CHINA’S ECONOMIC RISE

    The spectacular and meteoric rise of China in the latter half of the twentieth century has compelled the world to sit up and take notice of China as never before. But as we have seen in the discussion under the previous topic namely, China as a Civilizational State, China is one of the most ancient great civilizations that the world has seen and that its present meteoric rise is not the first time that it has dazzled the world by its economic achievements, but it has also witnessed prolonged periods of extreme economic decline and impoverishment. It would therefore be interesting to see, at a glance, the phases of economic growth and decline and the factors responsible for those ups and downs and its/their relevance to the present phase and the conclusions that we may safely draw from the same. The noted British Economist Angus Maddison, who specialised in quantitative macro-economic history, was also known for documenting economic performance over long periods of time and across major countries spread over every continent of the world. According to Prof. Maddison’s estimates, China was the only region in the world with a lower GDP per capita in 1950 than in the year 1000. [A. Maddison, “The World Economy”, 2006, OECD Publishing, as cited by Matt Ridely in “The Rational Optimist: How Prosperity Evolves”, Harper Collins, New York, 2010, page 180]. As can be seen from history China went from a state of economic and technological “exuberance” in around AD 1000 to one of dense population, agrarian backwardness and desperate poverty in 1950. As Ridely recounts and observes “The economy first truly prospered in the unstable Zhou dynasty of the first millennium BC. Later, after the Han empire fell apart in AD 220, the Three Kingdoms period saw a flourishing of culture and technology……China experienced its most spectacular burst of invention, which the Song dynasty inherited.” [Matt Ridley, Op. Cit. page 180]. But as we have seen in the previous chapter when we considered the Examination System which was the hallmark of the Confucian system, it created a merit-based bureaucracy which in the course of time became all powerful. It is a matter of general experience, that bureaucracies tend to get entrenched over a period of time and develop vested interests of their own which are more often than not in conflict with the interests of the people at large. While bringing about administrative consolidation and maintaining stability initially, the Chinese bureaucracy which was the product of the examination system, which in turn owed its origins to the Confucian system, eventually stifled the Chinese society and killed its initial sprit of enterprise and thus progressively impoverished the society and the nation as a whole. The whole process as it unfolded in China is best described by Ridley and I just cannot resist the temptation to quote from Ridley, rather extensively, because it gives us in a nutshell, all that went wrong with the hitherto flourishing economy of China as the Ming dynasty and its bureaucracy progressively ruined it irretrievably. So, then let’s have it in Ridley’s own words:

   “Not only did the Ming emperors nationalize much of industry and trade, creating state monopolies in salt, iron, tea, alcohol, foreign trade and education, but they interfered with everyday lives of their citizens and censored expression to a totalitarian degree. Ming officials had high social status and low salaries, a combination that inevitably bred corruption and rent seeking. Like all bureaucrats they instinctively mistrusted innovation as a threat to their positions and spent more and more of their energy on looking after their own interests rather than the goals that they were put there to pursue. As Etienne Balazs put it:

‘The reach of the Moloch-state, the omnipotence of the bureaucracy, goes much further. There are clothing regulations, a regulation of public and private construction (dimensions of houses); the colours one wears, the music one hears, the festivals- all are regulated. There are rules for births and rules for death; the providential state watches minutely over every step of its subjects, from cradle to grave. It is a regime of paperwork and harassment, endless paperwork and endless harassment.’

Do not be fooled by the present tense: this is Ming not Maoist China that Balazs is describing.” [Ridley Op. Cit. pp. 182-183] (bold emphasis mine). Incidentally Etienne Balazs (24th January 1905-29th November 1963), whom Ridley quotes, was a Hungarian born French Sinologist, who was trained in Chinese studies in Germany. The passage that Ridley quotes is from a collection of Balazs’ essays “Chinese Civilization and Bureaucracy”. The relevance of this to the present-day scene in China is too obvious to be missed, but more about it a bit later. The self-destructive policies followed by the Ming dynasty and its all-pervading bureaucracy eventually led to China’s ruin, as it was bound to. Whenever regimes and bureaucracies become entrenched over a period of time, they outlive their initial utility and usefulness, thereafter the law of diminishing returns sets in. And so, it did in China too, as Angus Maddison has so ably demonstrated.

