In interpreting China’s current economic difficulties fundamental issues of analytical approach are at stake, which I have started a Chartbook mini-series to address the issue.
What might be called the “authoritarian impasse” (on second thoughts I’ve amended the title of Part I), an interpretation forcefully articulated by Adam Posen in Foreign Affairs, argues that China is now suffering the fate that is, in due course, inescapable for any any authoritarian regime. Hence the telling title – “the end of China’s miracle”.
This is a view rooted in a trans-historic philosophy about property rights, trust and self-binding that has an obvious appeal to Westerners of a liberal bent.
Economist Michael Pettis has offer the most trenchant critique of this view.
Source: Pettis Twitter
I don’t want to repeat Pettis’s views in detail here. Everyone interested in China should follow his daily commentary which is – every time! – rooted in his analysis of China’s structural political economy. It really is a uniquely persistent and perceptive campaign of analysis and persuasion. What I want to do is to add value (hopefully) by drawing out the grounds on which Pettis and Posen disagree.
As Pettis points out the authoritarian impasse view has a problem with history. It may make a good morality tale – first they came for the corruption officials, then they came for the tech oligarchs, then, they came for me (ordinary Chinese) – to see the failure of zero COVID as the break point in public confidence in China. But China’s economic problems did not start in 2022. Already in 2019 we were worrying about its growth trajectory. One could generalize this point to say that the liberal anti-authoritarian view of history has an interpretation of history which is both too strong and too weak. It is too strong because it knows from the very start how things are going to go – “same old story”.
But that leaves it open why the inevitable disaster actually happens when it does in historical time. Charles Maier pointed this out long-ago with regard to the collapse of the Soviet regime in 1989 in a fabulous article in History Workshop Journal. Posen recognizes this problem and frankly addresses it by claiming that China in fact benefited from a “miracle” which has now run out.
Pettis’s account is based instead on economic history and on an economic analysis that also differs fundamentally from that offered by Posen and the authoritarian impasse school.
The fundamental issue slowing growth in China right now is not the way in which authoritarianism undermines incentives and property rights and thus confidence and investment in the private sector. The real issue is that the Chinese regime, by authoritarian means – but also by using more subtle techniques of financial repression – underwrites massive socio-economic inequality. It is the suppression of household disposal income and thus effective demand, which is the root problem of the Chinese economy. The share of consumption remains staggeringly low and the share of investment hugely inflated. China’s economic problem is on the demand side with households and consumers not the supply-side (with business owners and investors).
This lopsidedness would be socially unbalanced, but it would not be a source of crisis were the regime willing to settle for more reasonable growth rates. But it is not, so it compulsively and repeatedly opts for debt-financed investment and to ensure that this takes place the regime is repeatedly drawn to interfere. It is the lopsided political economy and the regime’s growth priorities not the CCP’s compulsive authoritarianism or Xi’s third term that are the drivers of intervention.
Investment-led growth would not a bad thing so long as China still needed basic infrastructure. Thirty years ago China was still desperately in need of infrastructure, which is why China’s ferocious growth drive was the world historic transformative triumph that it was, lifting hundreds of millions out of poverty. But, in the last fifteen years, investment has reached its limit. China reached the point of diminishing returns. Whether the investment is public or private matters less than the aggregates. They are simply too big.
And once you hit the wall of diminishing returns finance begins to matter. The debt-finance model becomes both unproductive and dangerous because the liabilities that are piled up are no longer matched with productive asset. So China is accumulating a large pile of painful write downs, which at some point inflict real pain. The question of which balance sheet the debts are on is a tactical rather than a strategic issue, but the pain of writing the losses down is real. On this more in a subsequent newsletter.
So, in Pettis’s story the historical causality is quite different. Whereas in Posen it is only a matter of time before the authoritarian shoe drops and the fact that it did not drop earlier is a “miracle”, in Pettis the question is when does your investment-driven growth model run into diminishing returns. When that happens, the debt-fueled growth complex begins to become more and more dysfunctional and dangerous and the trade offs of huge inequality-for-growth become less and less supportable.
But the Pettis story depends not just on investment. The imbalances of the growth model express themselves outwardly in China’s recurrent trade surpluses. And that in turn implies an international entanglement.
Though China’s macroeconomic regime is authoritarian and certainly sui generis in historic terms, its problems, once understood as macroeconomic imbalances à la Pettis, cannot be understood in isolation, nor can they be reduced to inherent properties of illiberal regimes peculiarly afflicted by a lack of confidence ultimately traceable to “original sin”. In fact, China’s problems in many way mirror those in export-dependent democracies like Germany or Japan in the 1980s and 1990s. Furthermore, China’s imbalances are not just comparable, all such mercantilist strategies have as their precondition the availability of the large market to which the surpluses are exported. For every surplus there must be a deficit. Since 1945 the market for chronic export-surplus countries has been provided by the United States.
