The Chinese Shadow: Three Billion New Capitalists: The Great Shift of Wealth and Power to

Robert Skidelsky – New York Review of Books

Copyright nybooks
Volume 52, Number 18 · November 17, 2005
Three Billion New Capitalists: The Great Shift of Wealth and Power to
the East
by Clyde Prestowitz
Basic Books, 321 pp., $26.95
China, Inc.: How the Rise of the Next Superpower Challenges America and
the World
by Ted C. Fishman
Scribner, 342 pp., $26.00
The “rise” of China has suddenly become the all-absorbing topic for
those professionally concerned with the future of the planet. Will the
twenty-first century be the Chinese century, and, if so, in what sense?
Will China’s rise be peaceful or violent? And how will this affect the
United States, the current “hyperpower”? In fact, China has been
“rising” for some time (after several hundred years of “fall”), but for
many years its claim to notice was obscured by more exciting events.
Attention in the 1990s concentrated on the fall of Soviet communism,
“globalization,” the spread of democracy, and the high-tech revolution.
These developments, which left America as the world’s sole economic and
political superpower, seemed to belie Paul Kennedy’s prediction in 1987
of relative US decline and “more of a multipolar system.”[1]
The attack on the World Trade Center in 2001, together with the
concurrent collapse of the high-tech bubble, exposed America’s
fragility, but this was masked by the hyperactivity of the Bush
administration. The “war on terror” planted American armies in
Afghanistan and Iraq; the Clinton surpluses were succeeded by the Bush
deficits to shore up the economy and finance the military operations.
However, as the Iraq escapade foundered and the deficits ballooned, the
sense of relative decline reasserted itself. Unlike in 1987, there was
now a clear candidate for the succession: China. This was especially so
as the US economy became dependent on China’s bankrolling its huge
deficit. The dream of an “American century” receded, to be replaced by
the nightmare of a “Chinese century.”
Focus on China is overdue. For the last quarter of a century its
has been growing by over 9 percent a year, increasing eightfold.
However, it is not just this long-sustained hyper-growth rate that
amazes and alarms the observer. It is the size of the economy which is
growing. China’s population is officially estimated at 1.3 billion, but
is probably larger—one fifth of all the people in the world. This makes
its rise much more important than that, say, of Japan in the 1960s.
the economic point of view its cheap labor is much more abundant, so
cost advantage will not quickly be eliminated. The size of an economy
obviously matters, too, in measuring power. The Chinese economy, in
terms of the purchasing power of the Chinese people, is about two
the size of the US economy.[2] If it continues to grow at 9 percent a
year, it will overtake the US by 2041. Lee Kwan Yu of Singapore
that the rise of China will shift the balance of power back to the East
for the first time since Portuguese caravels arrived there in the
sixteenth century.
China’s growth, simply because of its size, is bound to create problems
both for itself and others. From the Chinese leadership’s point of
the main problem is how to maintain social cohesion amid the vast
socio-economic upheavals going on. Apart from the environmental
degradation and rampant corruption, China’s pell-mell, and largely
uncontrolled, economic growth is disturbing its domestic stability in a
profound way: there is a huge floating population without settled jobs
or abodes, and a development and income gap between the coastal and
inland areas which is as big as between the United States and North
Africa. According to one estimate, 30 percent of China’s urban
workforce, or 200 million people, is currently unemployed or
underemployed. The livelihood of another 100 million agricultural
workers is threatened as World Trade Organization rules increase
dependence on foreign food supplies. The specter of chaos frightens the
rulers in Beijing.
In international relations, the issue is whether China’s impact on the
world will be peaceful or violent. The debate here follows disciplinary
lines. “Those who focus on economics tend to see partnership,
cooperation and reasons for optimism despite ten-sions, while security
experts are more pessimistic and anticipate strategic conflict as the
likely future for two political systems that are so different,” writes
one commentator.[3] Both views can claim some evidence in their favor.
