China, Capitalism, and the New Cold War

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NILS GILMAN

As Branko Milanović notes in his new book, capitalism convincingly triumphed over socialism at the end of the Cold War. That does not mean that struggles between the emerging variants of capitalism—liberal-meritocratic and political—will be any less fierce.

“Infernal world, and thou profoundest Hell

Receive thy new Possessor: One who brings

A mind not to be chang’d by Place or Time.”

― John Milton, Paradise Lost

When politicians, pundits, and academics speak of a growing competition, or even a New Cold War, between the United States and China, one thing that is not asked enough is what is being competed for. Likewise, when we speak of an “American” or “Western” model, in contrast to a “Chinese” one, it is worth asking what or who exactly is being modeled, and to what end. One of the virtues of Branko Milanović’s new book, Capitalism, Alone, is that it addresses these questions head-on and with useful insights and results. The answer, according to Milanović, is that the competition is to win the hearts and minds (or, as we will discuss, at least the pocketbooks) of the leaders of what used to be called the Third or developing world, and which is now generally referred to as the Global South.

Competition between economic models for the hearts and minds of the Global South is not new. Such competition was one of the issues at the core of the Cold War: Would countries emerging from the yoke of colonialism choose to follow the “free enterprise” model proposed by the newly emergent capitalist hegemon in the United States, or would they instead adopt the Communist authoritarian model proposed by the Soviet Union. From the late 1940s through the 1980s, billions of dollars in foreign aid were distributed, vast propaganda efforts were pursued, and numerous hot wars and insurgencies were fought across Asia, Africa, and Latin America to determine which of these models would prove more attractive to countries trying to chart the best way to improve their economic conditions. In other words, as Yale historian Odd Arne Westad has argued, the Cold War was above all an ideological competition over which would prove the superior model of development—authoritarian communism or democratic capitalism, and within each of those categories, which flavor—Soviet centralist or Maoist, autarkic-welfarist or neoliberal, and so on. As late as the early 1980s, it was not at all clear to contemporaries which of these models would prove most attractive.

By the late 1980s, however, the fog of ideological war seemed to lift, so much so that in the summer of 1989, a young political scientist named Francis Fukuyama dared to ask whether the ideological war for the hearts and minds of not just the Global South but the entire world was in fact over. It seemed clear to Fukuyama that the one best system for promoting prosperity and freedom was a globally-oriented market economy coupled to a democratic political system. While other systems remained entrenched in a few places such as Iran and China, the ideological debate was over, Fukuyama declared. “The End of History” had arrived, embodied in the form of democratic capitalism shared in some broad sense by all North Atlantic democracies. These systems had proven their superior capacity to deliver rising standards of living and peaceful, inclusive politics to such a degree that no right-thinking political leader anywhere could possibly aspire to anything else. The collapse of Eastern European communism that same Fall, the rapid embrace of capitalist “shock therapy” across the former Soviet Union, as well the “third wave” of democratization across Latin America in the late 1980s and 1990s, made Fukuyama seem like a prophet.

Of course, darker countervailing forces were still active. On June 4th, 1989, the Communist regime in Beijing signaled in the strongest possible terms that it was not about to embrace parliamentary democracy and liberalism as part of its economic “opening up” policy. The slaughter in Tienanmen Square that night indicated the commitment of the Deng Xiaoping regime to continued authoritarian rule no matter what. That same night, on the other side of Asia, the Iranian regime announced Ayatollah Ruhollah Khomenei had died. But Khomeini’s long-anticipated passing, unlike that of General Francisco Franco in Spain a decade and a half earlier, did not herald a break with the authoritarian order in Tehran. Instead, the Iranian mullahcracy’s ability to move past their original charismatic leader’s death signaled the successful institutionalization of an anti-liberal form of political practice in the Islamic Republic.

Even with these two cases, the case for Fukuyama’s End of History thesis long remained strong. What late-twentieth-century leader in the Global South, after all, looked to either China or Iran as a credible alternative developmental model to capitalism, liberal or otherwise? Up until the Global Financial Crisis in 2008, the Western model of liberal, democratic, and allegedly meritocratic capitalism seemed all but unchallenged from an ideological point of view. Yes, China and Iran and a few other holdouts weren’t yet embracing liberal democracy, but it seemed like only a matter of time before they, too, would come around.

