Cracks beginning to show in China's Miracle

If you're riding the tiger you don't get to choose when to stop. [Link]

Yet several specters haunt China.

In order for these economic projections to come to fruition, China’s economic planners must navigate a set of structural and demographic challenges the scale of which has never been seen before. To continue economic growth, China’s economy will have to fundamentally shift away from its current orientation toward exports and grow based on its own consumption. Other structural challenges, from taxes and regulation to intellectual property and the rule of law, all must be reformed if China’s economic growth is to continue. China’s leaders will also have to manage an unprecedented level of urbanization, with an expected 400 million new urban residents (yes, that’s more than the entire U.S. population) by 2050. Just as daunting, China’s population is rapidly ageing, which will become a tremendous economic challenge given the effects of China’s One Child Policy and its Bachmann-beloved lack of a Social Security program.

Beyond economic and demographic challenges, China is roiling with discontent. As the Wall Street Journalrecently pointed out, 40 percent of Chinese are unhappy with their lives, 70 percent of farmers are dissatisfied, and 60 percent of China’s rich are emigrating or considering doing so. While each group has its own reasons – farmers resent abusive land seizures by local government officials, city dwellers are regularly victims of government abuse, and China’s wealthy would prefer to live where their children have better educational opportunities and their wealth is more secure – this translates to a roiling hotbed of popular discontent. Tens of millions of Chinese who have moved from the countryside to the cities in search of work receive little basic government support, such as medical care and education, because they are generally considered to be illegal immigrants by city officials.

Riots, often violent, are a daily occurrence. According to official statistics, there were 127,000 so-called “mass incidents” in 2010 alone – an average of over 340 per day.

There are certainly ways to address these problems. The United States gradually developed tools to manage the negative effects of its own Gilded Age, by eventually allowing the rise of labor unions, laws to protect investment, efforts to stamp out official corruption, and eventually implementation of welfare and social security programs. Yet in each case, implementing these tools in China would require a fundamental change in how business is done. Labor unions are (naturally) controlled by the Chinese Communist Party, the rule of law in China is unreliable at best, and official corruption is a persistent problem on a scale that would even make Jack Abramoff blanch.

Most fundamentally, China’s ability to manage future problems will be hampered by its political system. The United States was able to (very gradually) adjust to the problems it faced because its leaders were accountable to a voting public that demanded reform. China’s leaders, however, aren’t directly held accountable by their people. While Chinese politicians routinely (and often genuinely) cite popular opinion as a driver in their decision-making, tying one’s position and job to regular elections has the effect of sharpening one’s need to represent the interests of the public.

The implications of these phenomena for China, and for the world, are staggering. Unlike with the democratic world, the Chinese people don’t have the ability to vent their frustration with free and fair elections. This has the effect of putting a lid on a political pressure cooker, forcing people to express their discontent through riots and difficult-to-censor microblogging. If something goes wrong, this pressure could explode.

Domestic problems in China, either caused by political discontent or structural economic difficulties, would have disastrous effects on the economies reliant on China as a source for trade, which basically includes every country on the planet. Economies around the world would fall, and history has demonstrated that countries during these difficult times can be unpredictable, at best, on the world stage.

China’s current leaders are acutely aware of the problems their country faces, and are trying to adjust economic growth and introduce policies designed to account for the problems created by unchecked economic growth. They have set a goal for slower economic growth, have called for increased development and investment in China’s poorer provinces, are considering policies to respond to concerns voiced by farmers and migrant workers, and are attempting to crack down on corruption. Ironically, China’s nominal communist ideology somewhat prepares China’s leaders for these challenges – after all, who understands the political challenges posed by burgeoning economic inequality and a rising middle class better than a Marxist?

America’s Gilded Age began after the national trauma that was the Civil War and a remarkable period of Reconstruction that saw significant internal development and stabilization. China’s Gilded Age began after the national trauma that was the Great Leap Forward and the Cultural Revolution, and occurred after a remarkable period of internal development and stabilization under Deng Xiaoping. The United States’ Gilded Age lasted for 16 years, ending with a financial panic in 1893 that turned into a depression, then a Progressive era that saw reform at home and adventurism abroad. It has been 22 years since 1989 signaled the end of Deng Xiaoping’s post-Mao Reconstruction and the beginning of Shanghai-style economic growth under the leadership of Jiang Zemin.