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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2 Comments

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2 responses to “China’s Economy May Surprise its Skeptics

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