As the Bush Administration’s National Security Strategy in 2002 put it:

The rule of law; limits on the absolute power of the state; free speech; freedom of worship; equal justice; respect for women; religious and ethnic tolerance; and respect for private property: no nation owns these aspirations, and no nation is exempt from them. . . . Many other nations, with different histories and cultures, facing different circumstances, have successfully incorporated these core principles into their own systems of governance . . .

Today, these ideals are a lifeline to lonely defenders of liberty. And when openings arrive, we can encourage change—as we did in central and eastern Europe between 1989 and 1991, or in Belgrade in 2000. When we see democratic processes take hold among our friends in Taiwan or in the Republic of Korea, and see elected leaders replace generals in Latin America and Africa, we see examples of how authoritarian systems can evolve, marrying local history and traditions with the principles we all cherish. . . . The national security strategy of the United States must start from these core beliefs.

What is most striking about this statement is how confidently it expressed the assumption that history was on the side of “the American model” of liberal democratic capitalism, the universal and final form of political evolution.

In many ways, it feels like a dispatch from a lost world.

It is now clear that the Global Financial Crisis (GFC) and the consequent Great Recession (2007-9) represent a watershed in the legitimacy of Western democratic capitalism. The events and aftermath of the GFC have had three signal effects. First, the GFC inflicted great economic hardship and financial trauma on vast swaths of the population in the United States and Europe, as millions of homes were foreclosed, unemployment spiked, and (especially in Europe) fiscal austerity was imposed. This has brought into persistent question the ability of the Western economic model to “deliver the goods.” Second, fairly or not, the widespread view is that those responsible for the GFC, both in government and in the financial markets, were not “held accountable”: Those who had enriched themselves via the pre-GFC bubble were allowed to walk away with their fortunes largely intact. This has caused widespread political rage, undermining the political legitimacy of Western democracies. Third, while the lack of sufficient fiscal stimulus in Europe and North America led to something approximating a lost decade, with economic growth rates averaging barely half what they had in the decades before the crisis, China continued to grow its economy at an enormous rate. If the proof of the economic pudding is in the eating, China seems to have been using a better cookbook over the last decade. Not surprisingly, it was precisely in the wake of the GFC that questions first started to get asked whether “the China Model” might come to replace the western one. Over the last decade, the fear in the West has risen steadily that China is eating our lunch.

Part of the backlash in the West against China comes from the much-belated recognition that the Chinese were never planning on adopting Western ways. Despite the fact that the post-Tienanmen Chinese Communist Party (CCP) has never been anything but direct that it would never brook any challenge to its political authority, many Westerners during the 1990s and 2000s continued to find evidence to maintain their fantasies, whether it was the New York Times reporting on how fan voting in Chinese gameshows suggested pent-up demand for democracy, or the Carlyle Group’s David Rubinstein claiming in 2012 that continued liberalization was “inevitable,” or various scholars who claimed, as late as 2013, that China’s only choice was to “democratize or die.” Even if the process was slow, many Westerners managed to convince themselves that at least China’s trends were “in the right direction” toward eventual political liberalization and convergence on the liberal democratic capitalism of the West. Subscribing to the hoary old master narrative of modernization-as-convergence convinced many in the West that time was on their side—or at least against the CCP’s.

Historians in the future will debate where the turning point was in the West’s attitude toward China. There will be an inevitable tendency to credit (or blame) the arrival of President Donald Trump, with his belligerent rhetoric toward China, but the shift in mood on China both pre- and post-dated Trump. Human rights organizations had of course long decried China’s treatment of dissidents and Tibet, but the turn to mass internment of ethnic Uighurs in Xinjiang starting in 2014 significantly raised the volume. Likewise, business groups that had hoped to tap the vast Chinese market became progressively disillusioned with China’s seriousness about providing market access and angrier about persistent intellectual property theft and mandatory IP licensing agreements in exchange for market access. But arguably, the decisive turning point was China’s announcement in early 2018 that it was abolishing term limits for the President of the Republic (which had previously been limited to two terms, a convention both Presidents Hu Jintao and Jiang Zemin had respected). This declaration effectively made President Xi Jinping president for life.

