Chris Anstey
For decades, China rode a wave of economic success by following what its neighbors had done. But now it has truly veered from that path—foreshadowing a potential failure to achieve upper income, or developed-economy, status.
Authoritarian governments in South Korea and Taiwan showed how to pull millions of people out of poverty by overseeing rapid and sustained economic growth propelled by an export-led model. Bill Overholt, drawing on his research at (now-defunct) Bankers Trust, recognized how that could be applied in the People’s Republic of China in his 1993 book, The Rise of China.
Overholt, who now conducts his research at Harvard, highlights that South Korea and Taiwan offered further lessons. In the 1980s and 1990s, their political systems evolved to embrace competition, and they became even more market-driven. This allowed them to progress to the next level of the economic scale.
But that’s where China has thrown out the playbook.
Chinese leader Xi Jinping, left, and members of the Communist Party’s new Politburo Standing Committee in October.
At a certain stage of development, Overholt said in an interview this week, “things get very complicated because of economic success.”
Among the patterns that appear are:Big companies get into financial trouble. Recent examples include Chinese real estate giants and conglomerates, not unlike big South Korean enterprises in the late 1990s.
Some large firms “get so big that they start trying to capture parts of the state,” he said. In China, that arguably evokes memories of how Alibaba Group Holding Ltd. came under scrutiny over its links to regional authorities.
Demonstrations increase. Overholt said that as interest groups multiply, they gain financial resources, organization and leadership. Before Xi took over the Communist Party and during the first years of his rule, China saw waves of protests over issues from environmental degradation to property seizures.
It as at this point that leaders have a choice, Overholt said. One option is to “bow to the complexity” of their now-more-sophisticated economies, allowing political competition and freer markets (as was done by South Korea and Taiwan). Or they can slam on the brakes.
In the early 2000s, when he worked at RAND Corp., Overholt was brought in as a consultant for the massive Tianjin-Binhai development southeast of Beijing. It was then, Overholt said, that he started to realize China wasn’t embracing the new complexity of its economy.
While Shenzhen (set up as a special economic zone in 1980) and Shanghai’s Pudong (a 1990s project) became world-famous, Tianjin-Binhai is better known for its debt problems. The trouble? Rather than let market demands prevail, officials were picking what technologies to invest in, he said.
A taxi driver washes his car across from the Tianjin-Binhai development in 2011.
Photographer: Sim Chi Yin
Over the past decade, China has clearly chosen the other path. This has been illustrated by crackdowns on privately run enterprises and the undermining of civil-society groups including non-governmental organizations, Christian churches and once-independent think-tanks.
China’s bureaucracy—which Overholt noted was once innovative and embraced working with private-sector companies—has in part been paralyzed by Xi’s anti-corruption campaign. And within the Party, the October leadership reshuffle sidelined anyone who could rival Xi and his associates.
This alternative path doesn’t bode well for the kind of innovation and productivity-led economic growth Beijing says it wants, observed Overholt, who’s now compiling a fresh book on US-China ties.
And that’s a problem when the potential of China’s other domestic-demand engines—property, infrastructure and urbanization—is fading, though Overholt added that urbanization still has a ways to go.
More broadly, Overholt warns that Xi’s current approach has unsettled so many interest groups so fundamentally that it raises major risks. It reminded him of something he observed in 1980 as a newly-minted analyst at Bankers Trust, then looking at Communist Poland.
The bank pulled its loans to the country after Overholt pointed out how its leadership had “alienated every important” group. A few months later, Poland defaulted. By the end of the decade, its government was overthrown.
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