On the one hand, the concessions China made to foreign investors and
corporations in order to gain entry to the WTO show a readiness to play
by the established rules of the game. It has embarked on a “charm
offensive” premised on its “peaceful rise.” On the other hand, its
voracious appetite for oil and raw materials opens up a familiar
geopolitical struggle for control of their supply. Its bid for Unocal,
the ninth-largest oil company in the United States, had to be withdrawn
in the face of congressional opposition. As the only country likely to
counterbalance the economic and political weight of the United States,
China is being wooed by those who want insurance against American
domination; in turn it plays host to such unsavory characters as Robert
Mugabe, president of Zimbabwe, and Islam Karimov, the brutal president
of Uzbekistan. The slogan of the “peaceful rise” is challenged by
Chinese nationalists in the Foreign Office and military establishment
and their affiliated scholars, who argue that it encourages Taiwan to
bid for independence.
However, the theory that economic relations are the peaceful form of
international relations, and geopolitics is the warlike form, is much
too simple. The growth of China’s exporting power—in ten years its
exports to the US have risen from $35 billion to $200 billion a
already produced a “bra war” with Europe and tensions over currency
the US. (The recent 2.1 percent revaluation of the renminbi has not
quelled American accusations that China is deliberately undervaluing
currency to gain export advantage.) Moreover, economics and politics
cannot be so easily separated. China is both an engine of globalization
and a rising military power, a “Wal-Mart with an army.” The US worries
that the expansion of China’s economic presence will be accompanied by
the expansion of its military presence. Changes in the international
distribution of global wealth, even if peacefully achieved, are bound
have implications for the distribution of global power. If China rises
economically, America falls politically. The historically minded recall
the years of Anglo-German trade rivalry which preceded World War I.
Concern about China’s impact on the world is heavily influenced by the
nature of its regime. India, which has recently been growing as fast as
China, and which will soon have even more people, hardly fills the West
with the same foreboding, because it is a democracy, and, as we are
continually told, democracies “never go to war with each other.”
The success of the Chinese Communist Party in retaining political
control over China has dimmed the sense of Western triumphalism induced
by the collapse of the Soviet empire. Twentieth-century communism,
unlike nineteenth-century Marxism, promised economic development at the
price of political freedom— “electrification plus the Soviets” in
Lenin’s telling phrase. Wherever it triumphed, a single-party state was
established, and the economy was collectivized and centrally planned.
When the Communist economy failed, the Communist system was dismantled—
completely in Russia and Eastern Europe. In China, the Communist
paramount leader Deng Xiaoping adopted a different strategy. He
that in order to save the Communist dictatorship, he had to create an
economic system that worked. From 1978 onward, he started
decollectivizing the economy. In Russia, Mikhail Gorbachev destroyed
Communist Party rule in a failed effort to create a “humane” communism;
in China Deng saved Communist rule by embracing capitalism.
So far his formula has worked brilliantly. Not only have tens of
millions enriched themselves, as Deng told them to do, but absolute
poverty, defined as living on $1 a day or less, has fallen from 64
percent to 17 percent of the population. In politics, information is
controlled, dissent is ruthlessly suppressed, and continuity with the
takeover of 1949 is asserted. The motto is: “We will give you freedom
make money, but politics is off limits.” Mao Zedong, exposed by Jung
Chang and Jon Halliday in Mao: The Unknown Story as brutally and
cynically responsible for the death of millions, remains China’s
icon. His giant portrait dominates Tiananmen Square; his face still
appears on yuan notes. He has even been rebranded to serve business
needs as a kind of Chinese Colonel Sanders, advertising food products
outside the restaurants in Hunan, his home province. There has been no
official repudiation of Mao’s legacy, even one like the limited
denunciation of Stalinism which Khrushchev undertook in 1956.
A Westerner will doubt that this duet of Party dictatorship and
freedom can continue. Although Party monopoly over the public sphere is
maintained, control over the budget has been largely decentralized to
provincial and municipal levels. Optimists say that democracy will come
incrementally, starting with provincial elections, as the middle class
grows. Fiscal devolution could crack the monolith. Pessimists argue
the loss of control accompanying precipitous economic growth and the
decline in state revenues could set off either a new bout of
“warlordism” or force a paranoid regime into a new bout of political
repression that will make Tiananmen Square seem like a vicar’s tea
party. Whatever choices may be allowed in provincial elections, no new
party will be allowed to present its case. Had China’s growth been
slower, its political prospects might be more benign.