Although Trump himself jocularly praised this move, Xi’s announcement shocked the foreign policy establishment in Washington, DC. While internal Chinese factional politics have always been opaque to outsiders, here was a clear, simple marker that China was not moving (however slowly) toward democracy and generalized convergence with the Western model, but rather in the opposite direction. Although the evidence of reinvigorated authoritarianism had been there since the start of Xi’s presidency for anyone paying close attention (in retrospect, the jailing of Xi’s political rival Bo Xilai upon Xi’s accession to power was a strong indicator, even as some western analysts at the time insisted it was actually “a very positive event”), the significance of this announcement was comprehensible to even people with little or no knowledge of China. What the Chinese regarded as a matter of internal politics and governance, and as such of no great relevance or interest to foreigners, represented an earthquake in Washington, putting the nail in the coffin of efforts to maintain the old narrative that China was making inexorable if slow progress towards democratization and generalized convergence with the West.

Trump’s Sinophobic turn, in other words, caught a fundamental shift in the zeitgeist in Washington that had little if anything to do with his own uninformed assessment of the situation in China (which was more a matter of longstanding prejudice than any careful assessment). Indeed, one of the few topics on which there has been almost complete bipartisan consensus in Washington during the Trump years has been toward taking a harder line on a China that everyone now recognizes has no intention (and indeed, never did) of trying to democratize or otherwise emulate the American or Western political system. This bipartisan shift may have coincided with Trump’s arrival but the very fact that it is bipartisan demonstrates that it was not Trump who created it. Like a rooster at dawn, his crowing simply called forth the inevitably rising sun. At this point, the mood has decisively shifted.

What Americans of both parties have belatedly and angrily realized is that we find ourselves locked in a profound struggle not with some communist power slowly democratizing, but rather with a rival, authoritarian brand of capitalism, firm in its own vision of politics, with neither need nor intention of converging with our own model. Indeed, if anything, the illiberal turn in western democracies over the last decade suggests that insofar as convergence is happening, it is via more fragile liberalizing democracies becoming more authoritarian rather than the other way around. What we have belatedly realized is that we are in a situation, as Henry Farrell and Abraham L. Newman wrote in a much-discussed paper this summer, of “weaponized interdependence,” or perhaps more optimistically, “a partnership of rivals.” At this point even the Chinese, who have watched with horror and disbelief as the relationship with the West has deteriorated, believe that the best we can hope for is to “maintain a mutually beneficial collaboration while managing a benign rivalry.”

Milanović’s Capitalism, Alone begins from this point of departure: Capitalism has conquered the world, operating everywhere, as Milanović puts it, “according to the same economic principles: production organized for profit using legally free wage labor and mostly privately owned capital, with decentralized coordination.” And yet, it turns out that this conquest has not ended geopolitical competition for the hearts and minds of the Global South about the proper developmental model. While central planning imploded in the 1980s and 1990s as a credible alternative to capitalism, Milanović documents how there have now emerged two (broadly stylized) ideological alternatives within capitalism, which he refers to as “Liberal Meritocratic Capitalism” (an abstracted version of contemporary American capitalism) and “Political Capitalism” (whose primary exemplar today is China).

Liberal meritocratic capitalism’s primary selling points are respect for the rule of law, political pluralism, cultural tolerance, and the concept of fair play—which together add up to the promise that everyone should have an equal chance at success, based on their God-given talent and hard work. As Milanović points out, however, the greatest threat to liberal meritocratic capitalism comes not from any direct challenge from political capitalism, but from the widespread sense that the liberal meritocratic order has betrayed its promises. Widening inequality in the West, and the willingness and ability of the elite to game the system to benefit their friends and offspring, have led many to feel that the meritocracy is sham, which in turn has fueled populist illiberalism on the right and neo-socialism on the left.

If liberal meritocratic capitalism was the world that Fukuyama suggested lay at the End of History, political capitalism is a form of market-based political economy in which the government, as opposed to civil society, retains ultimate authority over major economic decision-making. While Milanović names a variety of countries that fit his definition of political capitalism, China represents the “paradigmatic” case. According to Milanović, there are three defining features of political capitalism. First, “a highly efficient and technocratically savvy bureaucracy” is put in charge of the system, with a mandate to realize high economic growth. Second, while capitalists and entrepreneurs may make huge amounts of money under political capitalism, “capitalists’ interests are never allowed to reign supreme, and the state retains significant autonomy to follow national-interests politics.” Third, the state retains ultimate control over the capitalists because the “rule of law” as such is absent. While the system is meritocratic in that the bureaucrats are appointed and promoted based on objective criteria, the political echelon retains final and arbitrary power.

