In China, probable hardware failures include a banking crisis that causes a credit crunch, a budget crisis that necessitates reductions in important infrastructure and social expenditure (and possibly generates high inflation and balance-of-payments difficulties as well) and a serious slowdown in productivity growth from the accumulation of micro-inefficiencies created by state intervention.
A software failure refers to a flaw in governance that creates frequent widespread social disorders, disrupting economy-wide production and discouraging private investment. This situation is similar to a car crash resulting from a fight among the people inside the speeding car. Software failures could come from the present high-growth strategy producing inequality and corruption, which in turn may generate severe social unrest, and from the State not being responsive enough to rising social expectations, which may cause social and economic disorder.
A power supply failure refers to the economy being unable to move forward because it hits either a natural limit or an externally imposed limit—a situation that is akin to the car running out of fuel (a natural limit) or into a roadblock erected by foreigners (an externally imposed constraint). Examples of power supply failures are an environmental collapse and a collapse in China’s exports because of a trade war.
The probabilities of either a software failure or a power supply failure are higher than the probability of a hardware failure. This is because the first two are harder problems to deal with. For most hardware problems, China can learn from the experiences of the rest of the world, especially those of the richer countries in East Asia, as long as ideological constraints on methods of economic management continue to wither. The 1868 insight of the Meiji reformists that success in economic catch-up largely involves a willingness to adopt and adapt to ‘best international practices’ will continue to apply to China until its per capita GDP converges with that of Japan and Western Europe.
Dealing with software failure is harder than dealing with hardware failure for two major reasons. The first is that development policymaking in China has become more challenging because popular expectations of administrative performance have risen dramatically with income growth and, more importantly, with increasing knowledge of the outside world. A Chinese government that consistently fails to produce results in line with the rise in social expectations runs the increasing risk of being challenged by internal factions within the CCP, culminating in an open split, with each side seeking the support of non-party groups.
The second reason is that successful reconfiguration of the administrative software requires not just highly developed political skills but favourable circumstances in the domestic political arena and a benign international environment—both of which are normally beyond the reach of most politicians. What happens in the future will depend on whether the CCP is sufficiently confident and politically skilful enough to lead the democratic transition and emerge afterwards as the most important political force. History tells us that the French and British monarchies reacted very differently to popular requests for reform of the administrative software—and the outcomes were very different in each case. The practical issue is whether the CCP can do a better job in political transition than the Kuomintang did in Taiwan during the period 1983–88.
Dealing with power supply problems is much harder than dealing with hardware problems. This is because power supply problems are often issues of which the world has few (mostly, no) successful experiences, (for example, a global carbon dioxide emission pact) or it involves powerful foreign partners where differentiation between well-meaning cultural misunderstanding and unstated national rivalry is not easy. Sometimes, it involves working with both of these difficult conditions. In addition, most solutions to power supply failures require a mobilisation of international effort—which China has historically been too weak to participate in meaningfully.
China and the other major powers will need to have a similar opinion of China’s responsibilities in the world economy before there can be significant cooperation on common problems. China’s economy has now become an important shaping force of the global economy and, Chinese civil society has come to possess more and more of the middle-class aspirations common in the industrialised world. China’s continued high growth now necessitates a new development strategy that also emphasises the creation of a harmonious society and a harmonious world—and this will require an improvement in its administrative software and in its contributions to the protection of the global environmental commons and of global security.
Wing Thye Woo is Professor of Economics at the University of California at Davis. He is also a non-resident Senior Fellow in the, Foreign Policy and Global Economy and Development programs at the Brookings Institution.
This essay is a summary of an article published in Ross Garnaut, Jane Golley and Ligang Song (eds): ‘China, The Next 20 Years of Reform and Development’.
One wonders how many scholars are thinking like this about China.
Like all societies China has its own sets of problems, but the biggest of them is that it is heavily dependent as a manufacturing economy on foreign resources like raw materials, minerals and energy and on exports, which is the reason for its basket surplus foreign exchange – to manage its imports and mind it.
Chinese exports are so low in technology content that they are easily substitutable by any country of the day by the stroke of a political/administrative decision. For instance, China imports huge quantities of iron ore from India, which could be banned by a political decision under Chinese provocation on borders, and exports low quality toys to some white consumer goods, which again could be stopped without hurting China more than such decisions would hurt India.
It therefore seems that prudence is in not overheating the economy and remaining sufficiently dependent on internal resources and internal market demands and calibrated integration of national economy with international market forces. This approach should be more acceptable even at the cost of slower growth in GDP terms so long as slower growth is more equitable. Japan is a perfect example of this.
As of now, China’s advantage is that post-Cold War, there has been a distinct surge orientation of Western production and R&D towards civilian goods and services, and a conscious downgrading of defense focus of Western production. In fact, earlier strategic technologies are being put to more and more civilian use. This shift has led to much disruptions and resultant pain. All big markets like China are in a position to lessen such pains within their limitations.
As other economies emerge to substitute existing present day economies, developed economies may become less dependent and less tolerant to Chinese tantrums, which reflects in its conduct of its own foreign policy and its encouragement of irresponsible behaviour in other erring countries of East, South and Central Asia in particular. Thus, it is a good thing that the Chinese economy is such that it is tamable.