Counting on China to save the economy is a risky bet indeed

In the year 2030, a professor stands before a classroom full of young Chinese students in Beijing, delivering a lecture on why great nations fail.

“They all make the same mistakes,” he explains, “turning their back on the principles that made them great.”*

With his students hanging on to his every word, he discusses how the United States was brought down by its efforts to tax and spend its way out of recession, making “massive changes” to health care, nationalizing private industries, and running up debts.

“Of course, we owned most of the debt,” he says, followed by an ominous-sounding chuckle. “So now they work for us.”

The students laugh.

So goes a U.S. TV commercial produced and aired in 2010 for “Citizens Against Government Waste”, just ahead of America’s mid-term congressional elections.

By standard appearances, China is becoming a power to be reckoned with.

While other countries languished in recession, China’s economy is estimated to have grown by about 10 percent in 2010. Its public debt was a mere 19 percent of GDP. If needed, it could draw from a pool of 318 million men and 300 million women fit for military service. And the wealthiest five percent of its population are greater in number than the entire population of France.

Thus, some people wonder if it might be up to China to save the world. Consider the following commentary written for Britain’s The Guardian by Dean Baker:

Can China save the world economy? That is a question that people should be asking as the other potential candidates withdraw from the race. At the moment, the economies of the United States, Europe and Japan are all suffering from weak growth or worse. The debt crisis of eurozone countries threatens another financial crisis that could lead to another plunge in output, not just in Europe but throughout the world.

[…]

With the key actors in the wealthy countries either unwilling or unable to take the necessary steps to support the world economy, it is reasonable to ask whether China can fill the gap. Certainly, China has the ability to act as a backstop for the world economy, if it chooses to play this role.

[…]

If China were to take this path, it would provide enormous benefits to the world economy. The wealthy countries would have to acknowledge China’s role as the leading economic force in the world. They would also have to acknowledge the errors of their boneheaded economic leadership that put them in a situation where they could not rescue their own economies.

Are Europe and North America doomed to kowtowing before the newly rich and powerful Chinese?

Probably no more so than we were supposedly doomed to kowtow to “Japan Inc.” in the ’80s, when a confident, disciplined and seemingly wealthy Japan looked likely to end up dictating its terms to the soft, lazy North Americans and Europeans.

If Japan had its faults — most notably a corruption problem in its government — China’s faults are even worse. Take the World Bank’s latest Worldwide Governance Indicators for instance:

  • In 2009, China scored 5 out of 100 for Voice and Accountability, meaning that Chinese citizens had about as much say in how their country is run as did citizens of Belarus, Cuba, Iran, Libya or Saudi Arabia.
  • China scored 30 out of 100 for Political Stability, putting the country roughly on par with Cameroon, Guyana, Nicaragua and Serbia.
  • China’s strong point was Government Effectiveness, where it scored 58 out of 100. But even here, there was a danger: countries where the government is effective but still refuses to give citizens a say in running the country are at an elevated risk of revolution. Bahrain, Egypt, Jordan, Syria and Tunisia suffered from particularly large gaps between government effectiveness and accountability on the eve of the “Arab Spring”, and such problems persist in not just China, but also Cuba, Kuwait, Malaysia, Saudi Arabia, the United Arab Emirates and Vietnam, just to name a few countries.
  • China scored 44 out of 100 for Regulatory Quality, meaning that oversight of critical areas of the economy is likely no better than in the Dominican Republic, Egypt, Honduras, India or Senegal.
  • China scored 45 out of 100 for Rule of Law, suggesting that the idea of everyone playing by the same rules remains a hallucinogenic fantasy. In this case, China plays in roughly the same league as Belize, Serbia and the West Bank-Gaza.
  • China scored 36 out of 100 for Control of Corruption, down significantly from the turn of the century, when China was in the high-40s. By this standard, China is roughly as corrupt as Argentina, Guyana and Zambia.

Countries with poor-to-mediocre governance indicators are a risk to their neighbours, their trading partners and their investors. Government ceases to exist for the equal benefit of all, laws are enforced or ignored whimsically, and discontent is repressed and denied an outlet until one mistake by the government causes a sudden, violent backlash.

The risk is that, behind the happy face of an increasingly prosperous and self-confident China, is a country seething with discontent — and that one wrong move by the country’s leaders could produce the same sudden outburst of public anger that the world recently witnessed in Egypt, Libya and Tunisia.

The worst-case scenario would be to have such a flash-over happen back-to-back in China, the world’s third-largest economy, and in Saudi Arabia, the world’s largest oil exporter.

That could make the Greek debt crisis look like a walk in the park.

* – As an aside, I would say that the main threat to the U.S. is the perception that its government is too unaccountable (being roughly on par with Spain and Uruguay in this regard) and is in need of tougher anti-corruption safeguards (where America’s system of government is perceived to be no more honest than Japan’s, and less honest than Chile’s).

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About theviewfromseven
A lone wolf and a bit of a contrarian who sometimes has something to share.

2 Responses to Counting on China to save the economy is a risky bet indeed

  1. Fat Arse says:

    Good post. The possibility of political upheaval in China stemming from a grassroots backlash against systemic economic inequality is a concern that too few have taken the time to analyze. A friend of mine originally from one of the “hinterland” provinces repeatedly tells me I should not be surprised if, in the near future, the authoritarian Chinese state finds itself in the midst of a crisis it cannot manage. He speaks both sincerely & gravely of the possible regional geopolitical ramifications… it’s something I now take much more seriously.

  2. LC says:

    Globalization has destabilized economies which have had a negative impact , with the positive being since we are all in the same boat now, we are more aware of each other.

    Watched the IMF town hall this weekend and i got the distinct impression all they were concerned with was their status.

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