If liberal meritocratic capitalism has legitimation problems, so does political capitalism, albeit of very different sorts. On the one hand, there is an inherent tension (what Marxists would call a contradiction) between the need for technocratic, skilled elites, and the fact that this elite finds itself forced to “operate under conditions of selective application of the rule of law.” On the other hand, corruption tends to be endemic in such systems, in that the ultimately arbitrary power of the political elite provides innumerable opportunities for self-dealing. And this corruption is obviously corrosive to the legitimacy of the system, no matter how meritocratically the political leaders may have achieved the positions that enable them to enrich themselves and their family members. As Milanović glosses it, under political capitalism

the elite should not be seen simply as bureaucracy, because the lines between where bureaucracy ends and business begins are blurred: individuals may move between these roles, or the different roles may be maintained by different individuals with the same ‘organization’ that has its ‘representatives’ dispersed, some in business, others in politics. Using a pejorative term, one could say that such organizations are not too dissimilar from mafias.

Milanović’s definition of “political capitalism” is in part an argument about the world-historical role or function of communism. Communist regimes may have failed to create terrestrial paradises, but what they were successful at, above all, was destroying “feudalism” wherever they took power. This capacity was especially appealing to leaders of the emerging Third World in the middle of the twentieth century, who faced a dual mandate not only to overthrow foreign rule, but also to “get rid of the stifling power of landlords and other magnates.” In fact, Milanović argues, “the only organized force that could affect these two revolutions were communist parties and other parties that were both left-wing and nationalist.”

This latter argument is perhaps an overreach. While communist parties invariably killed off the ancien regime wherever they took power, they were not the only political force capable of achieving such reforms. For example, right-wing (or at any rate anti-communist) governments carried out land reforms in countries such as Taiwan, the Philippines, Indonesia, and South Korea. It is unclear whether communist regimes were actually more effective at setting the stage for “political capitalist” models than were various quasi-fascistic regimes. Be that as it may, it is undoubtedly true that wherever Communist regimes came to power, it spelled doom for incumbent elites. And where centrally planned economies collapsed or retreated, especially in the post-Soviet space, what has followed has rarely been liberal meritocratic capitalism, but instead almost always a mafia-esque political capitalism. Even the apparent exceptions, such as in Eastern Europe, are increasingly coming to seem to prove this rule, as demonstrated by the rise of creeping political capitalist regimes in places like Serbia and Hungary.

Fukuyama is not the first Hegelian to think he had reached the end of History only to see the dialectic renew itself at a new plane. “As has occurred so often in human history,” Milanović observes, “the rise and apparent triumph of one system or religion is soon followed by some sort of schism between different variants of the same credo.” In this case, the tension is between two variants within capitalism, rather than between two kinds of modernism, namely capitalism and communism. But if the two systems of capitalism, the liberal-meritocratic and the political, stand less far apart in their operating principles than did Communism and Capitalism, this need not mean the competition will be any less fierce.

Any would-be systemic ideological “peer competitor” to the United States needs three things to appear credible: 1. a viable developmental model; 2. a desire or motive to export that model; and 3. a capacity to export that model. Considering these three questions a decade ago in his much-discussed book When China Rules the World, Martin Jacques argued that China in fact does not have this kind of “export ambition.” For “cultural reasons,” Jacques claimed, the Chinese would prefer to remain “aloof” from the barbarians abroad. But as Milanović points out, “Aloofness is no longer a viable option.” As recent kerfuffles over NBA players and executives commenting on the protests in Hong Kong, or the development of a “corporate social credit system” suggest, China is increasingly flexing its economic and technological muscles to force foreigners to kowtow to its political proclivities.