            The establishment of the Peoples Republic of China under Mao and the Communist Party of China (CPC for short) in 1949, once again brought consolidation and territorial integrity and unity, but hardly any economic development. On the contrary, Mao’s communism not only threw China into an unprecedented period of turmoil and upheaval which progressively impoverished China, but increasingly brought it into conflict with its ideological brother state, the Soviet Union. The PLA and the Soviet Red Army found themselves frequently drawn into eyeball to eyeball confrontation/s on the borders shared by both the nations. In 1969 the Soviet Union seemed almost on the verge of attacking China. Mao was cornered, internally too as the anarchical aspects of his disastrous Cultural Revolution had brought China on the brink of complete economic ruin. Mao now embarked on an ambitious reversal of direction. He moved to mitigate the rigours of the Cultural Revolution and in order to end the anarchy unleashed by his own Red Guards, he ordered the armed forces to crack down on the Red Guards and had them sent to the vast country side, eventually condemning them to join their erstwhile victims (thousands of Chinese people had been forcibly sent to the country side during the Cultural revolution) to carry out forced labour. Incidentally the Red Guards were a student-led paramilitary social movement mobilized and guided by Chairman Mao himself, in 1966-67 when he unleashed the cultural revolution on China, which had already suffered grievously five years earlier during the great famine in China and the so called “Great Leap Forward” when as estimated 30 million Chinese perished. A leader of the Red Guards articulated the aims of the movement thus:

          “Chairman Mao has defined our future as an armed revolutionary youth organization...So if Chairman Mao is our Red-Commander-in-Chief and we are his Red Guards, who can stop us? First we will make China Maoist from inside out and then we will help the working people of other countries make the world red...And then the whole universe.” [Chong Woei Lien (3rd September 2002). “China’s Great Proletarian Cultural Revolution: Master Narratives and Post-Mao Counternarratives”, Rowman & Littlefield. As cited in en.wikipedia.org/wiki/Red_Guards, accessed on 11th June 2020). (bold italics mine)

Incidentally, it is worth noting that the avowed aim of the Red Guards, was first, to make whole of China Maoist, then to make the whole world, red and then, the whole universe (whatever that means). So once again it is the ancient imperial Chinese conviction that it has a mandate from heaven, to rule not only the whole world but the whole Universe, so long live “Emperor” Mao and the Chinese “Empire”. Be that as it may, any volunteer organization or paramilitary movement given such a Carte Blanche by the powers that be, inevitably morphs into a cabal and becomes a law unto itself and that is exactly what happened with the Red Guards. Having thus neutralized the Red Guards and mothballed the Cultural Revolution, Mao now moved to checkmate the Soviet Union by reaching out to his erstwhile and most vilified adversary, the United States of America. Richard Nixon was the president of the United States at the relevant point of time when Mao embarked upon this momentous change of course. But the real architect of this diplomatic high drama that was to play out on the world scene shortly, was the then US Secretary of State, Henry Kissinger. So, let’s have it in Kissinger’s own words, the Sino-US rapprochement and its immediate as well as long term aftermath and once again I cannot resist the temptation of quoting Kissinger rather extensively here:

“Mao calculated that opening with the United States would end China’s isolation and provide other countries that were holding back with a justification for recognizing the Peoples Republic of China. (Interestingly, CIA analysis, written as I was preparing for my first trip, held that Sino-Soviet tensions were so great as to make a US-China rapprochement possible but that Mao’s ideological fervour would prevent it in his lifetime.)

