We spend quite a bit of time trying to understand the drivers and fundamentals of Chinese growth. And while we have seen some recent signs of a policy-driven cyclical slowdown (see The Wen Jiabao Put and our latest Quarterly Strategy Chart Book), we remain very optimistic about the Mainland's structural potential. But up until know, we have not really touched on the more philosophical implications of the Chinese growth story. In that respect, a recent client comment triggered a couple responses we modestly believe could interest the broader readership.
Client Comment: GaveKal's writings on economics are unmistakably filled with fundamental beliefs regarding human potential, advancement, creativity and the pursuit of knowledge. And even if I did not know your backgrounds, these views appear decidedly French in nature: deeply held beliefs on the rights and dignity of man.
So how does a group of economists focused on the mind and the soul as well as the pocketbook reconcile the sociological challenges presented by modern China? It is undeniable that a country that pulls half a billion people out of subsistence farming in two decades is doing a lot for human decency, no matter how they accomplish it. So maybe I need to throw away my Western lenses when thinking about this. But I really wonder sometimes how you view the authoritarian qualities of 21st century China as it relates to treatment of political rivals, the autonomy of the courts, religious freedoms, control of all forms of media, etc. Should we bend with the breeze and accept that this is the new world?
Charles answers: As I have tried to highlight in a couple of recent documents (see The Way the World Works and Ricardo, Schumpeter & the Cost of Capital), I firmly believe that an overly powerful and extended government is very dangerous. Having said that, I also believe that a total absence of the State is even worse. And since you mention my intrinsic Gallicness, I will turn to the philosophers of the Enlightenment, who happened to often be French, and who showed quite conclusively that human freedom can be exercised in three areas:
1. Political freedom (voting the incompetents out, separation of powers)
2. Social freedom (freedom of worship, sending one's children to the school of one's choice, creating a union, etc.)
3. Economic freedom (the ability to create a business, hire or fire employees, etc., regulated by contract law between acting parties).
What the philosophers of the 18th century argued was that the Church had to move out of the political sphere, and the State out of the other two. In Hong Kong, which GaveKal calls home, we enjoy one of the freest societies in the World: we have total social freedom, total economic freedom but yet very little political freedom. Still, I believe this compares extremely well with what we have in France, where the church of Marxism has invaded the State and the educational system, destroying both, while the obese State has invaded the social and economic sphere, leaving entrepreneurs without oxygen. As Tocqueville expected, we have moved towards a strange and benign "molle dictature".
This brings us to China and your questions. Today, the Chinese government is prepared to increase the population's economic freedom (far from complete), as well as the social freedom (courts of justice gaining grounds on political cronies, some social rights). But as for political freedom - see you in 20 years. In essence, this is the same deal offered to Singaporeans 30 years ago by Lee Kwan Yew, who now effectively vote for Lee Kwan Yew & sons every time they get a chance!
As a result, and to use Hanna Arendt's terminology, China is gradually moving from a totalitarian state to an authoritarian state, with a technocratic bias (à la Singapore). To a certain extent, the Chinese government discharges some of its responsibilities pretty well, with some gaping and horrible holes. So while the immediate picture may look ugly, the movement is in the right direction.
Arthur Kroeber answers: Basically I think you need to clarify your questions. Are you surprised that China has been able to deliver high-speed growth while remaining an authoritarian state? If so, there is nothing odd about this. South Korea and Taiwan both achieved their highest sustained growth under brutal dictatorships; Japan achieved its first growth spurt (in the Meiji era) under a benign despotism and its second (post-war) under a one-party state. And of course, most of the modern Western democracies were not really democracies in any modern sense (only landowners could vote, women did not vote…) while they were industrializing. The idea that countries must be liberal democracies in order to achieve high-speed early-stage economic growth is a strange fantasy with no empirical support.
Or is the question that you are worried that China's path to success means that other countries will follow the same route? Again, the evidence at hand shows that each successful economy, like Tolstoy's unhappy family, is successful in its own way and that outside models are of limited use (see Dani Rodrik's One Economics, Many Recipes).
The China model could work in China because of a specific set of historical and institutional factors that are not replicable elsewhere.
These include a 1,500-year history of centralized bureaucratic rule, which set the template for the current governance system of bureaucratic authoritarianism; an almost equally long history of active commerce and preindustrial capitalism which set the template for private sector activity once the state decided to get out of the way; and the presence of Hong Kong, which meant that China could make full use of modern Western institutions (such as a reliable legal system, property rights, efficient services, etc) without having to go through the cumbersome decades-long political hassle of building these at home. (On this latter very important point see the opening chapter of Yasheng Huang's Capitalism with Chinese Characteristics).
Or is your concern that China has been able to have a dynamic economy while doing nothing to reform its political system, and will continue to be able to do so ad infinitum? Here the perception that China has made no political reform is specious. There is a gigantic difference between China in the 1970s and China today in terms of freedom of expression, breadth of political discourse, personal liberty and property rights.