In terms of the viability of their system as a model for the Global South to emulate, the looming fact is that China is an economic success story. China’s system of political capitalism, for all its flaws, has lifted more people out of poverty than have all the Western development programs of the last half-century. Moreover, since the global financial crisis, China has gone from an economy that was about half the size of the American one, to one as large (or by some measures bigger). Whether China wants to export its system or not, there is no question that many across the Global South are wondering if there are lessons they can learn. As Fukuyama himself has pointed out, at the beginning of this decade China seemed to be toying with the idea of proposing its system as a model for others to follow, as indicated by discussions in Chinese intellectual and social scientific circles about the potential exportability of the “China Model.”

In terms of China’s capacity for exporting its model, the “One Belt, One Road” (一带一路) initiative, now more commonly referred to as the Belt and Road Initiative (BRI), suggests possibilities. While more a slogan and a vision than a definite set of plans, it is clear that the BRI represents an effort by China to export its surplus capital and know-how in infrastructure development to countries throughout its periphery, with the evident ambition of turning China into the central trading hub of the 21st century. Seen from the hindsight of President Xi Jinping’s more assertive position for China today, it is easy to think that China in the 1990s and 2000s was simply following the famous dictum of former CCP Chairman Deng Xiaoping’s: “Hide your strength, bide your time.”

Milanović presents a nuanced argument in the face of these pregnant possibilities. On the one hand, he suggests it will be difficult for other countries to emulate what China has done. China’s long history of subordinating merchants to the interest of the state, its unique blend of centralized power and authority and decentralized administration, and of course its sheer scale both geographically and demographically make it a hard act to follow. On the other hand, Milanović points out, the attraction of “the China Model” for emerging generations of leaders in the Global South may primarily proceed from extra-economic motives. Political capitalism offers “manifest advantages for those who are in power: they are insulated from the immediate pressure of public opinion, they have the opportunity to parley their political power into economic benefits, and they do not face institutionalized time limits to their rule.” If the competition between liberal meritocratic capitalism and political capitalism is for the hearts and minds of the Global South, then above all it is a competition for the hearts and minds of the political elites in the Global South, and for such elites, the advantages of political capitalism are evident.

But what if the real terms of the competition for those hearts and minds isn’t in fact an ideological competition between two different systems of social and political organizations and value systems? What if the Chinese have, in fact, little interest in exporting their political-economic model to the rest of the world? Looking at China’s more recent statements and behavior in the international arena, there has been scant evidence that the Chinese government cares at all about how countries organize themselves internally, so long as they are deferential to China’s interests and sensibilities. While the United States habitually pressures other countries on their internal politics, the Chinese tend, in fact, to be studiously silent on the internal politics of other countries. China’s commitment to respecting the political sovereignty of other countries to this extent feels sincere.

In fact, China’s primary motive in international affairs does not seem to be about promoting a model, but rather about ensuring that they can maintain internal political stability and control. China’s big lesson from the 1990s was that it must never allow itself to fall into a position like the Japanese in the 1980s, or the Koreans and Thais in the 1990s, where the international financial institutions were able during a financial crisis to dictate internal reforms. Building up a huge current account surplus has been a central aspect of that strategy.

One crucial difference between the first Cold War and this new one is that whereas the Soviet and the American economies were separate from one another, the Chinese and the American ones are deeply interdependent, almost placentally so. Because the economies of the two countries are, at least for now, so intertwined, the new Cold War is less a matter of ideological competition than a struggle for economic ascendency. The frontline in this struggle concerns standard- and norm-setting regarding new technologies, as the battle over the deployment of 5G networking infrastructure has made clear. Dominance in the realm of information and communications technology is especially central because of the centrality of these technologies to control political communications. This has led to much handwringing about the Chinese exporting “totalitarian” surveillance technologies—usually failing to note that plenty of Western countries are exporting similar technologies, indeed sometimes to China itself. In a nutshell, what we are facing is not an ideological Cold War, or even a trade war, but in fact a tech war—that is, a war for control over technological standards and the commercial spoils that go with that. Arguably the greatest geopolitical risk today is thus that “tech may trip the Thucydides trap.”

