The Adventures of Chester: A Contrarian View of China's Future

As Hu Jintao's visit to the US winds down, allow a little bit of speculation about the future of China.

Earlier this week, the Wall Street Journal carried an article noting Hu's upcoming visit, and stating that the Chinese government's legitimacy is dually based on economic growth and nationalism.

The WSJ today carries an editorial that ends with this line:

The larger strategic bet here is that sooner or later China's economic progress will create the internal conditions for a more democratic regime that will be more stable and less of a potential global rival.

The US strategic assumption therefore is that "sooner or later, economic growth will lead to democracy." This is a controversial statement in political science circles -- there isn't any strong agreement on this, just a kind of fervent hope. Perhaps it is because of how closely Americans associate political freedom with economic opportunity. But it's still controversial.

But a completely uncontroversial statement in economic circles is that a boom-bust cycle prevails in most if not all markets and economies. Think about it: has anyone ever heard of an economy without a recession? and usually, isn't it true that the larger the boom, the greater the bust? I'm only 28, but I remember the heady days of 1999. Anyone who said a few key buzzwords and promised ridiculous market growth could get angel funding it seems. Then the bubble burst and we had a recession and now things are humming right along again.

Has China ever had a real recession since Deng liberalized the economy in 1978? There's been some slowing of growth here and there of course, but I don't believe a full-fledged recession, in which the economy actually shrinks.

Wouldn't it seem that China is . . . overdue for a recession?

No one can know how an economic retrenchment may begin. There are many possibilities:

-a collapse in the banking sector

-a decline in US domestic consumption

-oil price shocks

-deflationary slump caused by currency revaluation (as is argued by a Stanford professor in another Journal op-ed today)

But can one say, with any reasonable seriousness, that an economy which has boomed for two or three decades will not see at least one major recession?

Moreover, compared to developing countries, our recessions here in the US have been relatively mild. Consider these other Asian economic recessions:

1. Japan in early 1990s -- deflationary slump. The Japanese economy reached such lofty heights in the 1980s that the value of downtown Tokyo real estate was gauged as being higher than all of California. Fortunately, Japan has now recovered and -- as I heard on the radio the other day -- is in the midst of its second longest expansion in the postwar period, growing for 51 straight months. But from the early 90's for about ten years, Japan suffered what has become "the lost decade." "Nihon wa ima shiniso!" my host-brother proclaimed to me in 1994. "Japan is nearly dead these days."

2. Wikipedia's article on the East Asian financial crisis of 1997 notes that per capita GDP, (measured in purchasing power parity) has declined from 1997-2005 in Thailand, Malaysia, and Indonesia. In other words, those economies have been more or less stagnant overall in terms of the net effects of growth in the economy and growth in the populations ever since the currency and financial crisis of 1997.

So suffice it to say that when China has a slump or recession, there's a good chance that it won't be pretty. It will probably make one of our domestic recessions look like a single bad day at Nordstrom.

If economic growth stalls, what is to replace it as a pillar of political legitimacy? It seems there are two possibilities, more nationalism, or, in the hope of the United States, democratic legitimacy through political freedom. At the time of its recession, Japan had had a history of parliamentary elections and representative democracy for three or four decades (one could debate this given the overwhelming dominance of one party, but Japan was democratizing for a very long time to say the least). Thailand, Malaysia, and Indonesia all had some form of popular representation during their crises, though the democratization was varied in degrees in each. All of these countries though, at the time of their difficulties, were much, much, much further along the way toward representative and consensual government than China currently is.

Democracy in China seems unlikely to spring forward overnight during a time of economic crisis. It seems equally unlikely that any budding manifestations of it will suddenly blossom. Indeed, during the rural uprisings and riots we've seen trickling out in the news last year, it seems China was much more likely to send in the brute squads to put them down than to expand freedom for the rioters. Some of the freedoms the Chinese currently enjy might wither on the vine if poor economic times come along . . .

Perhaps nationalism will be intentionally spread to make up the difference in regime legitimacy?

This seems at least as likely a scenario as that of economic growth leading to greater political freedom, as is the strategy of the United States.

If China's roiling economy is one of the key pillars of regime legitimacy, I fear that the regime may soon learn what a bust is . . . and what might happen then?

In short, while everyone and their grandmother expects the "Chinese economy to surpass the US by 2030" or "China to emege as a global power" etc, I think it is just as likely that China will suffer a severe economic crisis, and do something horrible that makes it a pariah in the world's eyes -- whether internally or abroad; or that the Chinese regime could collapse under a popular uprising. I'm no expert, but it seems that if there's one place where they like to riot as much as France, it might be China. Flipping through a history of China is to read again and again of peasant or other popular uprisings.

If China transforms into a democracy with no political violence or economic hardship, we'll all break out the plum wine and celebrate. But all should have their eyes wide open as to the likelihood of more dreadful scenarios as well.

Sadly, I think there's little more the US can do than what we already are: building relationships with China's neighbors to counterbalance it if things go to heck; encouraging political freedom inside the country; trading with China; etc etc etc. The op-ed by the Stanford professor makes the case that we should quit complaining about their currency evalution, as a rapidly inflating currency was what led to Japan's deflation. I'm not enough of an economist to make heads or tails of that, but perhaps it's worth considering.

Perhaps we should just darn the torpedoes and pressure China to democratize much faster than it is, for its own sake . . . Given how many other things are on the US plate at the moment, it seems more likely that we'll kick this can down the road for a while longer . . .

Posted by Chester on April 20, 2006 9:37 PM to The Adventures of Chester