The Art of Chinese Management?

China’s continuing rise has put virtually every Western power on alert. But it would be a big mistake to see Chinese State Capitalism as inevitable. Beneath the surface, tensions are rising in Asia.

Eric Hobsbawm recently declared that the future of the world economy is that of “State Capitalism,” on the model promoted by China, where some 50 percent of the non-agricultural GDP is managed by state-owned enterprises. Somehow, we are assisting in the rise of a new dominant ideology. The success of economic and political concepts does not depend on the outcome of academic debates, but relies on the success of the powers that back it. The US is still the supreme power, but its declining dominance brings along an ideological decline. China’s story is the exact opposite.

But is this really the “big one,” a moment in history when we witness a great ideological switch from the West to Asia? Shall we believe in the fears of “The Economist”, which published a “special report” in January on The Rise of State Capitalism? The biggest concern is whether China would ever be able to withstand an economic crisis. But what analysts have termed a “downturn” for Asia’s giant is actually a monstrous economic growth of 7.5 percent, unseen in the US (almost) since 1984.

It is widely believed that, in order to remain politically stable, China must grow at least four percent per year: playing the Leviathan is a funny activity as long as more and more people can afford an iPhone. We have all but excluded the possibility of a downturn, despite the cracks that are beginning to show on the clean surface of the Chinese story.

Much has been written about the problems of the Chinese real estate bubble (which has even been honored by a Wikipedia page), or about the ramping inflation of productive factors as labor, raw material, and energy have become expensive. Yet China’s problems are not merely economic, but have a political dimension. Although it is often described as a rising ideology, “State Capitalism” is already a mature concept, as China has been constantly growing for some twenty years now. We now see problems that are typical of state-led projects: efficiency and thoughtful investment decisions are often sacrificed on the altar of personal prestige and apparatchik stubbornness. The presumption of state planners is that “they know best.”

This is a general problem, and is made even grimmer by the need to show off personal power by implementing “ambitious” state investment programs fuelled by public money. China’s GDP is driven by infrastructural investment, at a staggering 45.5 percent of GDP, whereas private demand is still lagging behind expectations.

The recent dismissal of Bo Xilai, party head in the booming municipality of Chongqing, is quite representative of the problem. Under his management, economic growth in Chongqing from 2007 to 2011 has been 15.8 percent per year on average – compared to its competitor Guangdong province (which had growth rates of “only” 11.5 percent), these are impressive numbers. Yet, in Chongqing, infrastructural investments account for some 76.2 percent of the economy. Which analyst is willing to bet that all these buildings and bridges will be productive in the future?

Like in hyper-finance, state capitalist projects begin to unravel when egos play a more important role than coherent planning. Chinese party officials may have the tendency to end up like Soviet generals, who amused themselves with state money to grow hypertrophic arsenals and increase their political clout, but only ended up squandering state revenue.

The worst mistake we could make in evaluating China is to use only economic calculus. Economics works only if it is integrated with politics and society. Take the example of Japan in the 1980s. A prominent book from 1981, “The Art of Japanese Management,” by two US professors (one from Stanford and the other from Harvard) argued that “in 1980, Japan’s GDP was third largest in the world and if we extrapolate current trends, it would be number one by 2000.” Yet, “extrapolations” did not consider the Japanese real estate bubble and the rise of China. In the early 80s everybody was afraid of Tokyo, as “Japan has come to dominate in one selected industry after another…. Japan … has maintained a very low rate of inflation [notwithstanding rising oil prices], has increased productivity, and has by most accounts proven a more competitive trading partner in the past five years than ever before.”

Somehow, one could use the same words to describe China today. Yet the future is still to be written, for better or for worse.

Read more in this column Stefano Casertano: Steady as she goes

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