     Revolutions, no matter how sweeping, need to be consolidated and, in the end, adapted from a moment of exaltation to what is sustainable over a period of time. That was the historic role played by Deng Xiao-Ping. Although he had been twice purged by Mao, he became the effective ruler two years after Mao’s death in 1976. He quickly undertook to reform the economy and open up the society. Pursuing what he defined as ‘socialism with Chinese characteristics,’ he liberated the latent energies of the Chinese people. Within less than a generation, China advanced to become the second largest economy in the world.” (bold emphasis mine) [Henry Kissinger, Op. Cit. pages 224-225]

China, under Deng’s leadership embarked upon its path of radical economic reform dumping communist dogmas and embracing the market economy. It was in the Third Plenum of the Party Congress’ 11th Central Committee which opened on 22nd December, 1978, that the Party leaders decided to undertake a programme of gradual but fundamental reform of the economic system. There was a candid acknowledgment that the Maoist version of the centrally planned economy had failed to produce efficient economic growth and had caused China to fall far behind not only the industrialized nations of the West but also the new industrial powers of AsiaJapanSouth KoreaSingaporeTaiwan, and Hong Kong or more popularly known as the Asian Tigers. However, the purpose of the reforms was not to abandon communism but to make it work better by substantially increasing the role of market mechanisms in the system and reducing-not-eliminating government planning and direct control. The first two years of the reforms were termed as “period of readjustment”. Reforms introduced during this period were incremental in nature. Initially such reforms were introduced in limited areas or zones and depending upon their success they were then extended to other areas. During this period of readjustment The major goals of the readjustment process were rapid expansion of exports; overcoming key deficiencies in transportation, communications, coal, iron, steel, building materials, and electric power; and redress the imbalance between light and heavy industry by increasing the growth rate of light industry and reducing investment in heavy industry. A boost was sought to be given to agricultural production in 1979 by effecting an increase of over 22 percent in the procurement prices paid for farm products.

           One of the most successful reforms, known as the contract responsibility system of production in agriculture, was introduced in 1979 as a way for incentivising poor rural units in mountainous or arid areas to increase their incomes. This system allowed individual farm families to work a piece of land for profit in return for delivering a set amount of produce to the collective at a given price. This arrangement created strong incentives for farmers to reduce production costs and increase productivity. Soon after its introduction the responsibility system was adopted by numerous farm units all over China. Free farmers' markets were established in urban areas, as well as in the countryside, by allowing some families to operate as "specialized households," for producing a scarce commodity or service on a profit-making basis.

                            In industry, Innovative policies were adopted by allowing a fair degree of autonomy to enterprise managers, de-emphasizing planned quotas, allowing enterprises to produce goods outside the plan for sale on the market, and permitting enterprises to adopt appropriate measures such as bonuses in order to incentivise higher productivity. A fundamental change in financial procedures was sought to be effected in a limited number of state-owned units: rather than remitting all of their profits to the state, as was normally done, these enterprises were allowed to pay a tax on their profits and retain the balance for reinvestment and distribution to workers as bonuses. A cluster of policies based on greater flexibility, autonomy, and market involvement significantly improved the opportunities available to most enterprises, generated high rates of growth, and increased efficiency. Enterprise managers gradually gained greater control over their units, including the right to hire and fire, although the process required endless struggles with bureaucrats and party cadres (this aspect particularly needs to be appreciated in the present Indian context where several states, mainly BJP ruled, have liberalized their labour laws by exempting industries from the plethora crippling labour laws which have been the biggest stumbling block in our aim of ease of doing business. Already voices of protests have started emanating from the usual quarters of the left liberals. Bureaucratic stumbling blocks by bureaucrats who have their vested interests in the present system and are yet to shake themselves free from their socialist hangovers of yesteryears, are also doing their bit to stymie our own reform process). The practice of remitting taxes on profits and retaining the balance came to be well established by the year 1985, thereby further incentivizing enterprises to maximize profits and substantially adding to their autonomy. There was an exponential rise in the volume of foreign trade. Hitherto, in the pre-reform period, the combined value of exports and imports put together never exceeded 10% of the national income. However, in 1969 it was 15%, in 1984 it rose to 21% whereas in 1986 it rose to 35%. The most conspicuous symbols of the new status of foreign trade were the four coastal special economic zones (SEZs), which were created in 1979 as enclaves where foreign investment could receive special treatment. Three of the four zones namely, the cities of Shenzhen, Zhuhai, and Shantou, were located in the Guangdong Province, close to Hong Kong. The fourth, Xiamen, was in Fujian Province, which was directly across the strait from Taiwan. More significant was the designation in April 1984 of economic development zones in the fourteen largest coastal cities- -including DalianTianjinShanghai, and Guangzhou—all of which were major commercial and industrial centers. These zones were to create productive exchanges between foreign firms with advanced technology and major Chinese economic networks. Cities such as Shanghai have become showpieces of the new China.

