is much talk of the West giving a bunch of money to the Underdeveloped World so the Underdeveloped World can pay for and roll out a whole entire renewable energy support grid for itself. China hopes to completely exterminate every trace of renewable energy machinery and grid-parts production everywhere in the non-Chinese world so that if the West ever agrees to give all that money to the Underdeveloped World to buy a totally renewable grid system, that China will be the only country left on earth who can build it and sell it.
Communazi China is playing a very high stakes game and is making a very high risk gamble on its game of Skycarbon Chicken. They may win. They may lose.
bruce wilder
After all the “globalization” and “financialization” fascilitated by the web of supranational organizations put in place by the American hegemon, China acted as an old-fashioned nation-state. The nation-state remains the only strategic actor capable of carrying forward a development policy designed to benefit a broadly conceived commonwealth. The market god not so much.
Mark Pontin
“The market god not so much.”
The Invisible Hand never picks up the check.
Astrid
The real estate wealth is the result of a combination of lacking other functional investment avenues (the Chinese stock market is correctly perceived as gambling rather than “saving” and Chinese capital control makes foreign investing challenging, though still enough to blow up Canadian, Australian, and US West Coast urban real estate), decades of underhousing (the lack of residential construction into the 1980s combined with a massive post-1949 baby boom meant China’s Boomers experienced extreme housing shortage during their family formation stage), and age old respect for land ownership over other sources of income.
I don’t think it’s quite as big of a chronic problem as similar property value rise elsewhere. First, Chinese home ownership levels are very high, I believe around 90%. Even the migrant workers who are locked out of urban housing ownership and are renting, typically have a home in their ancestral village that they can return to. So homelessness or younger generation being locked out, akin to what fueled so much of the dissatisfaction in Hong Kong, plays less of a role. And while the financing is getting murkier, the banks typically only loan 50% of the purchase. So home ownership is actually ownership, not renting from the bank on condition of monthly service payments. The urban demographics are such that the younger generation isn’t housing deficient, in fact many younger couple are looking to inherit 2 or more housing units from parents in addition to whatever they might own themselves with family help. The government is also apparently rolling out subsidized housing for families with more than one child to encourage larger families.
The multi-unit ownership appears to be kept at a low level. It’s a savings and speculation vehicle by individual families. I don’t think the rent returns (something in the order of monthly rent being 1/500th of property value in Shanghai) or Chinese financing allow for growth of Blackstone like entities, though I admit that this is second hand information and a couple years dated. I don’t keep a close enough watch on China trends to know what’s happening now.
The Chinese government also has a few levers that it will likely execute at some point soon, though it’s been shy in the past because of the dampening effects on the economy and the incomes of local governments (like Hong Kong, the local Chinese governments are heavily dependent on land sales for income, and taxation of individual and business incomes is quite low). It can enforce the 50 years lease (I believe it’s even shorter for certain other types of real estate) component of housing and start collecting substantial real estate tax on older properties, which will dampen the value of new builds and create a long term government revenue stream. It’s already starting to tax non-primary residences. It can also build more government subsidized housing to compete with private housing.
I think what Xi and his cohort are planning is to wait for the right crisis to devalue and tax real estate wealth. They know this would cause great dissatisfaction amongst urbanites, who are all paper millionaires (many of them dollar millionaires, very ordinary 2 or 3 bedroom flats in Shanghai and Beijing can easily go for a million+ USD, and almost half of the people I know in Shanghai own another unit or two of rental housing, these are people earning fairly ordinary salaries but got in at there right time), so they need to wait for a crisis (competent handling of Covid had been a great accelerant, I think US hostilities with Taiwan and SCS will be provide future opportunities) for an opportunity to do what they know must be done.
Hugh
So everyone in China owns two or three houses, all built to the exacting standards Chinese products are known for. So really nothing to see here. And Evergrande never happened.
Plague Species
Planned obsolescence applied to housing. How novel of the Chinese. Like my water flosser. My second one in fact because the first one failed after one year and the Chinese company replaced it under warranty. The second one failed after a year and they would not replace it and I didn’t want them to replace it because it’s wasteful. I’ve gone back to traditional floss which is wasteful too but not nearly as wasteful as a water flosser a year in my opinion. Paper or plastic, right?
This is perfectly normal, right? This is prosperity, right? Planet be damned?
China’s Housing Sector Is Crumbling – Literally
different clue
If the Three Gorges Dam was built to the same cheap crapola standards as the crumblejunk tumbledown ghost cities were built, then millions of people along the lower Yangtze are at some measure of risk if or when that dam blows.
bruce wilder
Very competent summary, Astrid. China is remarkably well-housed: the housing stock is abundant and much of it of high quality, though some may be under-utilized.
The financial problem is very real and of a remarkable magnitude — no other country in the course of modernization ever had household savings rates like those of China, 1990-2010. Solve that problem in the wrong way and the legitimacy of the state could evaporate overnite. Ironically, one path to a solution might entail socialism: social insurance schemes.
Astrid
Bruce,
Indeed! The hyperinflation that occurred during and after WWII was a major reason for KMT’s downfall. I’ve read period Chinese essayists speak wistfully about pre-1937 prices of foods and imported luxuries such as fountain pens. They would not regain their lost material wellbeing until the 1980s, on both sides of the straits.
The CPC fears their people, they can look back 170 years and see 3 major revolutions and countless rebellions. There are numerous instances of locals who protest unfair treatment by corrupt local governments and won. That’s why they need to wait for the right moment and in the right way, before taking away much of the unearned wealth of the Chinese newly rich. Money has to be liberated from these people (this is where pretty much all my Chinese friends and associates reside) lest they become a heritary rentier class.
jrkrideau
Thank you for the reference to Ha-Joon Chang I had not discovered him before.
“Further, all evidence I have seen indicates that contrary to what I thought in the past, the Chinese Communist Party (CCP) goes out of its way to recruit smart, competent people and has thus, so far, been able to avoid the generational nepotism and degradation cycle.”
I am not sure if this is totally true but the CCP so far seems to have avoided the worst of it. Brains count and, at a guess, if there is any nepotism, it is the smartest “nephews” as the rest of the cadre has no time for dullards. The CCP seems to put a premium on competence. Of course if you have ~90 million members competition may be tough.