The Chinese Steamroller Is Already Sputtering

For his new book The Myth of America’s Decline, Josef Joffe spent a lot of time studying and thinking about China — the current leading challenger to U.S. economic and political supremacy. While many portray China’s economic and political ascent as an epochal event, Joffe sees the country as yet another “fast riser” following a path previously traveled by Germany, Japan, and the Asian “tigers.”

What that means, in Joffe’s view, is that however impressive China’s rise has been, the country now faces many of the same hurdles that slowed down the other rising nations — plus some obstacles of its own making. Joffe is the publisher-editor of the German weekly Die Zeit and a faculty member at Stanford University. I talked with him earlier this month; what follows are edited excerpts from our conversation.

What does China have in common with Germany, Japan, Taiwan, etc.?

These models across cultures are uncannily alike. They all obey the same three or four principles: Overinvestment, the counterpart of which is oversaving; export über alles; underconsumption; and an undervalued currency. Plus collusion between state and the economy in various ways.

These countries all had amazing growth rates in the beginning — the Germans up to 8%, the Japanese even higher — then they all came down. So I had to ask myself what was happening here, and I concluded that in all cases that famous old law of diminishing returns begins to bite and every additional unit of fixed investment yields less additional revenue.

That is the case in China too. Lo and behold, the growth rate is down from 12% to 7%. Part of it may be cyclical, but the other part is structural. I mean, look at the other Asian countries. They came down from double digits to zero in the case of Japan. High flyers always come down to a normal rate.

A pretty obvious difference between Japan and China is that for Japan to become the world’s leading economic power, it would have needed a per capita income twice that of the U.S. With China there is a reasonable argument that even if they remain much poorer than the U.S. they’ll eventually have a similar-sized or larger economy.

But that means you have put together 1.3 billion very poor people. And look at the demographic curves these guys are facing. The United States is going to be the youngest country 40 years out, save for India. A young country means you’re going to be more economically dynamic — old people don’t bust ass. I think by 2020, the Chinese are going to account for one-fifth of the world’s population and one quarter of the world’s pensioners.

But at some level, this catchup story, it is a success.

Damn right.

All these countries went from being poorer to much more affluent. You look at Korea or Taiwan, and if China is even able to keep going at 7% for a couple of decades …

But there’s a tipping point, if you look again at those little tigers, when growth suddenly flattens. That’s what we call the middle-income trap.  All kinds of things happen when you’re in the middle-income trap. You have a rising middle class, and the rising middle class no longer allows you to extract so much surplus from it for the benefit of the state. Investment goes down, social security begins to move to the fore, etc.

Singapore has escaped the middle-income trap …

You cannot generalize from small countries. You know about the PISA tests? The hype is that the U.S. is not doing so well. Actually they’re not doing badly. They’re in the upper bound of the middle. Who’s on top? Shanghai. China as such chose not to be tested like all the others. So you take a choice apple and test it against the barrels of everybody else. But if you were testing Palo Alto or Bethesda or Cambridge, Mass., against Shanghai, guess what would have happened? I want to see Shanghai competing with Palo Alto High.

You say in the book that going forward it’s a lose-lose situation for the Chinese regime.

Democracy or enduring authoritarianism is not good for growth — for different reasons.

An authoritarian regime is good for catch up …

Very good at the beginning — Stalin, Hitler, they were great.

When you look at China, what do you see as the best plausible outcome — for China?

They’re caught in this double bind, which we just mentioned. Certainly the regime does not want to be unseated. So they’re going to hold on to power. Especially since they had that traumatic experience of the Cultural Revolution and Tiananmen. At the other extreme, in order to maintain growth in this post-industrial knowledge-based economy they have to loosen the reins. They have to allow for freedom of expression and freedom of research. But that’s very hard to do. You’re talking about the one-party system.

I think they’re going to do dilemma management, and keep their fingers crossed that they’ll have enough economic performance to maintain legitimacy. But I’m now at the point where I’m with Yogi Berra: “Never make predictions. Especially not about the future.” All I’m saying is that the streamroller is sputtering already.

None of this says anything about grand strategy, international behavior. That is a very subtle contest between the United States and China. It’s not like against Russia or Nazi Germany. China is not a revolutionary power. It’s a revisionist power. Revisionists just want a bit more for myself, or a lot more for myself. Revolutionaries want to overturn the table.

I’m also looking at sources of future strength. What’s enduring? Demography is one thing, and that’s where the Chinese are really in bad shape, whereas the United States is getting younger. Why? Immigration, plus whatever else makes Americans procreate more often. Immigration, it turns out, is probably the single most important asset you can acquire in our world. It’s no longer coal or even oil. And there the U.S. at this point beats everybody hands down.

China’s Next Great Transition
An HBR Insight Center
This entry was posted in Leadership. Bookmark the permalink.

Comments are closed.