These will affect Chinese policies and systems, as well as behaviour in other countries towards China. Larger countries are likely to take an active position in managing both their economic and political interests as they are affected by the impact of developments in China on the structure of international markets for goods, services, capital and investment.
This is not just a matter of the scale of China’s growth and its role in the world, although certainly scale is one dimension. Within less than a few decades, China has transformed itself from being a ‘small’ economy to being a ‘big’ economy in terms of its impact on world trade and output, world prices, its role in international capital flows and financial markets, its impact on the global commons (including the environment and climate) and its stake in managing the international economic and political system.
These changes have seen China seek to conform to established international norms and institutions (for example, through accession to the WTO), exercise responsibility within the G20 process in managing the global economic system and to play an increasingly active and constructive role in international diplomacy (for example, in the United Nations and through the Six-Party Talks on North Korea).
China’s emergence as the world’s second largest single trader in the world economy has been managed successfully within the global system of trade rules and institutions. As Chinese business goes abroad, there are more complex interactions between the market and the state. At home in China as well as abroad, and there are no international institutions, like the WTO for trade, within which to manage these dealings. Despite the scale of these changes and China’s increasingly important role in the world, China’s economy is still an economy in transition, with wide-ranging reforms still in progress. This affects the way in which the market operates across all sectors of the economy. China also has a political system that is different from the broadly representative political systems that typify the established international powers.
Yet economic transition in China has clearly had, and is continuing to have, an important impact on the political system and the way in which the political system operates within China. There is a question of whether continuing economic reform might lead inevitably to a trend towards further political system change because of the need for a separation of the state from economic enterprise, to facilitate the governance and transparency necessary to achieve very high levels of prosperity.
The relationship between the efficiency of economic institutions and the nature of the political institutions in which they are nested is one important question. Of more immediate interest and practical importance is development of an understanding of the way in which Chinese markets and business are affected by evolving economic and political institutions, how participants in these markets interact with the state in their dealings in international markets, and whether the relationship between the market and political system requires particular strategic policy responses from China’s economic partners.
These issues have become a prominent and urgent undercurrent in popular and policy discussion but are still little analysed and little understood.
As Australia grappled to deal with the sudden rush of China’s international demand for resources and the surge of Chinese interest in investment in the resource sector abroad, the tensions between the market and the state at home in China and in dealings abroad have risen to the surface.
These tensions are cogent in the response to Chinese investment abroad, particularly in respect of both foreign direct investment and the investments of Chinese sovereign wealth funds. China itself is also a very large recipient of foreign direct investment, and that is an additional context in which outward investment has been growing.
There is a need for a properly informed and calibrated approach from Australia and China’s neighbours and partners in Asia and the Pacific to this dimension of China’s economic rise, and the prospect of a rapid expansion of business and other dealings between China and the rest of the world. Success in this will require working closely with China to build institutions for consultation on investment issues and to establish norms and arrangements that encourage Chinese participation in business abroad on market terms.
Australia is in the cockpit of these developments internationally, because of the importance of its resource base to this stage of Chinese development. Its response has the potential, for better or for worse, to shape and influence responses and developments of policies towards China in other parts of the world.
Your commentary is auspicious because our paradigms and ground rules will all change.
I look forward to more thoughtful articles from a China perspective to better understand their Operating Realities and “civilisational” perspectives.
Both the existing largely Western, and Japanese, template for economic and political systems and emerging China templates will need to adjust and merge into a new framework.
This also implies profound changes for Australia in order to grasp new opportunities in pursuit of our national interests.
Old assumptions and concepts need to be re-examined.
My limited experience suggests that sometimes we can gain greater insights by reading translations by a China scholar than similar translations by a foreigner on matters Chinese.
The world will have global libraries in both English and Mandarin for commercial and intellectual discourse.
This in itself will be another manifestation of how the world will change.
The mainstream economics has been established on the premise of market efficiency in resources allocation, although even with that main stream, macroeconomics indicates that sometimes market can be seriously inefficient in the sense that large unemployment can occur from time to time and some non-market or super-market mechanisms, that is, government interventions have to be resorted.
Also, assets markets have shown to have tendance of extremely inefficient from time to time.
Further, there are different economies in the world that are vastly different in productivity, income levels and etc. The experiences of developing economies with different systems and growth have shown that the main stream economics have serious limitations in terms of its applications to the non world-frontier economies.
It seems that there are multi dimensions in economics and efficiency. There may be cases where it is obviously inefficient by the norm of the main stream economics yet the outcomes can be much more efficient than some cases where economics would say it is efficient.
Efficiency may work at higher dimensions than the current mainstream economics can comfortably handle. The current economics may be a special case or a branch in a higher dimension economics.
Maybe in economics of a higher dimension (that is yet to be developed), public institutions like government as opposed to pure market can improve the efficiency of a pure market approach. Alternatively, new institutions of a different nature from the current ones will be required to govern efficiency.
It is certainly interesting to consider the impact of economic changes upon politics but the impact of politics upon economic policy is also interesting. One area that has been under explored is the development of public choice models to apply to PRC decision making. So much of public choice analsyis has been applied to the US and to a lesser extent Australia. For example, in 19th century US in Pincus, “Pressure Groups and the Pattern of tariffs” (1975) Journal of Political Economy or in respect of 20th century Australia in Anderson, “The Political Market for Governmental Assistance to Australian Manufacturing Industries” (1980) Economic Record. the details of the model would have to be different but the essentials would be the same: political position being contestable, with participants in the political market seeking to maximize support and miniize opposition. Does PRC governance lead to the same kind of government failures?
It is important to realize that much of post WWII treaty arrangments in trade and monetary relations are a response to recognition that certain types of government failures tend to occur. The treaty relationships have diminished the welfare diminishing impacts of such government failures. Much has been written about the relationship between the design of the GATT and the function of disciplining government failures – but most theoretical and empirical study of the characteristics and likelihood of those government failures has focussed on the US. Now that we are in a new era in terms of global powers, are economists studying the likelihood of government failures in all of the new global powers? Can anyone refer me to any publications dealing with public choice analysis of PRC decision making (or Indian or Brazilian or Russian)?
Bret Williams’ comments and questions are interestint.
I don’t have much knowledge in the field, but I think some points particular to the current Chinese case may be of some interests.
For example, China is still a developing country with huge hidden unemployment. Of course, the Chinese government is a semi authortarian, as compared to the US or Australiam government. Associated with this, it is often said that the Chinese government has tended to be soft on foreignners and tough on its domestic people.