- (september 2011)
The evil empire.
Ronald Reagan wasn't much of a president (he caused more problems than he
solved, see
The 13 most feared words in the English language) but he must be credited with coining an effective slogan against
the Soviet Union: "the evil empire". It was evil not so much because it was
an enemy of the USA or an enemy of democracy in general but because it
supported so many despised regimes around the world that caused the
imprisonment, torture and killing of thousands of their citizens (not that the
USA, like all previous empires, was innocent of similar crimes around the world,
but the USA also defended good regimes).
In 2011 there is a new "evil empire". This dangerous world power has defended,
supported and funded
the regime of Sudan while it was genociding people in Darfur. It has tried to
sell arms to Qaddafi's regime in Libya in a desperate attempt to salvage the
most brutal dictator of Africa (see this article).
China opposed sanctions against Iran when the Iranian regime was cracking down
on its pro-democracy demonstrations. China opposes sanctions against Syria.
China is the only ally of North Korea, possibly the most brutal regime in the
world. China is the only ally of Myanmar/Burma, the only dictatorship left
in south Asia. China befriends the most obnoxious and ridiculous leaders in
Latin America, from Castro to Chavez. China also threatens peaceful democratic
nations like Taiwan. And, finally, China bans countless websites (at one point
also the one you are reading now).
There is a fundamental difference between this new "evil empire" and
the old one: the Soviet Union was actually smart. The Soviet Union was playing
a worldwide game of strategic influences against the USA, and was almost
winning, whereas China is getting more and more isolated.
The Soviet Union was playing an effect propaganda campaign on the
airwaves and the printed press and
often winning it (whereas China is the joke of the world with its obsession to
censor everybody in the age of the Internet).
The regime of mainland China, on the other hand, is losing on all counts: it
has not created a single strong ally anywhere in the world except those that
Mao already had 40 years ago. In fact, it has lost many: the regime of mainland China never misses an opportunity to alienate an entire nation. When a dictator
falls, the people and the new regime don't forget who was supporting him until
the end. The people and governments of the world are rapidly learning that
mainland China is even more heartless and indifferent than the previous colonial
empires. To use an old Mao slogan, this "evil empire" is a "paper tiger".
Its days are numbered, and the world will be better off when this evil empire
collapses. I predict that this website and millions of websites that today are
banned in mainland China will still exist long after the evil regime of mainland
China has gone the way the Soviet Union went.
TM, ®, Copyright © 2011 Piero Scaruffi All rights reserved.
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- (january 2011)
The great illusion?
It is widely assumed that soon mainland China will pass the USA to become
the largest economy in the world. Many also believe that China will eventually
become the world's superpower.
Not long ago the same prediction was being made for the European Union.
Not long before that many (especially in the USA) believed that Japan was the
emerging superpower. Now almost forgotten, the Soviet Union was the rival
superpower of the USA for 46 years, and many were betting that the Soviet
Union, not the USA, would prevail.
Each and every time those predictions were perfectly rational: they were simply
extrapolating the political and economic data to infinite assuming that nothing
would change in the world. The hidden assumption was that the
Soviet Union was telling the truth about the size of its economy and that
it would never break down, that the European Union would keep expanding and
its currency (the euro) would become the strongest in the world,
that Japan would experience exponential growth for eternity.
The prediction that China's GDP will pass the USA's GDP is based on similar
assumptions. Notably, it is predicated on a number of implicit assumptions:
1. China is telling the truth about its economy;
2. China will not enter a protracted period of stagnation a` la Japan;
3. China will not break down like the Soviet Union did;
4. The Chinese currency (the remimbi) will increase in value;
5. China will not succumb to a major recession
6. There will be no major demographic changes in China
7. China will create a consumer market
8. The Chinese people will be moderately happy about the economic growth
9. The world economy will not change significantly
10. China is no longer under the influence of the ancient habits that made it lag behind the West
1. In the middle of the global recession the government of mainland China
announced that the economy had grown by the usual stellar percentage, but
another agency posted statistics showing a decrease in energy consumption.
That made a lot of observers suspicious of an economy that grows dramatically
while consuming less energy. If the economy was growing so fast, one also
wonders why the government decided to inject a $4 trillion dollar stimulus
into the economy (six times the Obama stimulus package in the USA).