                          China aimed at becoming the manufacturing hub of the world by opening its doors to companies from America and Europe to shift their manufacturing bases from their mother countries to China by offering its unimaginably cheap labour as an incentive. Companies, shifted their manufacturing bases to China from all over the world, lock, stock and barrel. Within no time a majority of goods, of all descriptions, sold in the world markets bore the “Made in China” stamp. Common people the world over were suddenly taken aback by this phenomenon and marveled as to how China could work out this miracle without anyone getting so much as an inkling as to what was going on, hardly realising that the brand and the companies were still western, but they were manufacturing in China and from China, and it did not mean that the products were manufactured by China or Chinese companies. Be that as it may, it cannot be disputed that this sudden opening up of their markets brought in unprecedented increase in the rate of growth in the Chinese GDP which averaged 10% from 1978 to 2005 and it must be admitted that this was a stupendous achievement by any standards. To give just one example of what this growth meant in practical terms, in 1978 China manufactured 200 Air-Conditioners, in 2005 it manufactured 48 million.

                           China’s achievements, stupendous as they are, also betray a certain Achilles’ heel which also needs to be taken note of by the world and especially during this present COVID Pandemic period and as the world economies slowly emerge out of the present morass. It is clear that China is facing and will increasingly face massive headwinds in the years to come and all is not going to be smooth sailing for them heretofore. At one level, the high growth rates of the reform period, which were the result of massive mobilization of resources, and the shifting of the control of those resources from public to private ownership, allowed for improved efficiency in the management of those resources. But the benefits reaped from this era are now gradually and inevitably coming to an end and China will have to rely more on efficiency improvements in the future if it is desirous of sustaining its present economic trajectory and build further on it. But for sustaining such high growth and consolidating on the initial economic miracle requires every society to continuously innovate and adapt and constantly give rise to new ideas. Matt Ridley (op. cit.), speaks about ideas mating with one another and just as when humans mate, they give birth to new human beings, so when ideas mate they give birth to new ideas. For ideas to mate what you require is a free market of ideas. Just as in case of economic growth you require a free market of goods and services, which generates and creates wealth, to sustain this growth of wealth you require a free market of ideas which will generate and create new ideas. The Strength of the western capitalism lies in the fact that it stands on the bedrock of liberal democracy and this democratic system provides the space required for the system to come up with new and fresh ideas to deal with the crisis, which every economic system is prone to time and again, and bring about a course correction. This is how the western capitalist system has always managed to from every crisis, confounding the leftists, the rightists, the evangelical religionists of every description who always rush to write its obituary at the whiff of every crisis. In short, without a free market of ideas a free market economy of goods and services is not sustainable for long and that precisely is the Achilles’ heel of the China. As we have seen in the previous quotation from Henry Kissinger (op. cit.) he speaks of Deng Xiao Ping “quickly took to reform the economy and open up the society.” One wonders on what evidence Kissinger made this observation, because even though Deng certainly introduced widespread and rapid economic reforms which propelled China on its high growth trajectory, neither Deng nor any of his successors, least of all Xi Jin Ping, have done anything even remotely resembling “opening up of society” as observed by Kissinger. Kissinger’s observation was not based on any evidence or signs of the Chinese society being opened up but the general knowledge and belief that a vibrant economy cannot thrive for too long in an essentially closed and regimented society. But there is one more reason why American diplomats, politicians as well as its giant Corporate world  were so taken in by China and laboured under the fond belief that eventually, as China prospered it would progressively democratize and that is the Americans were simply dazzled by the sheer size of China and drooled at the prospect of getting their hand in the growing Chinese pie. As Fareed Zakaria puts it “Americans may admire beauty, but they are truly dazzled by bigness. Think of the Grand Canyon, the California Redwoods, Grand Central Terminal, Disney World, SUVs, the American Armed Forces, General Electric, The Double Quarter Pounder (with cheese) and the Venti Latte. Europeans prefer complexity, the Japanese revere minimalism. But Americans like size, preferably supersize……That’s why China hits the American mind so hard. It is a country whose scale dwarfs the United States.” [Fareed Zakaria, “The Post American World”, W. W. Norton & Co., New York (2008) p. 87]   And yet, the scene in China today is exactly the opposite of opening up, Xi has managed to bamboozle the Chinese law makers to meekly support constitutional changes which have resulted in Xi’s tenure at the helm of the China, extended for his lifetime. He is now the supreme leader of China having officially received the title of “Leadership Core” which has now elevated him to the same status as Mao Ze Donga and Deng Xiao Ping. Recently, on social media Xi was caricatured as the famous cartoon character of Winnie the Pooh. No sooner than the said caricature appear on the social media, the very cartoon character Winnie the Pooh itself was effectively banned in China. This is the level of paranoia that prevails in China today. Even the slightest or most oblique criticism of the present regime is not tolerated. But then it was not at all surprising, because whether it was Deng Xiao Ping, Hu Jin Tao, Jiang Zemin or Xi Jin Ping, the Chinese Communist leadership never for a moment even contemplated ceding their political control over power, or opening up the society as Kissinger and other westerners fondly hoped for.