So, for Pettis China’s difficulties are rooted in a global structure. And not just that, running across these different geographies and different political economies is a common problem of inequality and the structural class biases of economic policy. Just as China’s trade surpluses are rooted in inadequate domestic demand, which in turn originates in inequality, the same is true in Germany and also, in inverted ways, in the chronic trade deficits of the United States. As Pettis argued in a recent piece in the FT
While much of the debate about limiting US government debt assumes that rising debt is a consequence of profligacy on the part of Washington policymakers, the problem is in fact structural. Americans are forced to choose between rising debt and higher unemployment largely because of the level of income inequality in their country — exacerbated by the large US trade deficit — that has sharply reduced the consumer demand for American businesses and manufacturers.
Obviously, Pettis and his collaborator in global analysis Matt Klein (in their book Trade Wars are Class Wars), do not deny regime differences between China, Germany and the United States.
But the problem at stake is not incentives and the public-private boundary, the focus for Posen, but the way in which inequality is produced and reproduced under CCP rule and in capitalist democracies. In any case, China’s imbalances, rooted in Chinese inequality, which drive the regime to follow the unsustainable investment-led and debt-financed growth model, are matched by imbalances in the United States, which are also linked to America’s powerful structures of inequality. China’s problems in the Pettis (and Klein) interpretation are part of a global pattern of malfunction, in which “actually existing” capitalism, through uneven and combined development (my usage not theirs) tends to undermine mass prosperity and increase precarity.
Unsurprisingly, there are also fundamental differences in underlying politics and self-positioning between the two contending interpretations.
The analysis of China’s problems that Pettis proposes, is in its own way extremely radical. It suggests changes that would fundamentally challenge the distributional political economy of the CCP regime, as it has emerged from the transformative growth of the last 25 years. But it is not a critique of that regime as such. Indeed, one can easily see how his proposed solutions would help to make real the promise of common prosperity touted by Xi (共同富裕). In a Hobsonian-Keynesian spirit, what Pettis is proposing is a new growth path for China, which might be more moderately paced, but would serve the actual needs of the vast majority of the Chinese population much better than the current path. This, might increase regime legitimacy. It might foster a less subservient middle class. We don’t know and Pettis does not venture an opinion, though in his work with Klein it seems clear they believe that the matching adjustments in the United States would help to alleviate the profound legitimation issues afflicting the USA. What is undeniable is that according to the Pettis analysis, continuing with the current growth model, even if it involved more dynamic private investment, is a recipe for mounting danger.
By contrast, the “authoritarian impasse” interpretation offered by Posen directly and irreconcilably juxtaposes societies with rule of law (i.e “the West”) to those ruled by capricious “autocracies”. From this it follows that only profound regime change offers China the chance of resuming sustained growth. Right now, China is headed down a path, which Posen likens to that of Venezuela. Rather than recoiling from that vision in horror – Venezuela is, after all, the driver of one of the largest refugee crises in the world (7 million as of May 2023) – Posen offers advice to the United States government on how best to intensify this crisis. To do so he advocates encouraging the exit of China’s upper class – offering them “off ramps” & opportunities for “self-insurance” – thus increasing pressure on Xi’s regime and accelerating China’s economic demise. This demise, Posen’s analysis suggests, will take the form both of slower growth, culminating in stagnation and greater volatility, because policy loses credibility, and greater risk of acute crises.
To see how stark the contrast between the two positions is, imagine the futures as envisioned by Posen and Pettis assuming their analysis was read and taken seriously by the policy-makers to whom it is most obviously directed.
Pettis is advocating for a more inclusive growth model to the benefit of 1.4 billion Chinese and the entire rest of the world with which China trades, very much including working-class America. By contrast, having ruled out reform from within, Posen is advocating for the United States and its allies to encourage the formation of a powerful Chinese bourgeoisie in exile, firmly aligned with the current US project of containment, and, presumably, regime change in China. That according to the “authoritarian impasse” view, is the only way for China to escape the road to serfdom which Xi is taking his country down.
You might say that sketching this future history makes for a caricature of Posen’s subtle and multi-faceted argument. To be clear, my point is certainly not that Posen is not concerned for the welfare of ordinary Chinese. Speaking personally I am highly sympathetic to Posen’s argument in favor of liberality for Chinese migration of all kinds. I find the harassment of Chinese academics in the United States odious. It is a disgrace to the profession to which I belong. I am embarrassed that working in an American University makes me complicit in a racialized regime of surveillance and suspicion. Though I find his analysis of China’s situation unpersuasive, as I will elaborate in the rest of this series, on the need for an open door, I strongly support his view. My point in dramatizing these divergent scenarios is not to criticize Posen, but to highlight how dark our imaginations are becoming under the shadow of a new cold war.
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