If that was what many of us suspect it was, one
has to wonder how many other revealing statistics are not published or
doctored before being published. Mainland China is *not* a transparent system.
2. The reason that nobody predicted the multi-decade stagnation that still
afflicts Japan is that nobody realized that the Japanese economy is a
fundamentally different system from the Western economies. Japan is not a
liberal capitalistic economy. It is a unique case of oligarchy. There are
very few startups. Most of the Japanese economy depends on a handful of
conglomerates. There is little of the dynamic renewal that is typical of
the USA economy. Even within those corporations the rule are completely
different from the rules of a Western corporation.
Furthermore, Japan's population has stagnated at the same time that its economy
has stagnated, a fact that sets it apart from all known developed economies (in the past a declining population was the consequence of famine, plague or war, but not of wealth). Throughout human history, prosperity has always occurred during periods of rising population.
The Japanese system is so different
that in the 1980s the analysts used the correct data but came up with the
completely wrong prediction: they applied the data about Japan to the rules
that work with the USA economy. They don't work with a different system.
The system of mainland China is even more different than the Japanese system.
Chinese growth is largely due to central planning by the government. Entire
cities have been created not because of a vibrant startup that changed the
world but because the central government forced thousands of engineers and
workers to move to a new place. China does not have a central bank to regulate
inflation: the Communist Party is in charge of that.
The demographics is unique in the world and,
probably, in history: most families have only one child (average household size
is 3.1), and 54% of the population is male.
There is no telling which rules apply to such a unique system.
3. The Soviet Union lasted from 1919 to 1991, i.e. 72 years, whereas China
was born in 1949 and is therefore only 62 years old.
The Chinese Communist Party came out of Maoism determined to never let cult
of personality cause massive tragedies like the Cultural Revolution. Therefore
cult of personality was de facto banned by Deng and his successors. The
political leaders became faceless bureaucrats and technocrats. This approach
favored meritocracy over rhetoric and certainly benefited the overall
strategic planning. However, it also weakened the central power, and, in
particular, the power of the nominal "dictator".
Every leader after Mao has been weaker than his predecessor. Hu Jingtau is
the weakest ever. The next one (presumably vicepresident Xi Jinping) is
likely to be even weaker.
The word "dictator" hardly applies to Hu Jingtao, who seems to be little more
than a figurehead. When the USA secretary of defense visited mainland China,
president Hu Jingtao seemed to be unaware that its military had just tested
a stealth bomber, something that media around the world was reporting about.
Jiang Zemin and now Hu Jingtao, both holding an engineering degree,
are technocrats whose credentials are purely
political: the former mayor of Shanghai and the former strong man of Tibet.
Gone are the days when the leader of China (Mao, Deng) had
strong military credentials because he had personally fought in the civil war.
Furthermore,
Tibet, East Turkestan, Manchuria, Inner Mongolia and who knows how many other
regions hate the guts of the occupying Han people (the "Chinese").
The various provinces are run like personal feuds by powerful governors.
Last but not least, China has a long tradition of disintegrating into feuding
states whenever its empire gets too large.
4. A strong currency depends on a high standard of living. The standard of
living in mainland China is largely being raised by government efforts,
not by a vibrant private sector. Whether government planning alone can spread
wealth rests to be seen. We do know, though, that the vast majority of Chinese
people still live in poverty. Japan's currency started moving up when most
Japanese people were living in prosperity. It took Japan only 30 years from the
end of World War II to
raise the standard of living of its population, but Japan had enjoyed a high
standard of living before the war and only had 100 million people.
It will take decades if not centuries
for China to create a modest degree of prosperity for one billion people,
coming as it comes from the widespread starvation of the 1960s,
and accelerating inflation is even jeopardizing whatever improvement
has been gained so far.
Furthemore, China's economic growth has largely depended on exports, which
exist in the first place because of the cheap currency. The entire Chinese
economic miracle owes its existence to an undervalued currency. A strong
currency will require a radical change in the way China sustains its economic
growth or may cause the same kind of Japanese-style multi-decade stagnation.
5. China has not experienced a recession in almost 30 years. This may sound
like a plus, but it is actually a minus: we just don't know how the Chinese
system will behave when a recession finally comes. In fact, we don't even know
how people are going to behave. An entire generation of Chinese people has never
seen a recession. They got used to the idea that every year is better than
the previous one. We don't know how the people and the businesses will react
when the recession comes. Western democracies are extremely resilient to
recessions: they have had many, and they usually result in mass protests and
change of government, but not in national chaos or power collapse. Nobody
knows how the young Chinese people will do in a situation they never experienced before.
