Information and organisation: China’s surveillance state growth model (Part 2: The clash of models)
Phuah Eng Chye (23 November 2019)
Economic model preferences are shaped by historical experience. The Western models was shaped by their experience with ideological repression and influenced a shift towards “liberal democracies”. They evolved an economic system, institutions and rules that proved extremely successful. They now insist other countries follow the same precepts within the world order[1] established by them.
It is not the same for Asia. The Asian experience is based on the struggle for independence and nation building. Markets and democracy are not core philosophies but are regarded as tools to support the pursuit of economic growth. Asia tends to focus more on economic needs rather than political needs, community rather than individuals, are culturally acquiescent and distrustful of foreign power domination. In Asia, states are expected to play a stronger role in economic development.
In this context, the lingering suspicion among developing economies is that the world order is rigged; with the rules continuously changed to favour the developed nations. Ellen Brown notes the emerging Asian economies, led by Japan, exploded on the scene “with a new economic model called state-guided market capitalism. The state determined the priorities and commissioned the work, then hired private enterprise to carry it out. The model overcame the defects of the communist system, which put ownership and control in the hands of the state”. “In East Asia during the 1980s, economic growth rates of 7-8 per cent per year, rising social security, universal education and a high worker productivity were all backed by state guidance and planning, albeit in a market economy – an Asian form of benevolent paternalism”.
Ellen Brown relates the Japanese state-guided market system became “regarded as an existential threat to the neoliberal model of debt-based money and free markets promoted by the International Monetary Fund (IMF)…Western neoliberal economists persuaded Japan and the Asian Tigers to adopt the free-market system and open their economies and their companies to foreign investors. Western speculators then took down the vulnerable countries one by one in the Asian crisis of 1997-98. China alone was left as an economic threat to the Western neoliberal model, and it is this existential threat that is the target of the trade and currency wars today”.
Parallels between Huawei and Japan in the 1980s have also been drawn. Wendy Wu notes “Japan’s semiconductor industry surpassed the US as the world’s largest chip supplier in the early 1980s, causing wariness and discontent in the US over national security risks and its loss of competitiveness in core technologies”. “Washington accused Tokyo of state-sponsored industrial policies, intellectual property theft from US companies, and of dumping products on the American market…The US punished Japanese companies for allegedly stealing US technology and illegally selling military sensitive products to the Soviet Union. It also forced Japan to sign deals to share its semiconductor technologies and increase its purchases of US semiconductor products”.
The debate on the role of the state and state subsidies
Two key issues in the conflict relate to the role of the state and state subsidies. The reality for developing economies is the lack of an alternative to a state model. Developing economies lack a tradition of markets, a well-functioning legal structure while its private sector is lacking in knowledge and finance. It takes many decades to build domestic capacity and, even then, only a few have succeeded. In practical terms, adopting a Western model means opening up for foreign MNCs to dominate their economy. A state model allows developing economies to mobilise scarce resources to nurture domestic players to represent national interest in strategic industries. Hence, Asian economies prefer a state model accompanied by phased liberalisation of its markets.
In earlier decades, state models were tolerated because they were generally unsuccessful and did not pose a threat. But as Asian economies were able to adapt the state model to achieve economic success, the tune has changed. In this regard, is China now being asked to abandon its state model because market-based models are struggling to compete with them?
Dani Rodrik frames this point differently. “Many analysts believe that China’s industrial policies have played a key role in its transformation into an economic powerhouse. If so, it would be neither in China’s interests, nor in the interest of the world economy, to curb such practices. Alternatively, it could be that these policies are economically harmful on balance, as others have argued. Even in that case, however, the bulk of the costs are borne by the Chinese themselves. Either way, it makes little sense to empower trade negotiators – and the special interests behind them – to resolve fundamental questions of economic policy on which there is little agreement even among economists”.
While claims that state models create an unlevel playing field are valid but a superior economic model should be able to hold onto its lead even in a handicap race. There is therefore more to it than claims of unfair competition. China’s state model seems to be forging ahead while the growth dynamics of the Western model are perceived to be faltering. Many Western economies face maturity[2] challenges; displaying ailments such as high debts and deficits combined with underinvestment in infrastructure and funding shortfalls for their welfare, healthcare and education systems.