Through the end of Mao's rule, China was a totalitarian dictatorship ruled by individual caprice, with generally disastrous results (30-40mn deaths in the 59-62 famine, 10s of millions more in the Cultural Revolution, etc.). Since then it has transformed itself into a bureaucratic authoritarian state with very imperfect but generally increasing accountability of government. This is a massive political transformation. (And Huang, cited above, makes the important point that this "directional liberalism" -- this confidence that things were getting durably better -- was very important in encouraging China's entrepreneurs to start work in the 1980s, despite the absence of what we would consider clear property rights).
If we judge China not by how far it has to go but by how far it has come, the change has been dramatic, and we can reasonably expect the political system to continue to evolve in the coming decades, though not necessarily in linear or predictable ways.
Or is your concern that we in the West somehow have to render moral judgment on China, which requires some calculus along the lines of X amount of economic progress is worth Y amount of political repression, so if repression = y-1 then China is "good" and if y+1 then China is "bad"? Here I will wax philosophical and distinguish myself from Charles somewhat. Unlike him (and strangely, since I am generally considered the house Communist), I am not a Marxist, as I strongly believe that it is a society's underlying political bargains that tend to shape economic activity, not the other way round.
As Isaiah Berlin pointed out, societies grapple with the problem that there are lots of good things - justice, wealth, individual liberty, social stability, security, equity - and we cannot maximize all of them at once. Trade-offs among these ultimate values must be made and that is what politics is about. Societies create a set of trade-offs by negotiation (and by the way democratic elections are not in themselves a mechanism for making these trade-offs; they are simply a mechanism for transmitting information to the agents who are negotiating the trade-offs; so it is a fallacy to presume as many do that only via democratic elections can a society achieve a "true" bargain) and the ultimate bargain configures the playing field on which economic actors operate.
Among the societies we describe as democratic capitalist there are vast differences in the bargains and hence in the nature of economic activity. America tolerates levels of instability, crime, inequality and pernicious religious zealotry that Europeans and Japanese consider absurd, but it gets in return a much more dynamic entrepreneurial system of wealth creation. Japanese willingly accept levels of social conformity that Westerners consider bizarre, but achieves a high level of social stability and tremendous success in economic areas (such as high precision manufacturing), where self-disciplined social cohesion is a plus.
China, like all societies, is working out its bargain. It is still very much a work in progress but the process is dynamic, not static.
We Americans have a strange utopian tendency to assume that among all possible social bargains there is one perfect bargain out there (probably ours) and that it is our job to judge how well other people are keeping on the path to that bargain, any straying from which necessitates perdition for them and gnashing of teeth for us. But maybe we should just stop worrying about it. China will become what it will become and hopefully whatever it becomes will produce good results both materially and spiritually for most Chinese. As long as our society continues to do the same for us, it does not much matter whether the two societies wind up looking a lot or a little like each other.
Client Comment: GaveKal's writings on economics are unmistakably filled with fundamental beliefs regarding human potential, advancement, creativity and the pursuit of knowledge. And even if I did not know your backgrounds, these views appear decidedly French in nature: deeply held beliefs on the rights and dignity of man.
So how does a group of economists focused on the mind and the soul as well as the pocketbook reconcile the sociological challenges presented by modern China? It is undeniable that a country that pulls half a billion people out of subsistence farming in two decades is doing a lot for human decency, no matter how they accomplish it. So maybe I need to throw away my Western lenses when thinking about this. But I really wonder sometimes how you view the authoritarian qualities of 21st century China as it relates to treatment of political rivals, the autonomy of the courts, religious freedoms, control of all forms of media, etc. Should we bend with the breeze and accept that this is the new world?
Charles answers: As I have tried to highlight in a couple of recent documents (see The Way the World Works and Ricardo, Schumpeter & the Cost of Capital), I firmly believe that an overly powerful and extended government is very dangerous. Having said that, I also believe that a total absence of the State is even worse. And since you mention my intrinsic Gallicness, I will turn to the philosophers of the Enlightenment, who happened to often be French, and who showed quite conclusively that human freedom can be exercised in three areas:
1. Political freedom (voting the incompetents out, separation of powers)
2. Social freedom (freedom of worship, sending one's children to the school of one's choice, creating a union, etc.)
3. Economic freedom (the ability to create a business, hire or fire employees, etc., regulated by contract law between acting parties).
What the philosophers of the 18th century argued was that the Church had to move out of the political sphere, and the State out of the other two. In Hong Kong, which GaveKal calls home, we enjoy one of the freest societies in the World: we have total social freedom, total economic freedom but yet very little political freedom. Still, I believe this compares extremely well with what we have in France, where the church of Marxism has invaded the State and the educational system, destroying both, while the obese State has invaded the social and economic sphere, leaving entrepreneurs without oxygen. As Tocqueville expected, we have moved towards a strange and benign "molle dictature".
This brings us to China and your questions. Today, the Chinese government is prepared to increase the population's economic freedom (far from complete), as well as the social freedom (courts of justice gaining grounds on political cronies, some social rights). But as for political freedom - see you in 20 years. In essence, this is the same deal offered to Singaporeans 30 years ago by Lee Kwan Yew, who now effectively vote for Lee Kwan Yew & sons every time they get a chance!
