On The Economy -- The Giant Entangled

China is an economic power but not dominant.

In 1941, Henry Luce famously wrote that after the U.S. won the war, the 20th century would become the American Century. Recently, an increasing number of pundits, in a pale copy of that article, has begun to push for the 21st century as the Chinese Century.

Some 20 or 30 years ago, we were hearing similar claims about Japan, namely that Japan Inc. was going to put the U.S. out of business. It didn't happen. Japanese wages started rising rapidly and are now substantially higher than those in the U.S. Japanese imports remained restricted, resulting in an enormous trade surplus that pushed the yen to highly overvalued levels and hampered export growth. To continue an illusion of rapid growth, Japanese financial institutions loaned increasing amounts of money to unprofitable industrial firms while at the same time denying these firms were in trouble. For a while, money that was not spent on imports was funneled into skyrocketing stock prices and land values. When the bubble finally burst, consumption nosedived because of capital losses, investment stagnated because of overpriced production, and exports dropped because of the overvalued yen. The Japanese economy still has not recovered.

The Chinese have not yet developed the necessary management skills because they never lived under capitalism.
China may not follow the same route to stagnation. Nevertheless, China faces several roadblocks that in the long run may prove even more insurmountable than those that Japan faced. For example, more than 1 billion people in China still live in poverty on small, uneconomic farms, and the problem of absorbing them into a modern society will become increasingly more severe as China continues its Great March Forward to parity with the U.S. For example, many of China's western provinces are likely to face increasing turmoil from Moslem minorities. For example, the Chinese could make a tragic mistake over Taiwan.

Industrialized China is indeed expanding by leaps and bounds and is probably growing close to the reported rates of 9% per year. However, the massive agricultural interior is withering on the vine: Wages are hardly enough to provide the basic elements of survival. The Chinese have also for the most part ignored their infrastructure, and their financial sector is still as opaque as was the case in Japan 30 years earlier. The Chinese currency, the yuan, remains inflexible, and China will soon be hit by rapidly rising wages for its skilled workers. What's more, the Chinese have still not shown the aptitude for unraveling the mess left from previous bureaucracies in either manufacturing or finance.

Much has recently been made of the fact that the current Chinese leadership welcomes foreign investment and has loosened many of the previous restrictions on earning and repatriating profits. Yet the vast majority of Chinese exports are still low-tech products; China still has not taken the Giant Leap Forward into high-tech production. And the barriers to it doing so are formidable. First and foremost, the Chinese have not yet developed the necessary management skills because they never lived under capitalism. Second, a lack of familiarity with English is becoming a greater stumbling block when designing and developing high-tech products for world markets. And third, without adequate financial controls, firms will not know when their products and services are profitable, leading to misallocations of capital.

China will be a major player in the world economy -- as is already the case. But it is not very realistic to assume China will dominate the world economy in the 21st century, any more than Japan did in the late-20th century. It will be a long time, if ever, before we can certify the current century as the Chinese Century. Being a world leader takes more than simply having lots of people.

Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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