In addition, the ability of the Western companies to compete with “less regulated” foreign competitors appear stymied by over-regulation. China’s advantage is that it is not encumbered by a tradition of rules (e.g. IP, privacy and over-regulation). Unusually, China state power has been used to disrupt rather than protect legacy industries. In contrast, the Western model’s reliance on laws and markets may end up impeding information disruption and protecting legacy incumbents. The Western model policies is also predisposed to protecting legacy resource, agriculture and manufacturing businesses. This diverts resources from investments in the industries and infrastructure of the future. The implication is that the Western model is based on a legacy rather than forward-looking paradigm.
There is another major contradiction. Western economies are also facing a societal backlash against big companies and “excess” profits. There are growing calls for Western governments to intervene to address the social challenges posed by rising costs and growing inequality. Yet, on the international stage, there are growing calls for China to do the reverse; for the state to reduce its role.
In my view, the problem with the Western model is that it has become too ambivalent about the role of the state. Western governments are relying heavily on markets to make decisions on the future direction of the economy and society. This hamper governments from exercising leadership to achieve non-profit objectives. Policy neglect leads to under-investment in infrastructure, loss of competitiveness and allows social problems to compound. In the meantime, the invisible hand (private sector) has become addicted to fiscal stimulus and cheap credit. There is little doubt the Western model has gone astray. There is a need to clarify and reshape the role of the state in the Western model. In contrast, China’s state model is not constrained by the profit motive and have the freedom to shape policies to achieve non-profit objectives such as social needs or to accelerate innovation on a large-scale basis.
There has also been significant criticism[3] of China’s use of subsidies to support state owned enterprises. I would like to present a different take on this argument. First, criticisms of subsidies and bail-outs can be viewed as hypocritical. The provision of subsidies is widespread; including in Western economies.
Second, it is difficult to determine what is and isn’t a subsidy. Incentives are routinely offered to attract investments, even in market economies. In addition, the private sector is expert at taking advantage of and arbitraging government incentives and spending. One prominent example is Amazon which is highly profitable and yet pays very little tax. The tendency of fiscal expenditures to end up as corporate profits have caused many Western economies to turn anorexic[4]. Third, private firms benefit from the willingness of private investors to provide capital which can be used to subsidise prices so that firms can win market share at the expense of competitors. Both these points raise the question of why private (investor) subsidies should be differentiated from state subsidies and why state enterprises should be penalised in competing against private sector firms.
Overall, it is the role of the state to guide and assist economic development. Most countries use subsidies to accelerate growth; particularly in the “industries of the future”. Unfortunately, when these subsidies are viewed though a national lens, the subsidies can be construed as efforts to win market share at the expense of domestic producers. For example, China used subsidies to achieve scale and to drive down the costs of solar panels and therefore the costs of producing solar power. This is actually a desirable outcome from the viewpoint of the global development of sustainable energy. Unfortunately, this has triggered accusations of dumping and punitive tariffs were imposed which represents a setback to the goal of sustainable energy.
Hence, we need to think carefully about the outcomes we want in shaping the rules on subsidies and the public sector role. For one, subsidies do not guarantee success. Governments that channel funds into legacy industries such as coal, steel and agriculture will likely suffer consequences because the benefits are doubtful. No country has bottomless resources and it is up to governments to use their scarce fiscal resources wisely to the best economic effect.
Historically, subsidies have a bad reputation due to their distortive effects. In particular, subsidising the consumption of essentials (e.g. oil and food) prevents demand from adjusting to supply shortages and is very costly due to leakages. Subsidies are also costly when they are used to delay adjustments in legacy industries (by creating artificial demand for goods with low demand). It is also a puzzle why governments would want to provide subsidies to consumers in other countries. Importing countries should welcome foreign state subsidies as this helps to keep inflation low.