Overall, the evidence suggests that growing Chinese influence over how countries organize their political economies is the result less of any effort on China’s part to export their ideological model than of the eagerness of leaders in the Global South to exercise the kind of social and political control enabled by these technologies, which the Chinese are happy to sell to them. China’s motives, in short, are commercial rather than political. Nonetheless, even if the Chinese are less interested in exporting their ideological and governance model, they may nonetheless de facto begin pushing countries they work with toward political capitalism because of what political scientists refer to as “isomorphic” conformism: Organizations that interact intensively start to converge in structure and process, not for ideological reasons, but simply so that their interactions can become more efficient. Over time, they increasingly mirror each other’s operational practices and organizational structures and habits. “Convergence,” in short, proceeds not for Hegelian ideological reasons, but for technical ones. In sum, even if China is not pushing anyone to adopt Chinese governance strategies, as China becomes an ever more dominant trade partner, we should expect the leaders of China’s major trade partners to increasingly adopt political capitalism as their de facto governance style.

The central question facing American foreign policymakers is how to promote the liberal values associated with meritocratic capitalism in a world of growing de facto support for the political capitalism that China symbolizes. In the end, that comes down to renewing the faltering appeal of liberal meritocratic capitalism. As Milanović points out, the ultimate appeal of liberal meritocratic capitalism is great—most people living in democracies, after all, consider meritocratic democracy a “primary good,” that is, an end in itself—so long as it actually lives up to its promises. Liberal meritocratic capitalism does not need as much growth as political capitalism in order to legitimate itself, but it does need to ensure that there is in fact reasonably equal opportunity to succeed. Redressing the widespread view that the system is rigged in favor of incumbents is essential for reinvigorating both the moral justification for and political legitimacy of liberal meritocratic capitalism.

Here Milanović offers up several recommendations that can help restore the meritocratic promises of liberal capitalism. First, it is essential to equalize access to high-quality education. In the United States today, in particular, the educational system at every level is intensely stratified, and incumbent elites have largely reserved access to the best institutions for their own class. When more students at Ivy League schools are children of the One Percent than from the bottom half of the income bracket, it undermines the legitimacy of the entire system. Massive renewed investment in public education is thus one critical leg. “The objective is to reduce transmission of advantages across generations and make equality of opportunity real.”

Second, because income from capital grows more quickly than income from labor, as Thomas Piketty has taught us, abating growing inequality requires a broader distribution of access to capital. Milanović cheekily co-opts Margaret Thatcher’s term “the people’s capitalism” to suggest a renewed commitment to spreading access to capital, by ensuring that shares in enterprises are owned broadly, not confined to a narrow class of rentiers and executives. The goal should be to “reduce the concentration of wealth and income from capital” and increase inter-generational income mobility. To achieve these objectives, Milanović proposes increases in the taxation of the rich, especially a return to high taxation of inheritance with the explicit goal of reducing the concentration of wealth in the hands of the rich. How individual states are supposed to accomplish such an objective in a world where the truly wealthy mostly stash their lucre in corporate and offshore vehicles is left unexplored, though elsewhere Milanović has praised the work of Berkeley economist Gabriel Zucman, who along with his colleague Emmanuel Saez has been exploring precisely this policy challenge.

If liberal meritocratic capitalism can address the betrayal of its own ethical operating principles, or perhaps even evolve into some more mutualistic form of “people’s capitalism,” then it may well be able to renew its long-term appeal to the Global South, albeit perhaps not directly to political elites. Conversely, if China’s style of political capitalism can avoid the besetting sins of previous authoritarian regimes, namely the tendency to generate bad policies and social outcomes that benefit only political insiders, and instead continue to deliver higher rates of growth, efficient administration, and an ability to address perceived social challenges, the appeal of the Chinese system may only grow. But even if China succeeds in this goal, it is unclear whether other countries will be capable of following China’s model of political capitalism.

In the end, Milanović doubts whether either the political or liberal meritocratic variants of capitalism is likely to achieve total global victory. For one thing, neither the United States nor China is going to embrace the other’s system for themselves. Despite Americans’ eternal optimism that if foreigners just tried a little harder they could become just like us, there’s little indication that the Chinese have any desire to adopt “barbarian” ways. Contrariwise, the Chinese retain an abiding skepticism about the capacity of barbarians ever to cease being barbarous, which as Jacques suggested puts breaks on their ambitions to export their model. In the end, whereas Americans want to be emulated, the Chinese merely want to be paid tribute.