New book: China crisis?

Observer columnist, author and think tanker Will Hutton knows that controversy sells. So he's done his best to highlight the dark side of China's political economy in his a book to be published January 18: The Writing on the Wall: China and the West in the 21st Century (Little, Brown UK). The book is being serialised, with three excerpts published so far:

1. New China. New crisis: The Observer, Sunday January 7 - "In the last decade China has emerged as a powerful, resurgent economic force with the muscle to challenge America as the global superpower. But, in his controversial new book, Will Hutton argues that China's explosive economic reforms will create seismic tensions within the one-party authoritarian state and asks: can the centre hold?"

2. Power, corruption and lies: The Guardian, Monday January 8 - "To the west, China is a waking economic giant, poised to dominate the world. But, argues Will Hutton in this extract from his new book, we have consistently exaggerated and misunderstood the threat - and the consequences could be grave."

3. Low wage competition isn't to blame for western job losses and inequality: The Guardian, Tuesday January 9 - "US and British business culture is creating our widening pay gap, not the impact of sub-contractor economies like China."

His central thesis is neatly summarised in the second piece:

The west is unforgivably ignorant about China's shortcomings and weaknesses, which leads it vastly to exaggerate the extent of the Chinese "threat". China is certainly emerging as a leading exporter, but essentially it is a sub-contractor to the west. It has not bucked the way globalisation is heavily skewed in favour of the rich developed nations.

Its productivity is poor; it lacks international champions; its innovation record is lamentable; it relies far too much on exports and investment to propel its economy. To characterise China as an unstoppable force whose economic model is unbeatable and set to swamp us - the stuff of almost every ministerial and business lobby speech - is to make a first-order mistake.

Gripping stuff, which I'm sure will go down particularly well in America. Hutton overstates his case, of course. And he's no China expert. But he's a well known commentator and author and he writes better than 99% of those who do know better - so I'm sure it will sell well.

UPDATE: Torcuil Crichton of the Sunday Herald interviews Will Hutton about his book, and British politics: Great Will of China

Hutton's handling of the complex Chinese economic puzzle is refreshingly straightforward. China, as we all vaguely know, will be very important very soon. The economics of the 21st century will belong to China, much as the 19th came under British influence and the 20th closed under US dominance.

He details the fantasy that is communist doctrine, the endemic corruption of the state and the unsustainability of China's exponential growth. Within a decade it will be the world's second largest economy. The country is the single most important financier of the enormous US trade deficit. It competes for oil, water and military muscle. But though it looks like an unstoppable engine, it is not a market economy that we would recognise and it is on the verge of collapse.

 

Sitting in his office at the Work Foundation, the left-of-centre think tank he now heads, Hutton insists that "collapse" is too strong a word; convulsion might be better. "The question is, how will they make the transition from what they've got to where they need to be without very substantial convulsions?" says Hutton. "In the best case the Communist Party see the light and build plural institutions, which will mean losing monopoly control of the state. The next generation of leaders enact this or fight like tigers to resist it. If so we will see civil war in China or they may rally the country in a foreign adventure." 

                                                                                                                                           

Comments

[Arthur Eckart]

Obviously, there's another side to China's economy that reveals the ignorance of conventional wisdom, particularly in Europe. Many also believed Japan would soon take over the world in the '80s, until reality proved otherwise.

[Lafayette]

Ae: "Many also believed Japan would soon take over the world in the '80s, until reality proved otherwise."

Congratulations, AE, you got there first. You are quite right.

Let's not get hysteric about China. It has a good many challenges ahead before it achieves greatness. The first one I see cropping up fairly quickly is the inability to explain to the population the great disparity in income that its economic growth is stimulating.

[Lafayette]

NE: "Will Hutton argues that China's explosive economic reforms will create seismic tensions within the one-party authoritarian state and asks: can the centre hold?""

The challenge is that China is setting great expectations within its population. There is (or will be soon) an emerging middle-class that will expect more than a house, a car and gadgets, and a vacation on the French Riviera.