In my view, state subsidies work best when they are being used to promote risk-taking, to nurture demand or to expand opportunities for new technologies and industries. Governments should be allowed to provide subsidies without fear of being subject to retaliatory actions. This will enable governments to strengthen their role in incentivising an acceleration in innovation, expanding markets and scale and lower costs to the benefit of societies around the world. The question of level playing field will not arise if all governments can freely choose what they wish to subsidise.
In addition, it no longer makes sense to differentiate between public and private sector “players”. With the legal advances in governance structures and the increasing overlap between private and public sector, governments should be allowed to compete with the private sector. There should no differentiation between state and private subsidies. State subsidies can also be viewed as a form of the government crowd-financing.
The real problem with the state role is not subsidies but the protection of inefficient firms and the prevention of consumers getting access to the cheapest, best and most innovative products and services in the world. Reforms to promote fair competition should focus on removing constraints on market access (government purchasing, licensing, standards and ownership) and on resolving issues relating to intellectual property and fair enforcement.
The clash of models
Can the two models co-exist peacefully[5]? It did in earlier decades when the state model did not pose a threat to the Western model. But as the state model gains strength, the consequences of divergent policies become significant and increases the likelihood of a head-on collision[6].
Dani Rodrik attributes “today’s China-US impasse is rooted in the faulty economic paradigm I have called hyper-globalism, under which countries must open their economies to foreign companies maximally, regardless of the consequences for their growth strategies or social models. This requires that the domestic rules governing markets converge considerably. Without such convergence, national regulations and standards will appear to impede market access. The main US complaint against China is that Chinese industrial policies make it difficult for US companies to do business there. Credit subsidies keep state companies afloat and allow them to overproduce. Intellectual property rules make it easier for copyrights and patents to be overridden and new technologies to be copied by competitors. Technology-transfer requirements force foreign investors into joint ventures with domestic firms. Restrictive regulations prevent US financial firms from serving Chinese customers”.
Dani Rodrik argues “the world economy desperately needs a plan for peaceful coexistence between the United States and China”. He suggests “peaceful coexistence would require that the US and China allow each other greater policy space, with international economic integration yielding priority to domestic economic and social objectives in both countries, and in others. China would have a free hand to conduct its industrial policies and financial regulations to build a market economy with distinctive Chinese characteristics. The US would be free to protect its labour markets from social dumping and to exercise greater oversight over Chinese investments that threaten technological or national security objectives”.
In this context, the inability of the two models to co-exist will accelerate deglobalisation. “The failure to stem deglobalisation will shift the struggle from the economic to the political and military arena. Countries will scramble fiercely to retain miniscule advantages as liquidity and trade shrinks. Elites will attempt to re-impose control on the ownership of ideas and brands, access to information and information flows”[7].
The consequences of deglobalisation are severe. First, rising conflicts will lead to policy divergence as nations focus on domestic needs at the expense of international cooperation. There will be adverse effects from the unwinding of past fiscal and monetary policy cooperation.
Second, the conflict centers around information rather than physical trade[8]. Rival countries and international players are still feeling their way around decoupling as there is little precedent for the international enclosure and enforcement of rights relating to intangibles and information. Access will diminish as territories are demarcated and new barriers erected. This marks the return to a more physical environment. There will be an unwinding of past benefits from scaling, exchange, access, sharing and cooperation. Innovation will be hampered while the ability of countries and companies to monetise value from information will diminish. The consequence is to reduce the return on capital and to entrench economic stagnation.
Third, multinational firms were the main vehicles for globalisation and therefore much of the deglobalisation adjustment will take place through the multinational firms. In this regard, the large trade imbalance can be viewed as the outcome of “multinational configuration of production chains”[9]. In the face of rising tensions, most firms will attempt to reconfigure their production operations to achieve resilience and neutrality (to evade sanctions and other retaliatory actions). Generally, they will be forced into retreat and to scale downwards.
In the past, globalisation of firms meant geographical expansion which expanded the diversity of stakeholders across countries – employees, customers, owners and governments. In the process, national identities, cultures and allegiances were diluted. The current escalation in conflict is putting pressure on multinational firms to reflag and to choose sides (declare their loyalties to a country or cause). Wearing their nationalities or beliefs on their sleeves will however expose firms to risks from sanctions, coercion[10], boycotts, retaliations and sabotage. These risks do not only arise from the trade war but also from social media activism[11]. It will be interesting to see how the fracturing of the global economy into “territories” will affect multinational firms’ diversity of markets, stakeholders and cultures.
