Is China Doomed to Fail?

Yesterday, David Goldman called out his conservative friends for continuing to predict that China’s collapse was imminent. He might have mentioned that good liberals have been predicting the same for well over a quarter-century now.

At the time of the government crackdown on Tiananmen Square protests New York Times reporter Nicholas Kristof insisted that the Chinese people would inevitably rebel against an autocratic government.

How did that one work out, Nick?

One must also mention that some people on the radical left are rooting for China to fail because they have never gotten over the fact that Communism lost the Cold War.

Why do so many people, on the right and on the left, believe that the Chinese model is doomed? Simply put, they do not believe that a capitalistic economy can exist for very long without liberal democracy.

If people do not have a voice in their affairs, if they do not have a vote, the government will lose legitimacy and will ultimately fail.

Of course, they fail to recognize that the Chinese people now enjoy a considerable amount of economic freedom... to say nothing of prosperity. Do you think that they would trade it in for Barack Obama?

Time will tell who is right or wrong. For now the belief in liberal democracy seems to be out of touch with reality.

Goldman offers his opinion:

China is not going to blow up politically. Its financial system isn’t going to collapse. China just scored the biggest diplomatic success in its history by persuading nearly 50 nations to join the new Asia Infrastructure Investment Bank despite US objections.

Goldman is not alone in emphasizing the importance of the China-led Asia Infrastructure Investment Bank. Note well that the "diplomatic success" spells a significant diplomatic failure for the Obama administration.

Read what Lawrence Summers wrote last week:

This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the US before, and times when American behaviour was hardly multilateralist, such as the 1971 Nixon shock, ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.

This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the US approach to global economics. With China’s economic size rivalling America’s and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the US have rendered it increasingly dysfunctional.

One hesitates to offer further commentary on the new bank and what it means for the international economic order. One hesitates because one does not understand it very well.

And yet, no media outlet has really covered the story. It is not as sexy as terrorism so it does not lead the news, anywhere.

One is inclined to take the words of Lawrence Summers seriously, especially since he has always been a staunch supporter of the Democratic Party. When Summers and Goldman agree, we should take heed.

Summers distributes blame even-handedly, but, truth be told this happened on Barack Obama’s watch. Isn’t the Obama presidency the ultimate proof of a dysfunctional political system?

Why, if you were in Beijing would you want to emulate a political system that made Barack Obama the president?

Americans like to think that they will prevail in economic competition because they are better at innovation. They believe that American capitalism is the best and more effective economic system in the world, despite the political constraints that hobble it.

And yet, when it comes to innovation in business, America has been falling behind. It’s not just Goldman’s view. Thomas Edsall wrote an important article about it in the New York Times.

Over the past three decades, the American economy has become less vigorous. An extensive body of evidence shows that the public focus on the success of high-tech companies like Apple and Google masks an overall downward trend in key measures of business vitality.

“Business deaths now exceed business births for the first time in the thirty-plus year history of our data,” note Ian Hathaway and Robert E. Litan, economists at the Brookings Institution, in a May 2014 essay, “Declining Business Dynamism in the United States.”

He continues:

The forces driving this trend include the increasing regulation of small businesses, corporate consolidation, more occupational licensing requirements and too few immigrants with high-tech skills. Ultimately, however, the political system itself appears to be making a significant contribution to the problem.

Federal and state officials, often under pressure from major corporations seeking to stifle competition, have adopted a regulatory regime that makes the creation of new businesses more difficult.

Many, if not most, of the reforms proposed by economists and other analysts require political action. At the federal level, this would require bipartisan support, an achievement often out of reach in a polarized system.

Contemporary American politics have become an economic hindrance. Daron Acemoglu, an economist at M.I.T., put it this way in an email to me:

It’s becoming more and more difficult to run a successful business in the United States without doing lobbying, campaign contributions and other deals with politicians. This I think is the most dangerous, I would even say nefarious, trend for the creativity of American business in general, and young and new businesses which we badly need in particular.

The drop in new business start-ups should be seen in the context of other key indicators — for example, a lack of labor liquidity, which is a measure of “the rate at which workers leave one firm to go to another,” according to Acemoglu.

Edsall, like Summers, bemoans our factional politics. Very little can get done when the parties occupy ideological extremes and refuse to work with each other.

One might muse about how we have arrived at this juncture, but the truth remains that, politically speaking, America is suffering from a leadership deficit. We have a president who is much better at polarizing the country than at forging compromises, a president who is better at lying for political advantage than conducting honest negotiations.

Admittedly, the problem pre-dates Barack Obama, but he bears the primary responsibility for its current state.