For instant expertise on China all that is required is “a rush of
statistics, an occasional nod to history, a Confucian aphorism or two
and, hey presto, we can all grasp the vast meaning of the Middle
Kingdom’s re-emergence as a global power.”[4] This is certainly the
impression conveyed by Clyde Prestowitz, a former trade official in the
Reagan administration. Though the title of his book, Three Billion New
Capitalists: The Great Shift of Wealth and Power to the East, suggests
focus on Asia, it is really a “wake-up call” to America. His thesis,
chattily if not wittily expressed, is that the virtually endless supply
of labor in China and India, combined with the negation of time and
distance by the Internet and global air delivery, portend the ruin of
American manufacturing and a long-term decline in American living
standards. Already America is living beyond its means.
In essence, Prestowitz tells the familiar tale of Western capital
investing abroad to relieve squeezed margins at home. Outsourcing,
contracting, and eventually offshoring were ways to reduce American
corporate costs and increase sales in face of Japanese competition and
the pressure of consumerism. Outsourcing begat offshore manufacturing.
In the 1980s Motorola, Intel, and Texas Instruments began to transfer
the labor-intensive side of their manufacturing to Malaysia, Singapore,
and Taiwan. Sears Roebuck contracted with textile factories in Japan to
get the best deals for their customers. East Asia became a buying
for US retailers and an assembly line for US manufacturers.
China, Prestowitz writes, was interesting for two reasons: “endless
cheap labor to produce low-cost products for export, [and]…the
potential to become the world’s largest market.” Retailers and
manufacturers switched to China because its prices were cheaper.
Building and equipping factories cost less, and low-cost labor can be
substituted for machinery. Today China produces two thirds of the
world’s photocopiers, shoes, toys, and microwave ovens, half of its DVD
players, digital cameras, cement, and textiles, 40 percent of its
one third of its DVD-ROM drives and desktop computers, a fourth of its
mobile telephones, TV sets, steel, car stereos, and so on. It exports
percent of the world’s electronic goods. In Prestowitz’s fevered
imagination the United States is the Dr. Frankenstein who raised the
monster destined to devour it.
India started too late to challenge China in manufacturing, but
software, IT services, and medicine were virgin territory. India’s key
asset was a huge pool of inexpensive but highly trained, talented,
English-speaking workers, many of them educated to a high level abroad.
In 1984, Rajiv Gandhi decided that India should develop a software
export industry; coincidentally, Texas Instruments began satellite data
link services from Bangalore, preparing the way for on-line access to
global clients. With the development of the Internet, and later
broadband, in the 1990s, the proportion of software work “offshored” to
India increased dramatically. General Electric realized that the
operations of its call centers and much office work could be
to India at a fraction of the cost elsewhere. Airlines could offset
rising fuel costs by offshoring ticket bookings and repairs.
Prestowitz describes how in Wipo Spectramind, a twenty-four-hour call
service outside Delhi, “accent neutralization” is taught to give
the feeling that their calls are being answered in Kansas City. The
collapse of the high-tech bubble in 2001 provided further cost-cutting
incentives. “Medical tourism” flourishes as Indian private hospitals
provide hip replacements and heart and eye surgery at a fraction of
Western cost. (The Apollo Hospital in Chennai—Madras of old—does heart
surgery for $4,000 as against $30,000 in the US.)
The US government helped Asia’s rise by embracing a laissez-faire
ideology and floating the dollar. As a White House economic adviser
quipped: “Potato chips, computer chips, what’s the difference? They’re
all chips.” Prestowitz claims that, entranced by market fundamentalism,
American policymakers misunderstood the sources of American innovation.
US technological leadership was built not on market forces, but on an
unnatural collaboration between defense and government in a “military
industrial complex,” the product of two world wars. For example, IBM
grew on the basis of government grants for the B-52 guidance system.
shift to laissez-faire in the 1980s, followed by the end of the cold
war, dissolved this “ecosystem of interrelated companies, universities,
government institutions, bankers, and, yes, lawyers.” After 1973
Americans stopped worrying about international trade, because they
print as many dollars as they wanted to pay for imports. “We handed
China the money they are using to try to buy Unocal,” said Prestowitz
a recent interview. Prestowitz’s point is that “nobody is taking an
interest in the health of the long-term economic structure of the
country because America’s ideology says it is wrong to do so.”
