This is part 2 of three. Read part 1.
US politicians’ cynical blame of China for America’s most difficult domestic problem, the development-driven transition from a manufacturing to a services workforce has an exact counterpart in China.
That is Beijing’s tendency to cast blame outside for its own most difficult domestic developmental problem, namely the economic and political management issues that emerge from social complexity.
For China, successful economic development brings two predicaments, one domestic and one foreign.
Domestically, rapid development quickly makes the economy and society more complex. An economy that consisted predominantly of peasants, rural managers, roadbuilders and simple manufacturers suddenly has thousands of large, interconnected manufacturing industries, a complicated and transformative tech sector and a highly differentiated services sector.
A complex economy entails a complex society. In 2015, China had over seventy-seven million companies and the number was growing by 11.8% per year. People who once were satisfied by having enough to eat now want different things.
Because of China’s successful development, each sectoral group in that complex society now has money, education, and organization to push its demands, making political management of interest groups more difficult.
Large enterprises can make strong attempts to influence or capture government policies, as happened when Jack Ma criticized the state banking sector and its regulators.
This complex economy is much more difficult to manage centrally, and the complicated society is also much more difficult to manage centrally.
In all the Asian miracle economies, this rapid emergence of social complexity leads to a crisis of success. Big, government-supported companies get into financial difficulties. Often a property bubble bursts. The government experiences a financial squeeze – in China, this is manifested by local government difficulties.
Demonstrations rise: South Korea experienced the Gwangju upheaval in 1980 and Taiwan experienced the Kaohsiung riots in 1979 while in China demonstrations rose by an order of magnitude in the early years of this century; eventually the government stopped publishing statistics on the phenomenon.
Companies and sectoral associations challenge government policies and may capture parts of the state. Such crises happened in South Korea, Taiwan and Japan in the 1980s. All of them responded by accommodating the complexity through more market-oriented economics and more market-oriented politics. By accommodating complexity, they achieved stability, high incomes and high technology.
Elsewhere, established economic and political institutions frequently become so entrenched at this level of development that they are able to resist further reform of the economy. This is known to economists as the middle-income trap, which often curtails rapid economic development.
The Asian miracle economies have avoided the middle-income trap by insisting that their state-supported firms – the dozen chaebol in South Korea, the 40 Kuomintang infrastructure conglomerates in Taiwan, the government-linked companies (GLCs) in Singapore – accept the disciplines of the market, which often means government-affiliated firms being surpassed by those without government affiliations. The overall theme of accommodation is freer economic competition and more open political competition.
The smaller economies’ strategies of accommodation work – in the sense that they lead smoothly to high levels of income, technology, and stability. Future historians may look back on China’s current strategy as an alternative form of successful adaptation – or, alternatively, as an institutional reaction against adaptation that pushed China into the middle-income trap.
China’s alternative to the smaller societies’ accommodation of complexity is to fight the tide of complexity. This requires further centralization of the economy and more hierarchical politics.
Since further economic success brings further complexity, this strategy requires ever tighter controls on the government, the party, the economy, individual companies, social groups, speech, media and connections to foreigners.
Contrary to what one would expect after decades of economic improvement for all groups, and contrary to what happened in the other Asian miracle societies, development success in China has led to heightened security fears and now to adoption of policies for security that have a high cost for future economic development.
While official policy still states that economic development has top priority, the reality is a host of policies for security and political control that will reduce economic growth – policies that, intentionally or not, weaken private sector credit and investment, impose political controls on the private sector, suppress innovation, reduce foreign direct investment, increase discontent among various elites, frighten government and party officials into unwillingness to act and limit connections with the rest of the world.
As a result, total factor productivity growth has declined by about two-thirds. Absent major policy changes, these effects may well mean that mainland China will never achieve the income and technology levels of the US, the EU, Japan, South Korea, Taiwan, Singapore, Australia and New Zealand.
Although China is objectively stronger than ever, leaders express fears that, like the Soviet Union, China’s system might collapse for lack of political will. But the Soviet Union did not collapse for lack of political will. The Soviet collapse was a bankruptcy.
Decades of worsening labor, capital, and goods shortages, falling longevity, the extraordinary opportunity cost of Soviet priority for the military over everything else and rising drain from the economic cost of the Soviet empire finally led to collapse. The Soviet collapse resulted from extraordinary economic failure.
In contrast, China’s problem – the complexity revolution – results from extraordinary economic success. China has a sustainable, competitive and diverse economy. China faces no risk of Soviet-style collapse. It does face the risk of failure to adapt as successfully as some neighbors to the new era of social complexity that comes with economic success.
Abroad: the color revolution bogeyman
Likewise, China today expresses fears of foreign manipulation and of color revolutions. But the US was incapable of manipulating China’s politics even when China was poor and weak. It tried and failed. In addition, a change of political structure in Turkmenistan or Uzbekistan would be no more consequential for China than an election in Thailand, the Philippines or Indonesia.
The explosions in Eastern Europe in 1989 reflected the fact that, because of the USSR’s domestic economic failure, Moscow could no longer afford to repress its client states as it had in 1956 and 1968; Soviet problems were not caused by East European revolts. Rather, the East European revolts succeeded because of Soviet domestic economic failure.
China has no such economic failure and therefore no such vulnerability to developments in small neighboring countries. China’s problems, again, result from extraordinary economic success. But, like the US, China projects its domestic problems onto foreigners and this induces an erroneous fear of foreign influences.
As in the US, the projection of domestic problems and fears onto foreigners raises Sino-American tensions unnecessarily. It also leads China into an alignment with Putin’s Russia, because of a mistaken sense that Russia and China face the same risks.
Russia’s economy is narrowly based, largely a raw materials quarry for China and Germany. It is structured to benefit a small group of oligarchs, not to provide broad social benefits the way China’s does.
Because of a structurally unsound economy, a priority for the military that overwhelms all other priorities and disinterest in broad-based social improvement, Russia does have the same weaknesses as the old Soviet Union.
This is a sharp contrast with China’s diverse, competitive economy that is a sustainable success because it benefits every segment of Chinese society.
Russia is a weak partner for China because it is economically and socially unsound. It is a risky partner because it associates China with a dangerous, potentially nuclear militarism that infringes upon China’s principle of respect for sovereignty. This is another consequence of projecting domestic problems into the foreign realm.
NEXT: Part 3, Victim China evolves to predator as US overreacts
William H Overholt (william_overholt@harvard.edu) is senior research fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government.
This article, first published in the China International Strategy Review, is slightly abridged and republished under a Creative Commons Attribution 4.0 international license.