They will want considerably more, and one particularly hot item is going to be democracy.

The problem with a monolithically structured society is its rigidity. When a societal/political earthquake happens, it tends to fall apart. Russia is an example, in the ensuing transitional chaos, the oligarchs rushed in to grab industrial equity values as state industries were privatized.

Will the Chinese know how to devolve power to a democratic process? If they are smart and wish to preserve their economic gains, yes, they will. If not, the country will regress, only exacerbating the deception.

They are managing to reduce the state component of the GNP. But, the army is maintaining fast, that is, it has a heavy ownership of industrial/commercial firms, the profits of which go to army (to be distributed who knows how).

I suspect that, today, the Chinese leadership has a blue fear of its own people. It really does not know how to manage a transition from dictatorship of the Communist Party to a multi-party state.

When push comes to shove, the army may be pivotal. Will it want to maintain its economic privileges? Good question, methinks.

[jon livesey]

I suppose even a blind pig finds an acorn once in a while, but Will Hutton has an almost perfect record as a countra-indicator. In the seventies and eighties he was arguing that Maggie's liberalization of the UK economy was a disaster, and that what the UK needed was Japan-style guided development. Japan then entered a recession they still have not recovered from. Then he claimed that the UK and British economies would suffer from wage competition from Mexico. The Mexican economy and currency went into free-fall shortly after. Five years ago he was arguing that for the UK not to enter the Euro would ensure that all FDI to the UK would dry up. They didn't enter, and FDI is now at record levels.

I've always been impressed that someone who gets things wrong so consistently still manages to be widely published and has even managed to get funding for his own economic think-tank. In a sense, Hutton is a perfect example of what's wrong with pseudo-intellectuals in the UK. Amateurs who write well.

[Edward Hugh]

"Hutton overstates his case"

Quite

"And he's no China expert".

Quite. Is he even a macro economist, or is he simply a journalist? I have no idea, since I stopped reading the Guardian years back.

"But he's a well known commentator and author and he writes better than 99% of those who do know better"

This is probably the point.

"I'm sure will go down particularly well in America."

In fact I imagine he will go down proportionately better the less people really understand about economics. China is the big tough nut to crack, and from the little I can see from your coverage there is nothing really new or especially insightful here. A more interesting starting point would be the differences between China and India. Incidentally, I don't at all share the view that middle class consumption lead growth can continue to hold in India for much longer, I think we are about to move over to the investment driven leg.

China on the verge of collapse, c'mon, pull the other one, it's got bells on it :).

[Lafayette]

EH: "China is the big tough nut to crack, and from the little I can see from your coverage there is nothing really new or especially insightful here."

Does this mean you think China incapable of developing a viable consumerist middle-class to take up the inevitable slack in export led economic growth?

Pray tell, why?

[Arthur Eckart]

China's economy is much easier to understand than large and diversified economies, e.g. the E.U. or U.S. No economy is impervious to economic laws (e.g. trade-offs, constraints, marginal changes, etc). Yet, there are periodic beliefs of "new" economies, that defy economic laws. There's been widespread ignorance about China's economy for years. The article may be biased. However, it also begins to reveal the other side. It's somewhat surprising most don't understand China's economy is suboptimal to a large extent.

[john bunyan]

Lafayette, you do not have even the beginnings of a klew.

"They will want considerably more, and one particularly hot item is going to be democracy."

Where do you get this ridiculous idea ? Chinese people do not have even the vaguest interest in democracy. Not even the tiniest, slightest interest. None. And they aren't going to suddenly become little George Bush wannabes just because you think they should be. The Communist Party doesn't rule China and never has. It attempts to exert some kind of guiding influence on a totally uncontrollable population. Your ideas are off in la-la-land and have no basis in fact, none whatsoever.

"The problem with a monolithically structured society is its rigidity. When a societal/political earthquake happens, it tends to fall apart. Russia is an example ..."

If you can't even tell the difference between the Soviet Union and China, you are hopeless.

"Will the Chinese know how to devolve power to a democratic process?"