In many senses, Hong Kong’s one country, two systems is a forerunner of the global schisms pitting the China state model in direct confrontation with the Western model. There are some surprises in how events are unfolding. Under the two systems, Hong Kong was presumed to be a superior model showcasing the benefits of capitalism for China to adopt. However, the violent protests are taking place in capitalist Hong Kong rather than in mainland China.
First, the causes of the protests are rooted in history. Wang Gungwu[12] notes “on the question of democracy, Hong Kong people have high expectations. The Chinese, of course, don’t really want democracy, and that was quite clear from the beginning”. Andrew J. Nathan suggests “Chinese decision-makers are hardly surprised that Hong Kong is chafing under their rule. Beijing believes it has treated Hong Kong with a light hand…granting it special access to the mainland’s stocks and currency markets, exempting it from the taxes and fees that other Chinese provinces and municipalities pay the central government, and guaranteeing a reliable supply of water, electricity, gas, and food. Even so, Beijing considers disaffection among Hong Kong’s residents a natural outgrowth of the territory’s colonial British past and also a result of the continuing influence of Western values”.
Second, the divisions are ripping apart Hong Kong’s social fabric. Alex Lo suggests “the seismic changes in our society run deep…It’s not just housing, economic inequality or lack of social mobility. These are grievances that fuel the anger and discontent. What we are seeing now is the emergence of an indigenous nationalistic ideology…survey after survey has shown a majority of people under the age of 35 consider themselves Hongkongers, and not Chinese. Most are closed off from the rest of the country with a well-defined border and speak a different language from mainlanders. They are not really Western, yet not entirely Chinese. There is the crucial us-vs-them mentality, years in the making, against mainlanders. It’s not that Beijing had behaved like a tyrant to Hong Kong people, despite their claims. Rather, it’s precisely its exercise of restraint that provides the space for local-nationalism to develop and build an irresistible momentum”.
Luisa Tam writes “it is wretchedly frustrating to see families, couples and friends at war over the anti-government protests in Hong Kong. Most people don’t know how to negotiate around the political debate and social chaos; there is no escape from the controversy, and the battle on our streets has infiltrated some homes. Many thorny issues related to the protests, such as police brutality, mobs vandalising properties across the city and heated arguments over right and wrong, are splitting families and wrecking marriages and relationships. There is also a huge generational divide, with mostly young people siding with the protesters, while many older people remain neutral or take an opposing stance”.
Jeffie Lam points out “tens of thousands of teenagers who make up the backbone of the movement…fuel the protests with an idealism and innocence – if not naivete – that in turn draws sympathy, guilt and worry from older adults that young people could be trading their future for seemingly impossible dreams of democracy and a Hong Kong with its own distinct characteristics…Their yearnings, as revealed on social media, imagine a Hong Kong where people speak Cantonese, patronise family-run shops and not chain stores and pharmacies catering to mainland Chinese tourists, and care for one another as neighbours in close-knit communities…It is of a Hong Kong lost over the years with more mainland Chinese and rapid development that brought wealth to the upper crust and left many others feeling out of place in their own city”.
Mike Chinoy cautions Hong Kong’s “strife increasingly resembles the early years of what became known as “the Troubles” – a conflict that lasted 30 years and left 3,000 people dead…The Troubles began as a peaceful protest movement demanding that the province’s minority Catholic population be given the same political and civil rights enjoyed by the Protestant majority and other British citizens…In Northern Ireland, the government’s unwillingness to address demands for basic civil rights also sparked clashes, with the police using rubber bullets and tear gas…had enormous power to weld a crowd together in common sympathy and common hatred for the men who gassed them. By the time the Northern Ireland authorities grudgingly conceded some of the basic civil rights demands in the early 1970s…it was too late…Demands for specific reforms gave way to calls to overthrow the system altogether. For the Irish Republican Army, or IRA, this meant the start of a campaign of violence aimed at severing the North’s British connection and creating a united Ireland…It is not unreasonable to worry that the uncompromising approach of the Beijing and Hong Kong governments risks pushing some of the youthful protesters in a similar direction”.