                                 The point therefore now is, can China continue with this inherent contradiction of a totalitarian political system, which no more pretends to being democratic, married to a free market economy? And if yes for how long before it falters? Any hopes that the outside world may have had of the progressive democratization of China were soundly dashed when the Chinese leadership used decisive force against the unarmed protestors gathered in the Tiananmen Square demanding democratic reforms, in 1989. The only lesson that the Chinese Communist leadership seems to have learnt from the collapse of the Soviet Union, is that ideological and nationalistic fervour cannot be a permanent substitute for material prosperity, for the people. If people’s yearning for a better and prosperous life is not addressed and met by the rulers, then sooner rather than later the people will rise against the system and the system will collapse. The Chinese therefore unabashedly embraced capitalist market economy to give their people a better and prosperous life and believed, and continue to believe that once the people are kept happy and well fed and clothed with luxuries thrown in for good measure, no one will bother about freedom and democracy anymore. But they are increasingly likely to learn a bitter lesson and that is that material prosperity and a better and materially contended life whets—does not diminish-people’s appetite for liberty and freedom. Tiananmen Square protests were a wakeup call which the China’s communist rulers have chosen to ignore and believe that the use of brute force will do the trick in the future too. Once again to quote Zakaria (it bears noting here that Zakaria’s words are of 2008, when everyone in the west firmly believed that with a free market economy in China democracy will not be far behind) “In a balanced essay in Foreign Affairs, Thornton (Zakaria cites here John Thornton, ‘Long Time Coming: The prospects of democracy in China’, Foreign Affairs 87, no. 1 (Jan/Feb 2008):2-22), paints a picture of a regime hesitantly and incrementally moving towards greater accountability and openness……Incremental steps may not be enough. China’s ruling Communists should read, or reread, their Marx. Karl Marx was a lousy economist and ideologist, but he was a gifted social scientist. One of his central insights was that, when a society changes its economic foundations, the political system that rests on it inevitably changes as well. As societies become more market oriented, Marx argued, they tend to turn towards democracy.[Zakaria, op. cit. p.101-102] (bold italics and emphasis mine). It appears that the Chinese Communists believe that they will be an exception to this immutable rule. No one should be taken in by the ever new phrases and slogans invented by every new Chinese ruler, be it “Market Socialism”, “Socialism with Chinese characteristics”, “Socialist spiritual civilization” etc. they are all euphemisms for Communist totalitarianism, and that too, communist only in name. The Chinese system is increasingly morphing into a brazenly fascist system with a claim to a divine right to rule the whole world on the basis of some innate Chinese cultural (read racial) superiority. The system is therefore going to find itself, internally coming into conflict with the people’s democratic aspirations and externally in conflict with most of the world. The signs of that happening were already becoming visible in the form of such expansionist programme as BRI and have only accelerated with the COVID 19 pandemic. China therefore now faces a massive pushback from around the world. It would be interesting to see how the regime navigates its way in the gathering storm. With this we can now turn to the next important topic regarding China’s strategic/military profile.

- Adv. Kishor Jawle