As a result, and to use Hanna Arendt's terminology, China is gradually moving from a totalitarian state to an authoritarian state, with a technocratic bias (à la Singapore). To a certain extent, the Chinese government discharges some of its responsibilities pretty well, with some gaping and horrible holes. So while the immediate picture may look ugly, the movement is in the right direction.
Arthur Kroeber answers: Basically I think you need to clarify your questions. Are you surprised that China has been able to deliver high-speed growth while remaining an authoritarian state? If so, there is nothing odd about this. South Korea and Taiwan both achieved their highest sustained growth under brutal dictatorships; Japan achieved its first growth spurt (in the Meiji era) under a benign despotism and its second (post-war) under a one-party state. And of course, most of the modern Western democracies were not really democracies in any modern sense (only landowners could vote, women did not vote…) while they were industrializing. The idea that countries must be liberal democracies in order to achieve high-speed early-stage economic growth is a strange fantasy with no empirical support.
Or is the question that you are worried that China's path to success means that other countries will follow the same route? Again, the evidence at hand shows that each successful economy, like Tolstoy's unhappy family, is successful in its own way and that outside models are of limited use (see Dani Rodrik's One Economics, Many Recipes).
The China model could work in China because of a specific set of historical and institutional factors that are not replicable elsewhere.
These include a 1,500-year history of centralized bureaucratic rule, which set the template for the current governance system of bureaucratic authoritarianism; an almost equally long history of active commerce and preindustrial capitalism which set the template for private sector activity once the state decided to get out of the way; and the presence of Hong Kong, which meant that China could make full use of modern Western institutions (such as a reliable legal system, property rights, efficient services, etc) without having to go through the cumbersome decades-long political hassle of building these at home. (On this latter very important point see the opening chapter of Yasheng Huang's Capitalism with Chinese Characteristics).
Or is your concern that China has been able to have a dynamic economy while doing nothing to reform its political system, and will continue to be able to do so ad infinitum? Here the perception that China has made no political reform is specious. There is a gigantic difference between China in the 1970s and China today in terms of freedom of expression, breadth of political discourse, personal liberty and property rights.
Through the end of Mao's rule, China was a totalitarian dictatorship ruled by individual caprice, with generally disastrous results (30-40mn deaths in the 59-62 famine, 10s of millions more in the Cultural Revolution, etc.). Since then it has transformed itself into a bureaucratic authoritarian state with very imperfect but generally increasing accountability of government. This is a massive political transformation. (And Huang, cited above, makes the important point that this "directional liberalism" -- this confidence that things were getting durably better -- was very important in encouraging China's entrepreneurs to start work in the 1980s, despite the absence of what we would consider clear property rights).
If we judge China not by how far it has to go but by how far it has come, the change has been dramatic, and we can reasonably expect the political system to continue to evolve in the coming decades, though not necessarily in linear or predictable ways.
Or is your concern that we in the West somehow have to render moral judgment on China, which requires some calculus along the lines of X amount of economic progress is worth Y amount of political repression, so if repression = y-1 then China is "good" and if y+1 then China is "bad"? Here I will wax philosophical and distinguish myself from Charles somewhat. Unlike him (and strangely, since I am generally considered the house Communist), I am not a Marxist, as I strongly believe that it is a society's underlying political bargains that tend to shape economic activity, not the other way round.
As Isaiah Berlin pointed out, societies grapple with the problem that there are lots of good things - justice, wealth, individual liberty, social stability, security, equity - and we cannot maximize all of them at once. Trade-offs among these ultimate values must be made and that is what politics is about. Societies create a set of trade-offs by negotiation (and by the way democratic elections are not in themselves a mechanism for making these trade-offs; they are simply a mechanism for transmitting information to the agents who are negotiating the trade-offs; so it is a fallacy to presume as many do that only via democratic elections can a society achieve a "true" bargain) and the ultimate bargain configures the playing field on which economic actors operate.
Among the societies we describe as democratic capitalist there are vast differences in the bargains and hence in the nature of economic activity. America tolerates levels of instability, crime, inequality and pernicious religious zealotry that Europeans and Japanese consider absurd, but it gets in return a much more dynamic entrepreneurial system of wealth creation. Japanese willingly accept levels of social conformity that Westerners consider bizarre, but achieves a high level of social stability and tremendous success in economic areas (such as high precision manufacturing), where self-disciplined social cohesion is a plus.
China, like all societies, is working out its bargain. It is still very much a work in progress but the process is dynamic, not static.
We Americans have a strange utopian tendency to assume that among all possible social bargains there is one perfect bargain out there (probably ours) and that it is our job to judge how well other people are keeping on the path to that bargain, any straying from which necessitates perdition for them and gnashing of teeth for us. But maybe we should just stop worrying about it. China will become what it will become and hopefully whatever it becomes will produce good results both materially and spiritually for most Chinese. As long as our society continues to do the same for us, it does not much matter whether the two societies wind up looking a lot or a little like each other.
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