Third, the Hong Kong protests reflect the growing influence of social media movements[13]. Alex Lo notes “today’s protesters have decided they don’t need leaders; everything has to be as spontaneous as possible. Indeed, spontaneity is taken as proof of the movement’s legitimacy and authenticity – contrary to Beijing’s claims about protesters being in the pockets of Washington and Taipei”. “But the logic of such a movement, unrestrained by any leadership or a peaceful faction, necessarily means it’s being led by the most radical members – and violence will escalate as their demands become greater and more difficult to satisfy. No one has the authority to call off the protests or de-escalate, but anyone can get on social media to launch another wave of violent protests. The government may want to sit down and talk, but the protesters can’t”. Thus, the movement is unable to “self-correct and rectify its own mistakes…What we are seeing is not moderation but escalation. The violent protests have undermined not only the rule of law but unwritten norms of behaviour – such as encouraging children to fight police – that have secured the city’s stability for generations. The movement has spawned its own Frankenstein’s monster”.
Chris Horton notes “months of protests in Hong Kong have pitted residents of all ages and backgrounds against their police force, local government, and the Chinese Communist Party, and there is no question of who is less powerful. Yet in a parallel battle over international public opinion, it is Beijing and its minions that are outgunned…From Oslo to Osaka, Congress to the United Nations, Taiwan to Twitter, Hong Kongers have taken their DIY approach to protest to a global audience. Celebrity supporters testify in high-profile settings; highly targeted, crowdfunded media campaigns aim to keep the issue in the spotlight; and viral videos, catchy slogans, and even a movement anthem and flag help magnify the message on social media”.
The divide between the Hong Kongers and mainland Chinese is wide and the ill-feeling is reciprocated. Ren Yi notes “people in Hong Kong, Taiwan, the United States and elsewhere who support the months-long anti-government protests are outraged that many mainland Chinese took issue with the protests. They believe China’s Great Firewall – its system of online censorship – effectively filters every piece of information deemed detrimental to the ruling regime, thus depriving mainland Chinese of any ability to form a correct judgment about the so-called pro-democracy protests (which, incidentally, many mainland Chinese now see as a nativist movement driven by a group of radicalised youth with extremist views and a willingness to use violent means to achieve their aims)…But such perceptions are a far cry from reality. Many mainland Chinese have access to tons of information and news daily about China hyperconscious of the fact that the government dominates and controls information input and inflow, hence they do not easily accept whatever the government says…people who live in a somewhat sophisticated authoritarian society, like China or the Soviet Union of the recent past, are more likely to have developed a cognitive condition better understood as cynicism – a proclivity for denial, rejection, doubt and non-belief, unless such information is checked and somehow verifiable. This actually makes them much more suspicious to one-way information, especially when it’s backed by the government”.
The history of social frictions, contrasting cultures and expectations makes it difficult to expect an expedient resolution. Zeynep Tufekci notes “for months now, I’ve been told that Hong Kong’s protests would end soon…It’s not that the protests haven’t taken a toll on the protesters. Many are tired. Some surveys suggest that more than 80 percent of the people of Hong Kong may have been exposed to tear gas – an astonishing figure…We are afraid, they quickly admitted…This is our last chance…If we stand down, nothing will stand between us and mainland China”. In reference to “China had done to the Uighur minority…China may have wanted to make an example out of the region, but the lesson Hong Kongers took was in the other direction – resist with all your might, because if you lose once, there will be a catastrophe for your people, and the world will ignore it… weren’t sure whether they would win…But we cannot give up,” one insisted, “because if we do, there will be no future for us anyway. We might as well go down fighting.” On a Hongkonger website, Ted provides a personal account of how he shifted from being a peaceful protestor to becoming “increasingly involved at the frontline of the protests”. He explains the protestors “are determined to put their lives on the line and fight for Hong Kong’s democracy at all costs. They cannot be dissuaded…The road ahead is rough, but we must remember that everyone has an impact. You can never foresee how your actions today will spur the actions of other people in the future. The daily news is distressing, but we must turn our grief into action, so that we can bring about changes for Hong Kong, for our next generations, and for the sake of democracy and freedom”. The Hong Kong protests is thus turning into a contest of wills – with the Hong Kong government trapped in the middle and many waiting to see Mainland China’s reaction.