So what is to be done? Prestowitz says that the United States must
abandon laissez-faire. It must renounce its crazy ambition to flood the
world with dollars and instead develop a more limited dollar sphere
consisting of the North American Free Trade area plus its trade with
Japan. “For the United States, this deal would marry Japan’s surpluses
with US deficits and create a dollar zone in trade balance with the
of the world. It would also serve to keep Japan in the US orbit and
prevent it from slipping into China’s.” Domestically, the US must
restore fiscal discipline by cutting defense spending and raising taxes
on consumption. It needs an energy policy which makes it independent of
Middle East oil (“Just applying the mileage regulations to SUVs would
significantly reduce US oil dependence”). It needs to upgrade its
physical infrastructure, promote manufacturing “ecosystems” like
Valley, reform Social Security to encourage labor flexibility, and
educational performance by restoring classroom discipline and fully
funding students studying science and engineering. In short, it needs
active “competition” policy. Prestowitz rejects the free trade model of
globalization as harmful to US interests. He is a modern mercantilist:
trade freely with your friends, and strategically with everyone else.
a world of sovereign states, this is not a bad rule.
Ted Fishman, a journalist and former commodities trader, covers much of
the same ground in China, Inc.: How the Rise of the Next Superpower
Challenges America and the World. There is the same touristic flavor: a
trip down the Huangpu River in Shanghai reveals the garish skyscrapers
and low nightlife of the new moneyed metropolis, where “nerdy Western
engineers can find girls so hot their friends at home would laugh.” The
main difference is that Fishman emphasizes the indigenous sources of
China’s rise. Without Deng’s decision to “open up” China, American CEOs
could not have solved their problems by relocating production to it.
Readers will learn about the working of the hukou, or passbook,
by which Mao Zedong kept rural labor on the land and out of the cities;
about the origins of Deng Xiaoping’s “Household Responsibility System”
of 1980, which revolutionized agricultural productivity by replacing
collective farms with a system of family plots; about how the “township
and village enterprises” (TVEs) grew up to fill the ideologically gray
area between public and private enterprise; about the extensive
migration from countryside to towns, where the private economy was born
“with a wink and a nod from the central government”; and about
China’s first Special Economic Zone, grown from a marshy fishing
to a city of ten million in twenty-five years. China, writes Fishman,
“is an infinite jumble of hybrid businesses” that “conflate the
often in impossibly complex, opaque ways.” Almost all business “is
conducted by words, handshakes, and occasionally by written but
extralegal contracts.”
Fishman tells of the orgy of city-building; of the forced demolitions
and evictions to make way for new buildings and hydroelectric projects;
of female workers exploited in textile and electronic factories who
dream of returning to their villages; of the encroaching deserts; of
pollution so intense that the “Asian Brown Cloud” wafts over to the
Pacific coast of the US; of China’s great road- and railway-building
program; of the spread of HIV, the abortion of unwanted girls, and much
else. But his central theme is the same as Prestowitz’s: countless US
businesses are being hammered by the low “China price,” which includes
counterfeiting and piracy. Jobs for many more millions of US workers
will disappear. Nothing, he believes, will stop the Chinese juggernaut,
for China is already building “the critical masses of companies that
catalyze the creative ferment that leads to rapid innovation.” Fishman
foresees US– Chinese rivalry growing: “it is a slow power game, but it
is afoot.”
Prestowitz’s and Fishman’s books are about the impact of China on the
economy of the West. But what about the West’s impact on China? To what
extent are Chinese society and politics being transformed by China’s
integration into the global economy, and what might this tell us about
the future of the relationship between West and East? These topics will
be discussed in a second article.
—This is the first of two articles.
[1] Paul Kennedy, The Rise and Fall of the Great Powers (Random House,
1987), p. 534.
[2] Output data in national currencies must be converted to a common
currency to compare the size of economies. If the conversion is done at
market exchange rates (MERs), the Chinese economy is only the eighth
largest in the world, one tenth the size of the US economy, and not
likely to overtake it until between 2040 and 2050. However, data
converted according to exchange rates are not good measures of the
relative size of economies because they take into account only
internationally traded goods and services and are distorted by
short-term currency fluctuations. That is why economists are
increasingly using purchasing power parity (PPP) converters, which
measure the relative purchasing power of different countries’
with regard to the same “basket” of goods in each one. This can be a
much higher GDP for a developing country. On a PPP basis China’s GDP in
2006 will be $8,877 billion; on an MER basis $2,172 billion.
[3] Steve Lohr, “Who’s Afraid of China Inc.?” The New York Times, July
24, 2005.
[4] Philip Stephens, Financial Times, July 1, 2005.

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