Look, let's get this straight. Democracy has absolutely nothing to do with China's problems. Nothing whatsoever.

"I suspect that, today, the Chinese leadership has a blue fear of its own people."

You'd better take your suspecter in for a tuneup.

"It really does not know how to manage a transition from dictatorship of the Communist Party to a multi-party state"

And doesn't need to. China has been an empire for roughly 2500 years. It's going to stay that way no matter what you think. It is an empire because that is what Chinese people find suitable.

Let's figure something out here, shall we ? No matter what you think, China's economic and social problems are not now and have never been tied to the "evils of communism." If you knew anything whatsoever about China you would stand in awe before Mao's tomb, admiring what miracles the communist party accomplished in China. Have you considered why even today, more than thirty years after his death, there are posters and paintings of chairman mao in homes, in restaraunts, in little stores, on walls and down halls ? Please, get this through your head : Chinese people DO NOT WANT YOUR STINKING DEMOCRACY. IT DOES NOT SUIT THEIR CULTURE. They want material progress, plain and simple.

btw, I am writing this in zhejiang huzhou .... where do you live, Lafe ?

[Lafayette]

"Where do you get this ridiculous idea ? Chinese people do not have even the vaguest interest in democracy."

Yes, well, this bit of idiocy will not do either. It is the sort of simplistic reasoning that led America into its present Iraq folly.

You have no faith in the intrinsic value of liberty that all peoples harbour naturally - even if that value is inexpressible in a totalitarian society.

[Lafayette]

“It's somewhat surprising most don't understand China's economy is suboptimal to a large extent.”

I suggest that what is happening in China is no different than what has happened in a great many countries that transitioned from the Agricultural Age to an Industrial Age. Britain and Western Europe did this in the 19th century; the US a wee bit later.

History repeats itself, but in different ways. This time, the phenomenon is slightly altered. China is developing at a hectic pace within a truly global economy that has the ability to watch first hand. Its performance has dislocated jobs in major economies, which has triggered some political activism that captures headlines and feeds internet forums.

All this is a great advance? In a way, yes. If one wishes to go OTT with this historical phenomenon, then that is their business. But, such a reaction will not distract the Chinese from doing what America did in the 19th century, called “manifest destiny”, which the attribute of a country to seek its fullest potential.

China has become a bull in a china shop – which simply behoves the rest of us to watch carefully and react instead of wailing passively. Besides, as mentioned here above, China has serious obstacles to overcome before reaching its full potential.

Only time can tell.

[mike]

When discussing China, its people, its economy, or its politics, many people don't pause to consider that occurrences of "China" can be replaced with "20% of the entire human race on planet Earth" and thus fail to scale their ideas accordingly.

[Lafayette]

mike: "China" can be replaced with "20% of the entire human race on planet Earth" and thus fail to scale their ideas accordingly.

Yes, and that would change what (in the conclusions)?

Perhaps one might be foolish enough to think that there is a linear relationship between population size and market volume?

False assumption. The “market size” is more dependent upon "disposable income" than it is on gross population. Even if doubles its GDP/head every seven years (10% growth per annum), it will take decades before it shifts enough people from abject poverty in the rural countryside to a middle-class existence. And, with an economist's usual cop-out, one must add the caveat “if all else holds equal”. Well, “all else” rarely “holds equal”. Life, if we haven’t noticed, is highly random.

Remember, we used to make the same predictions about Japan, which is just coming out of a decade of disinflation and higher than usual unemployment There’s many a slip twixt the cup and the lip.

Anecdote about the perils of forecasting:

Someone predicted, towards the 1870s or thereabouts, that at the then present rate of increase of horse drawn carriages in New York City, that the city would be covered uniformly in horse dung to a depth of two feet in twenty years … ; ^ )

[Arthur Eckart]

Properly isolating a variable (including minimizing the error term) is a "cop out?" Of course, some will also believe if one regression is proved wrong, then all regressions are wrong.

[Arthur Eckart]

Of course, there are unexpected shocks, which can't be, well, expected. However, the OLS method has often been valuable.

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