Models in transition
The Hong Kong conflict has important economic model issues that shouldn’t be overlooked. How could it all have gone so wrong for capitalism’s best-known success story so suddenly? The success of Hong Kong’s capitalist model was a function of time and circumstance. In this regard, there are similarities between Hong Kong and UK. Prior to 2000, they thrived as international centres for trade and finance catering to the needs of a vast hinterland. As global financial centres, Hong Kong and UK enjoyed massive information advantages reinforced by reliability (rule of law) and confidentiality.
However, the value of the entrepot model has been undermined by globalisation, the growing strength of the hinterland, rising information flows[14] and transparency. In my view, the Hong Kong protests and Brexit[15] are symptoms of the fading allure of their once-admired entrepot and capitalist-based model. The citizens of the entrepots feel suffocated by the growing dominance of the hinterland and their diminishing stature as it is overtaken by other hinterland cities. They react by seeking to separate from their hinterlands in an effort to re-establish their unique identity.
Hence, Hong Kong’s economic challenge cannot be simplified into housing affordability and income inequality. The more critical policy question is whether Hong Kong’s fallen capitalist model can be put together again? I believe Hong Kong’s challenge is to evolve its capitalist model to restore its economic potency given the changing landscape.
First there is a leadership issue that needs to be resolved. China and the Hong Kong elites (the government[16] and business tycoons) seem more active in deflecting responsibility than in stepping up to the plate. Second, Hong Kong needs to craft a strategy to manage maturity challenges and the displacement effects of globalisation. Synonymous with the Western model and in contrast to China, Hong Kong’s economy faces maturity[17] challenges. Hong Kong also suffers from a higher level of global displacement. The social problems related to affordable housing, living costs and employment are accentuated by its entrepot model as there is a high proportion of foreigners relative to the domestic population. The entrepot model that used to offer the best of both worlds (the benefits of the Western model and as a gateway into China’s economy) has now turned into a model squeezed by the worst of both worlds (the maturity of the Western model and China’s growth).
Third, Hong Kong needs to move on from the glory of its entrepreneurial past. It needs a new vision and to remake its identity. In this regard, Hong Kong needs to rethink its positioning with the context of an information rather than a mercantilist paradigm and as a point of access[18] in a network rather than being a main gateway. Lastly, as the protests demonstrate, Hong Kong needs to address its greatest shortcoming; namely the broadening of economic participation and the harnessing of generational change.
The forces tearing Hong Kong apart reflects the challenges to maintaining peaceful co-existence between the China state model and the Western model. As China becomes stronger, the West will become more fearful and suspicious[19] and will seek to erect barriers to protect itself against perceived China aggression[20]. It is the end of the free pass for the China state model as Western countries attempt to constrain China’s role in the global production chain and its access to global markets. In this regard, China can consider its approach to handling Hong Kong as part of the solution it seeks to manage its relationships with the rest of the world.
This raises a question on the evolution of both models. In effect, both models represent an ongoing experiment of finding an appropriate balance between state and markets. In the past, the Western model won hands-down in competition with other models. As the model matured, it lost competitive power. In my view, the Western model can be rejuvenated by clarifying the role of the state given its social challenges.
The state models have advanced by adapting best practices for the private sector from the Western model. While state models are on the ascendency, they need to be alert to reactionary risks. At the moment, the state bureaucracy is willing to give the private sector leeway but it is always a risk that powerful bureaucrats may seek to reimpose their grip with dire consequences. The intervention may not even be overt. For example, there is a debate in Malaysia and Singapore that the sizeable ownership of equity by government-linked funds led to unfair competition and stifled entrepreneurship and economic growth.
