Monthly Archives: October 2013

China’s Economy May Surprise its Skeptics

For as long as commentators have warned of China’s coming world domination, others have dismissed its rise as a temporary phenomenon. The latest of the China pessimists is Josef Joffe, an influential German journalist. In the Wall Street Journal’s Saturday Essay, Joffe uses 20th century history to argue that China may never become as powerful as many assume.

His argument is based on two observations. First, he writes, every economic boom in history was followed by a slowdown. His reference to Japan is fitting: 25 years ago many Americans feared that a booming Japan would supplant the U.S. as the world’s economic superpower. But the boom was followed by two decades of economic stagnation, and Japan never came close to rival U.S. influence over the global economy.

The gist of Joffe’s argument is in his second observation. 20th century authoritarian governments have been successful at creating rapid economic growth initially, he writes – but never in the long run. Political elites in authoritarian systems resist change in order to preserve their vested interests:

“The larger the state, the richer the rents. If the state rather than the market determines economic outcomes, politics beats profitability as an allocator of resources. Licenses, building permits, capital, import barriers and anticompetitive regulations go to the state’s own or to favored players, breeding corruption and inefficiency. Nor is such a system easily repaired. The state depends on its clients, just as its clients depend on their mighty benefactor. This widening web of collusion breeds either stagnation or revolt.”

In other words: China will stagnate unless its regime is toppled by revolution. But even revolution won’t raise China’s economic bar. Unlike the classic champions of liberalism, Joffe doesn’t believe that democracy is more compatible with growth than authoritarianism: “The irony is that both despotism and democracy, though for very different reasons, are incompatible with dazzling growth over the long haul,” he writes. According to Joffe, the democratic welfare state is just as effective in slowing growth as a powerful authoritarian elite.

If we are to believe Joffe, China has no chance to become the world’s economic superpower, no matter what it does. But the problem with Joffe’s argument is that he ignores China’s ability to reform.

Pointing to the French Ancien Regime and the Soviet Union, Joffe claims that authoritarian systems are unable to reform themselves because of the power of vested interests. But China itself is the best evidence that reform of authoritarian systems is not impossible. China has all the vested interests Joffe writes about, and yet it managed a gradual transition to a semi-free market economy. If such change is possible in the face of hostile parts of political elites, there is no reason to believe that further reform won’t happen.

The Soviet Union may have collapsed, but people often forget that Gorbachev made some promising attempts to reform the system. Had he gone about it more patiently – and wisely – the Soviet Union may well have survived as a more modern socialist state, much like China did.

Over the last three decades, China’s leadership has shown a surprising willingness to reform the country’s economy. And there is a logical explanation for it: political elites in authoritarian systems want to preserve their privileges, but once a system stagnates and popular discontent spreads, the status quo becomes more dangerous to vested interests than reform. China’s regime has survived this long because it has understood this.

There are already many signs that China’s president Xi Jinping is planning further economic reforms, for example by liberalizing the country’s rigid banking sector. If China’s leadership continues to show the flexible pragmatism that has served it so well in the past, the state will retreat more and more, making way for the market.

China is able to reform its economy, which makes Joffe’s claim that the country will stagnate because of its political system at least questionable. I am not arguing that he is necessarily wrong. Perhaps China’s leadership will abandon the path of gradual liberalization and let the country’s economy lose steam – it all depends on the judgment of its leaders. But it is at least possible that the country’s economy will become more and more liberal – the prerequisite for continued growth.

Joffe makes a decent case that an annual GDP growth of 8% or more is unsustainable in the long run. But this argument is not new, and pretty much beyond dispute. The question is not whether China will slow down, but whether its growth will last long enough to make it the world’s economic superpower.

China’s economy faces many hurdles – an aging population, a lack of natural resources, possible separatist violence – and its political system may be one of them. But there is no historic law that states China can’t one day dominate the world economy.


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Runciman’s Theory of why Democracies Succeed

The question why some democracies fail and other succeed has generally been the preoccupation of those studying third-world countries, such as India and Pakistan. But the government shutdown has shown that this question should also concern anyone interested in the U.S., as the country’s political system seems more and more dysfunctional compared to Britain’s or Germany’s. The Economist recently reviewed two books by historians that take the longer view and try to explain democracies’ successes and failures. David Runciman’s The Confidence Trap: A History of Democracy in Crisis from World War I to the Present has an interesting theory, according to The Economist:

“Mr Runciman illustrates his thoughts with seven critical episodes: unforeseen war (1918), unexpected slump (1933), threats to post-war Europe (1947), possible annihilation in the Cuban missile crisis (1962), stagflation (1974), short-lived triumphalism (1989) and financial meltdown (2008).

Add those up, and you get a fair list of the challenges facing present-day democracies. So why do they repeat mistakes? Oddly, perhaps, for a historian, Mr Runciman suggests that ignoring the past is a democratic strength. Old problems recur, but never quite in the same form. Unlike autocracies, which are “fatalistic” and inflexible, democracies expect the future to be different. Counting on ceaseless change, in other words, helps democracy adapt and muddle through.”

