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China as No. 1: True or False?

Photo: David Croxford

It’s inevitable that China’s economy will overtake America’s in the next 20 years, right?

After all, Chinese gross domestic product grew at an average annual rate of 9.3 percent over the past five years, according to the World Bank, while U.S. GDP actually shrank in two of those years and ended up with an average annual growth rate of just 0.6 percent. America seems to have grown dysfunctional and barely able to tread water, while China appears to have 1.3 billion people paddling hard to get ahead.

Of course, with a population more than four times as large as America’s, everyone in China does not have to become rich for their economy to reach No. 1 in the world. Undoubtedly, the odds are in China’s favor.

Nonetheless, the obvious doesn’t always happen and to understand why, it helps to know the past. History suggests this crucial question: Is China more like Singapore or the Soviet Union?

In the 1950s and 1960s, many economists and other observers on both sides of the Iron Curtain believed the Soviet economy would overtake the U.S. within a few decades. After all, Soviet GDP grew at an average annual rate of 4.7 percent from 1950 to 1980, according to a 1987 report published in the Journal of Economic Literature; the American economy grew at an annual rate of 3.3 percent. Nikita Khrushchev, Stalin’s heir, famously boasted to Western ambassadors in 1956, “We will bury you.” Many people believed him.

Except, it never happened. One reason the Soviet economy grew so fast was it started low; Russia was likely the poorest nation in Europe at the time of the Bolshevik Revolution. China was also poor when it embraced capitalism, so rapid GDP growth was relatively easy in a globalized world economy.

The Soviet command economy, reinforced by Stalin’s terror, was very effective at building industry, but less effective at motivating workers, innovating or creating quality products. The Chinese command economy is more effective because it depends on capitalist incentives and markets, but the government’s hand is much heavier than in Western economies. Corruption, especially at the regional level, means wealth is often created by expropriating property and rights from the poor and powerless, and an incomplete legal system means businesses and individuals lack confidence in the rules.

But here is the most important Chinese-Soviet similarity: a one-party state. Like the Soviet elite, Chinese leaders prevent a pluralistic system that would allow the Communist Party to lose power. And, as long as the party elite is unwilling to give up power, it will also be unwilling to give up its economic privileges. As China’s economy matures, its political leaders will prevent the creative destruction of their huge companies and investments, and that will eventually stifle economic expansion.

Singapore is the only advanced economy governed by a de facto one-party state. Everywhere else, modern national economies thrive only under pluralistic politics. Can China change that rule? I doubt it, because China is much larger and harder to control than tiny Singapore.

So while it is likely that China and its 1.3 billion people will become the No. 1 economy in my lifetime, there is a good chance that a truly modern Chinese economy will only happen after a political revolution transforms China.

America has already had that revolution, and though our politics are often dysfunctional and sometimes dominated by narrow groups, our pluralism usually proves to be our salvation.

Further Reading

My thinking is informed by many sources, but mostly by "Why Nations Fail: The Origins of Power, Prosperity, and Poverty," by Daron Acemoglu or MIT and James Robinson of Harvard. The book is a fascinating round-the-world journey through history that explains why some nations prosper and others fail.

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