In addition, state models need to address threats from inept management and corruption. In this regard, one of China’s key reforms have been to tackle “widespread official corruption, but its side-effects have also become obvious”. Wang Xiangwei note that “officials have retreated into a lethargic mode and are averse to making any decisions, obfuscating government directives in order to deflect responsibilities. This has resulted in poor progress in reform and opening up…Meanwhile, the party’s forceful efforts to assert control have unnerved an increasing number of private entrepreneurs, reducing their appetite for investment. This has led to a downward trend for overall private investment, dragging down economic growth. To ease their concerns, the government has promised financial incentives and tax breaks but the private business owners are more concerned about the lack of proper legal protection of their rights and even their personal freedoms”.
While China has attempted to “govern the country in accordance with law…In reality, the authorities have often resorted to extralegal detentions and other coercive measures to deal with politically sensitive cases involving outspoken civil activists, journalists, lawyers, academics and religious figures. Even well-known political figures and business people often disappear for months, if not years, before reports emerge that they are being held on corruption allegations. Such reports can hardly inspire confidence in the government’s promise to promote the rule of law and its governance model at home and abroad”.
Overall, the China state model and Western model are at different phases of growth. China’s state model growth took place on the back of a youthful population and labor force, large-scale industrialisation and infrastructure development, urbanisation, market liberalisation, and globalisation. However, many of these favourable factors will eventually diminish or reverse as China’s economy matures. Already, economic growth is slowing as population aging begins. The trade war is accelerating the hollowing out of several manufacturing industries. Debt levels and property prices are already at relatively high levels.
It will be interesting to see how the China state model responds to Western model maturity problems. Xiang Songzuo[21] warns “short-term stimulus efforts by the government would not be effective, and that the country should stay on the course for structural reforms that promote basic research and innovation”. In managing the transition from the low value-added labour-intensive industries towards the high value-added technology-oriented industries, China is gearing “larger spending on research and development”. However, China’s weakness in nurturing outstanding talent is noted. Xiang Songzuo “warned of an overemphasis on business model innovation, whole-nation system and the role of state-owned enterprises, as well as the lack of academic competition and flow of ideas…The whole-nation system certainly generates effects and it had some successful examples, but it’s worth study whether it can work well for large-scale innovation.”
Conclusions
Alan Doss asks “are liberal, democratic societies now trapped in an existential struggle with China in the marketplace of political ideas and economic competition? Or can they find ways to manage the global redistribution of economic wealth and political power that has come with China’s ascendancy without forfeiting the fundamental precepts of their own societies?”
Alan Doss suggests unintended conflict can be mitigated through “a preventive approach” that emphasises on diplomatic engagement and on expanding “the circle of democracies and democratic alliances”. Through engagement, China “may well become more amenable as demographic change and the limits of mercantilism gradually push the country towards a lower growth path and reduced surpluses”.
In his view, dealing with China requires “strategic patience”. “Better-educated, more prosperous and well-connected societies do not automatically produce more liberal, peaceful societies. The ruling ethos has to evolve as well. And that may come with generational change with the “successor generation…may well be less accepting of the trade-off between stability, material well-being and personal freedom. This does not mean China will become a Western-style liberal democracy; but neither is the country destined to remain an authoritarian, one-party state”.
The current geopolitical tensions can also be viewed from the “clash of models” perspective where a new variant of a competitor model threatens the franchise of an established model. There doesn’t seem to be an obvious pathway to converge the two distinctive models. With its success, China isn’t likely to give up on its model[22] and adopt Western norms. Similarly, it is difficult to see the Western economies switching to the China state model as these norms are not culturally acceptable.
An uneasy decade therefore looms ahead as leaders attempt to reshape the global framework for cooperation between two equal but different systems. New arrangements would be needed to accommodate the changing balance of economic power, to clarify the roles of states and firms and to establish the rules on the flow and use of information (covering technology, data and intellectual property).
Within this context, both models have further to go in their evolution. It is my hypothesis that the Western model has become backward-looking rather than forward-looking; and protective rather than visionary. I suggest the Western model can be rejuvenated by shifting from an industry paradigm to an information paradigm.