As a historian, I am obviously a strong supporter of not ignoring the past. Had the Republicans looked back closely at 1996, they might have realized that shutting down the government was a bad idea. Either way, The Confidence Trap seems like an interesting book.

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Is Janet Yellen the Most Powerful Woman in World History?

The Atlantic’s Matthew O’Brien has a bold claim: Janet Yellen, the soon-to-be Fed Chair, will be the most powerful woman ever. While Queen Victoria, Maggie Thatcher and Merkel were or are very powerful, O’Brien argues, their power was limited by their countries’ borders. Yellen, on the other hand, will determine the economic fate of a country dominating the world economy, which gives her “more control over the global economy than any other living person once she’s confirmed as Fed Chair”.

The argument sounds compelling, but I think O’Brien overestimates the Fed’s power. Sure, the Fed could do some serious damage –  as it did with some bad decisions in 1929. But Neo-Keynesian thinkers have made a pretty compelling case that monetary policy itself can only go so far, and loses much of its impact when interest rates start nearing zero. The post-2008 crisis is a case in point. The Fed’s quantitative easing may have prevented further damage, but it was unable to create significant economic growth by itself. As long as fiscal policy doesn’t play along, Janet Yellen will by no means decide the fate of the world economy.

She will be very powerful, sure. But she won’t rule half the world – as Queen Victoria did. She arguably won’t even have as much influence as Angela Merkel, who holds the keys to Europe’s economic future.

Here’s the link:

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Weimar’s Lesson for the Tea Party

As political analysts around the world are wondering how on earth the standoff in Washington can come to an end, perhaps the more interesting question is what the shutdown will do to U.S. democracy in the long run. Weimar Germany offers a useful lesson here.

I know this is a tough sell to Americans, who tend to see their political system as so “exceptional” that comparisons to any other country are futile. But while Weimar Germany was radically different from today’s U.S., they share one very important trait: widespread disillusionment with the democratic system. Weimar shows that an unwillingness to cooperate in parliament can go a long way towards destroying a democracy.

Just a quick note up-front: I won’t claim that Republicans and Democrats have much in common with Nazis and Communists, and I don’t think the U.S. will be ruled by a fascist dictator anytime soon.

That said, the late Weimar Republic was suffering from a severe case of bipartisan (actually sept- or octpartisan) bickering that sounds awfully familiar. Germany was more or less a functioning democracy until 1930, when a grand coalition of several democratic parties led by the social democratic SPD split up over a dispute on social-spending cuts.

From 1930 until Hitler’s victory in 1933, no government had a majority in parliament. Chancellors Brüning, Papen and Schleicher had to rule by presidential decree and parliament was dissolved four times in three years. This state of chaos was the result of the parties in parliament refusing to cooperate on any issue.

The parties of the dissolved grand coalition lost their majority in the election of September 1930, which meant that any majority government would have to include a non-democratic party. The SPD and the Communists of the KPD shared many policy priorities and could have ruled together, but the KPD had categorically ruled out any cooperation. It followed Stalin’s theory of “social fascism”, claiming the SPD was the greatest enemy of the working class – more so than the Nazis.

Similarly, Hitler’s NSDAP was unwilling to cooperate with any party that supported a parliamentary democracy Hitler derogatorily called the “system”.

Hitler’s rise had much to do with his charisma, anger at the treaty of Versailles and the Great Depression. But parliament’s dysfunction – its inability to reach decisions by majority – was crucial in making voters disillusioned with democracy.

A similar process is noticeable in today’s U.S. Multi-party coalitions are obviously not an issue here. Unlike Weimar, the two-party system guarantees there is almost always a working majority in each chamber of parliament. But the impasse between House and Senate has the same effect as the lack of majorities in Weimar: It is impossible to pass a budget through the democratic process. And like Weimar, the impasse is the result of hardliners categorically refusing to cooperate.

By hardliners, I mean the Tea Party. Much has been written about both sides being at fault, but this is clearly a crisis created by a far-right group sticking to demands everyone knows can never be met – in effect refusing to cooperate. The Tea Party is intent not on running a country, but on bringing down a democratically elected government – a goal it shares with the non-democratic parties of the Weimar Republic.

Weimar shows how dangerous this strategy is. Germans voted a fascist in power in part because they saw that democracy was no longer functioning. The longer Congress is unable to do its job, the more Americans will think their system is broken – as polls show they already do.

Americans will never vote a politician as bad as Hitler into power. His rise was the product of very unique circumstances. America’s democratic tradition is much stronger than Weimar’s, and any demagogue will still consider him- or herself a democrat.

But what U.S. voters may soon do is fall for a populist politician who offers to clean up a complicated and dysfunctional democratic system. This could be a Sarah-Palin type or a more charismatic version of Ted Cruz on the right, or it could be a left-wing populist. Weimar shows that as democracy descends into chaos, voters start to long for simple solutions and a strong hand to end the bipartisan bickering. But populism and simplistic solutions are always dangerous because they undermine the foundation of democratic governance – compromise and reason.

America’s democratic system has functioned well for over two hundred years because the people trusted and supported it. Once this trust is gone, the damage may well be permanent.

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