6. China's orderly economic growth owes quite a bit to the one-child policy
enacted in 1979. Since then China's population grew a lot slower than India's:
0.5% versus 13% (and even slower than the USA's 0.9%). That made it a lot
easier to raise the standard of living for its 1.2 billion people. In most
of the world economic development usually leads to slower growth rates.
Both options could be harmful to China: either the fertility rate will decline like
it did in Western Europe and Japan, leading to the same kind of demographic
crisis (younger generations have to pay for an aging population) or
the expanding middle class will demand the right to have more than one child,
and that will become not only a desirable status symbol but a rapidly
spreading novelty, leading to a rapid increase in population that requires
a rapid increase in jobs (the exact opposite of the circumstances created so
far by the one-child policy).
7. The government of mainland China is painfully aware that it needs to create
a consumer market if it wants to have stable growth that doesn't depend on
exports. Of course, that's what Japan has been trying to do for decades and it
fundamentally failed to do. China, a much bigger and poorer country, is trying
to do what Japan failed to achieve. It would be difficult enough in principle.
It's even more difficult if one realizes that China's internal economic growth
has been closely tied to private investment in real estate and to government
investment in infrastructure. Both have created lots of jobs, but not widespread
wealth. In fact, the cost of real estate has created a new young class of
city workers who cannot afford rent.
8. The government's stimulus package of 2009 ($4 trillion) and the real estate
bubble have contributed to inflation. Furthermore, the government's plan to
create a consumer market resulted in a centrally planned policy to increase
wages across the board. Only a dictatorship can think of and achieve this:
the central government ordered companies to increase wages. The companies
obeyed, but, of course, this resulted in higher production costs and therefore
in higher prices. Coupled with the worldwide increase in commodity prices
(that itself caused in large part by Chinese demand), these factors are likely
to cause inflation for a long time. There is no example in history of a country
that had inflation for a long time and no social turmoil.
9. China used to export deflation: cheap jobs, cheap goods.
That was China's contribution to the
worldwide economic boom that started in the 1990s and deeply transformed the
economy of the USA as well as many economies of the developing world.
China's labor is no longer so cheap, and it will be less and less so. On the
other hand, China's desperate need for natural resources has caused a spike
in prices throughout the world. China, that used to export deflation for the
benefit of the developed world, is now exporting inflation to the whole world.
The world economy of the last twenty years has been largely shaped by the
balance between the two giants: the USA, providing the demand, and China, providing the supply. As China becomes more relevant as a "demand" factor, the world
economy will lose its equilibrium and nobody can predict how it will change. In other words, China itself is causing a significant change in the very world
economy that helped China emerge.
10. China may have abandoned Confucianism, but in several aspects it is still
influenced by its old beliefs. First of all, the primary preoccupation of its
leaders is: stability. This is an old belief that every dynasty in Chinese
history has valued, and that ordinary Chinese have always treasured even over
personal freedom and empire building. The West, by contrast, has always
lived in instability. Some of the most monumental changes have come precisely
from extreme political instability: the Renaissance happened at the time when
Italy was split into dozens of small warring states, and the industrial
revolution started when Britain was engulfed in all sorts of wars in three
continents, etc. The very notion of stability is about avoiding change.
And the price to pay for stability is usually to suppress any innovation.
For example, today China has to twart the Internet in order to maintain
political stability. Another example of how China is still influenced by its
traditions is the way scientific research is carried out. Traditionally,
scientists were employed by emperors. That is one reason why science did not
progress in China the way it progressed in Europe (where scientists were
working outside the government). Being employed by the emperor discouraged them
from advancing new theories, from arguing with the ruling theory and from
conducting research that their employer did not care about. Today China's
science is still under control by the political establishment, in sharp
contrast with the main Western universities (that, on the contrary, tend to
become hotbeds of political dissent).
For all these reasons i am not sure at all that China's GDP will continue
to rise, let alone at the current pace, and i am not even sure that 50 years
from now China's GDP will be greater than it is today.
TM, ®, Copyright © 2010 Piero Scaruffi All rights reserved.
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