China has evolved but a large part of its economic system remains opaque and state-directed. It too faces headwinds and pressures to shift from industrial policies. China’s model has flaws and still need to improve on transparency, rules and due process. But China seems to have an edge because it is better at organising information; it is more facilitative of information disruption and scaling, and in deploying new technologies. China’s state model may be a raw version but it is the more promising version of an organisational model for the information society.
References
Alan Doss (4 November 2019) “How can liberal democracies best manage China’s re-emergence as a great power?”. SCMP. https://www.scmp.com/comment/opinion/article/3035434/how-can-liberal-democracies-best-manage-chinas-re-emergence-great
Alex Lo (29 September 2019) “Leung Chun-ying was right about Hong Kong nationalism”. SCMP. https://www.scmp.com/comment/opinion/article/3030860/leung-chun-ying-was-right-about-hong-kong-nationalism
Alex Lo (1 October 2019) “Protest movement spawns its own Frankenstein’s monster”. SCMP. https://www.scmp.com/comment/opinion/article/3031146/protest-movement-spawns-its-own-frankensteins-monster
Bryan Gruley (26 October 2019) “The US sees Chinese state-owned rail company CRRC as a cybersecurity threat. Is it right to?” SCMP. https://www.scmp.com/magazines/post-magazine/long-reads/article/3034335/us-sees-chinese-state-owned-rail-company-crrc
Chad Bown, Jennifer Hillman (4 November 2019) “The October truce on US-China trade failed to address subsidies”. Voxeu. https://voxeu.org/content/october-truce-us-china-trade-failed-address-subsidies
Chris Horton (29 September 2019) “Hong Kong Is winning the global public-opinion war with Beijing”. The Atlantic. https://www.theatlantic.com/international/archive/2019/09/hong-kong-public-opinion-beijing/599059/
Chris Lonsdale (29 October 2019) “Hong Kong is no longer a colony, but officials still await instructions from on high – and that’s a problem”. SCMP. https://www.scmp.com/comment/opinion/article/3035138/hong-kong-no-longer-colony-officials-still-await-instructions-high
Dani Rodrik (12 April 2019) “Capitalism with US and Chinese characteristics can peacefully coexist – if we give up on hyper-globalism”. SCMP. https://www.scmp.com/comment/insight-opinion/article/3005674/capitalism-us-and-chinese-characteristics-can-peacefully
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[1] See Henry Kissinger (2014) World order. Penguin Books.
[2] See “Information and development: Escaping the industrial maturity trap and moving forward to an information society”.
[3] See Chad Bown and Jennifer Hillman.
[4] Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
[5] The US-China Trade Policy Working Group suggest a regime of “peaceful economic co-existence” that preserves policy space – for China to conduct its industrial and growth policies and for the US to safeguard its labor markets and technological systems is the best politically sustainable option to preserve the enormous benefits of robust international trade.
[6] See John F. Copper on analysis on the current animosity towards China stemming from its rise and challenge to the Western global order.
[7] Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
[8] The physical share of total trade has fallen. See “Information and development: Globalisation in transition”.
[9] “Information and development: Globalisation interrupted and deglobalisation risks”.
[10] See Tom Holland.
[11] See “Future of work: The labour movement (Parts 2 and 3)”; “The sharing economy: Sharing, social media and information”.
[12] See Gary Cheung.
[13] See “Future of work: The labour movement (Parts 2 and 3); “The sharing economy: Sharing, social media and information”.
[14] “Information and development: Globalisation in transition”.
[15] David Dowell compares the similarities between the self-inflicted Brexit and the Hong Kong crisis.
[16] See Chris Lonsdale.
[17] “Information and development: Escaping the industrial maturity trap and moving forward to an information society”.
[18] See “Critique of information” for a theoretical exposition on the concept of access.
[19] See Mark Magnier for a comparison of the success of India relative to China in Silicon Valley.
[20] See Bryan Gruley for an account of the US reaction to China’s state-owned CRRC domination of the global railway carriage industry.
[21] See Frank Tang.
[22] See Jane Cai.