Has the West Lost It?

In the uncertain years after Mao’s death, long before China became an industrial juggernaut, a group of ambitious economics students gathered at a mountain retreat outside Shanghai. There, in the autumn of 1984, surrounded by the thick bamboo forests of Moganshan, the young scholars grappled with a pressing question: How could China catch up with the West? There had been progress in the countryside, but more than three-quarters of the population still lived in extreme poverty. The state decided where everyone worked, what every factory made and how much everything cost.

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The students were keen to unleash pent up market forces but worried about crashing the economy — and alarming the party bureaucrats and ideologues who controlled it. Late one night, an epiphany dawned on them: Factories should meet state quotas but sell anything extra they made at any price they chose. It was a clever, quietly radical proposal to re-concoct the planned economy — and it intrigued a young party official in the room who had no background in economics.

The proposal that Mr. Xu took from the mountain retreat was a pivotal early step in China’s astounding transformation. Since then, its economy has grown so fast for so long that it is easy to forget how unlikely its metamorphosis into a global powerhouse was.

China’s domestic economy now accounts for half of the increase in the world’s productivity. It leads the world in the number of homeowners, internet users, college graduates and, by some counts, billionaires. No economy in history has lifted so many, so quickly out of extreme poverty. Eight hundred million people have risen out of poverty, or about two and a half times the population of the United States. Most of this has been due to jobs created by the West. The saying goes that one job lost in Green Bay or Stuttgart is five new jobs in Guangzhou or Tianjin, due to wage differentials. Wealth, as elsewhere, has accumulated disproportionately. UBS, the world’s largest wealth manager, says China creates two billionaires a week.

A wave of officials had opportunities to enrich their friends, their relatives and themselves. Many abandoned the state and went into business. Over time, the party elite amassed great wealth, which cemented its support for the privatization of much of the economy it once controlled.

China is so populous and is developing so quickly that hardly a nation or company has not been swept into its momentous ‘gravitational pull’. Here in Switzerland, EMS Chemie reinvented itself there, building 117 turn key synthetic fiber factories throughout China with ETH trained engineers, before morphing into a specialty chemicals company. Schindler’s stunning 20-fold increase in its share price since 2000, unprecedented for any company, but especially for one producing machines, has been largely due to its role in outfitting Chinese skyscrapers with elevators and subways with escalators. The resurrection of the Swiss watch industry has been helped by the enormous demand in China for items that denote status. There are few things a Chinese man can wear that amplify his stature (and vanity), and brands such as Audemars Piguet, Breguet, and Patek Philippe are considered locally as non plus ultra. Thomas Schmidheiny told me ‘’Holcim consists of two companies; a zero growth company and a high growth company’’. Its decision to merge with Lafarge was, in the main, designed to reshuffle its activities in favor of Asia and other emerging markets. These are just a few examples.

But these forces have now given way to an epochal contest. President Xi Jinping is pushing a more assertive agenda overseas while the Trump administration has launched a trade war in what could morph into a new Cold War. Meanwhile, in Beijing the question these days is less how to catch up with the West than how fast to pull ahead without triggering its hostility. What western government doesn’t cast an increasingly suspicious eye on Chinese acquisitions of strategically important companies? Australia and New Zealand recently banned Huawei from implementing its planned 5G upgrade, saying it posed a "significant network security risk." Here in Switzerland, most experts I speak to sorely regret Chinese takeovers of Gate Gourmet, Swissport and, especially Syngenta. There are rumblings in Bern about establishing restrictions.

The pattern of a rising power challenging an established one is familiar to historians. And it has a familiar complication: For decades, the West encouraged and aided China’s rise. What major American or European company hasn’t invested their capital and technology in exchange for the allure of the world’s largest consumer market? During this time, eight American presidents assumed, or hoped, that China would eventually bend to what were considered the established rules of modernization. Prestigious publications such as The Economist and the Washington Post have long patronised the Chinese with the repetitive refrain: Prosperity would fuel popular demands for political freedom and bring China into the fold of democratic nations. Or the Chinese economy would falter under the weight of authoritarian rule and bureaucratic rot.

But neither happened. Instead, China’s Communist leaders have defied expectations again and again. They embraced capitalism even as they continued to call themselves Marxists. They have become adept at beating the west at its own game, while maintaining power without stifling entrepreneurship or innovation. Surrounded by rivals and sceptics they avoided war and presided over 40 years of uninterrupted growth, often with unorthodox policies the textbooks predicted would fail.

 

Since this Moganshan epiphany, the private sector now produces more than 60 percent of the nation’s economic output, employs over 80 percent of workers in cities and towns, and generates 90 percent of new jobs. Lim Siong Guan, the former Chairman of GIC, told me recently ‘the central bureaucrats tend to stay out of the way, as long as local governments and companies tow the party line’.

At the same time, the party invested in education, expanding access to schools and universities, and all but eliminating illiteracy. Mainland China now produces more graduates in science and engineering every year than the United States, Japan, South Korea and Taiwan combined. Chinese schoolchildren in Shanghai rank number one in PISA scores compared to peers around the world. Over the past three years, Tsinghua University produced more of the top 1% most highly cited papers in mathematics and computing than any other university in the world.

Not long ago, Chinese firms were best known for copying Silicon Valley or stealing its intellectual property. American companies now look to Alibaba and Tencent for the latest tricks that keep users glued to their phones or tempt them to buy online. Facebook recently took a page from TikTok, a Chinese service that is a sensation among Western tweens for its goofy short videos.

Data has become the ‘oil’ of the 21stcentury and AI is poised to become the next technical revolution that impacts us all. China looks to have a longer and sharper sword owing to its vastly larger population, disregard for privacy, and surfeit of computer engineers qualified to mine data. Expect many applications under the category ‘Internet of Things’ to be ‘Made in China’.

As the economy flourished, officials with a single-minded focus on growth often ignored widespread pollution, violations of labor standards, intellectual property, and tainted food and medical supplies. But prosperity has brought rising expectations in China; the public wants more than just economic growth. It wants cleaner air, safer food and medicine, better health care and schools, less corruption and greater equality. The party is struggling to deliver, and tweaks to the report cards it uses to measure the performance of officials hardly seem enough.

The world thought it could change China, but the opposite occurred. China’s success has been so spectacular that it has forced all of us to recalibrate the world we are living in based on circumstances permeated by China.

None of the participants at the Moganshan conference could have predicted how China would take off, much less the impact this would have on the rest of us.

Many questions now arise: Can China sustain this model with the United States as an adversary rather than a partner? Will it eventually crumble under the weight of its own success as Western sceptics have touted for 40 years? Or has the West lost it, and still living in a state of denial?

Transitions of empires have recurred throughout history, but they seldom occur peacefully. As Hannah Arendt once said "violence appears where power is in jeopardy”.

The world feels eerily fragile.

Small to Fail’, my forthcoming book about how some small nations are outperforming (Harper Collins):

Thank you for your continuing interest and support. Best regards,

R. James Breiding Author

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