“China did it right, Russia screwed up”

Here’s an intriguing and disturbing article by a native Muscovite turned NY-based economist on how China has secured its position as, in effect, the linchpin of the world’s economy. The article is fascinating on multiple levels. First, there is its argument that Russia in effect committed suicide with its rush to democracy while China, by taking a different path, went on to become master of the universe. Second is its argument, which I find more compelling than the previous point, that any blow to the Chinese economy could reverberate to cause unimaginable fiscal strife for America (and thus the world). It’s an eyeful and should be read in full, but here’s a taste.

China’s rapid economic development is the most amazing story of the past decade — just as the collapse of the Soviet Union and Russia’s slide into irrelevance was the main historical event of the previous 10 years.

Until the mid-1980s, Russia and China vied for the supremacy of their respective brands of communism. Then, in the early 1990s, the focus of the rivalry shifted to the best model for transition to the free market.

After the Russian default in 1998, it became accepted wisdom that the Soviet Union should have delayed democratization, reforming its economy along Chinese lines first. The rollback of democracy and reassertion of the role of the state under President Vladimir Putin can be seen in this light as a shift toward the Chinese model.

As recently as at the turn of the century, Russia still seemed to be in the running. Even now, Chinese gross domestic product remains low on a per capita basis, and many Russians retain a sense of superiority toward everything Chinese, from goods to people. But the race for economic supremacy is over. After 25 years of annual growth averaging nearly 10 percent, China’s economy on a purchasing-power-parity basis is approaching $10 trillion, gaining inexorably on that of the United States. Its annual exports have increased sixfold in the past decade alone and measure close to $1 trillion.

China is not just an enormous producer of manufactured goods. In accordance with the Marxist law of transformation of quantity into quality, its global weight has increased substantially. It is now a linchpin of the East Asian manufacturing network. With its trade surplus breaking records, and its stock of direct foreign investment approaching half a trillion dollars and central bank reserves hitting $1 trillion, China is also a pivotal player in the global financial system.

After this comes the analysis of how China’s economic misfortune can (and most likely will) launch a global crisis hitherto unimaginable since the Great Depression.

Update: I was going to leave it at that but can’t resist quoting the final grafs:

During the Cold War, the Soviet Union could annihilate the United States with its nuclear weapons — and face instant annihilation in return — but it could not make a serious impact on its economy. China has emerged as probably the only nation in the world that can single-handedly undermine the U.S. economy. If China suffers an economic or political crisis, the United States will likely be plunged into a severe recession — if not an outright depression.

This scenario is ominously similar to that of the Great Depression of the 1930s, which was largely a U.S. crisis taking place after a decade of breakneck economic growth. The stock market crash occurred on Wall Street, but its shockwaves promptly spread around the world. Ultimately, the Depression marked the demise of British economic dominance and the end of the pound as a global currency. While the next global economic crisis is likely to originate in China, it will almost certainly mark the end of the dollar as the linchpin of the global financial system and a substantial diminution of the central role of the United States.

I do not see this as being at all unrealistic. Sobering stuff.

Via CDT.

The Discussion: 12 Comments


All I’ll say is that Alexei Bayer is a yellow journalist, and I’m, ah, “dismayed” that you’re uncritically promoting his propagandistic trash.
(Whose propaganda, you ask? He’s an emigre in New York; that’s where his interests are based. And this is a case where powerful American and Chinese interests make strange propagandistic bedfellows.)

Nothing personal, but this is one time when you and I totally disagree, and I will not make any further comments on this thread, because it just plays into the CCP’s favourite propaganda meme, and their verminous supporters will certainly greet this thread with glee.

End of my comments on this thread. Next thread, please?

December 11, 2006 @ 11:45 pm | Comment

Ivan, I do NOT agree with his comments on how Russia failed and China took over the world. I do agree with his comments that the US economy is perilously tied to China’s, and that a crisis in China’s economy could shake the world at its economic foundations.

December 11, 2006 @ 11:53 pm | Comment

And it’s for this reason that I call those protectionist China-bashing congressmen/women in the U.S. irresponsible demagogues. Destabilizing and threatening China in this game makes as much sense as Curtis Lemay’s repeated threats to nuke Moscow. While I agree that the CCP has warts and everything, it’s done a remarkable job of keeping the global economic system from running aground. I shudder to think what a bunch of religious fanatics like the FLG or a bunch of idealistic “democratic” revolutionaries will do with China’s foreign reserves… and how much the U.S. would have a real reason to hate China then…

December 12, 2006 @ 2:06 am | Comment

Related articles: here, here, and here.

December 12, 2006 @ 4:24 am | Comment

THM, links please.

December 12, 2006 @ 5:25 am | Comment

Related articles: here,
here, and here.

December 12, 2006 @ 5:53 am | Comment

On the one hand, I see economic interdependence as positive because it forces otherwise rivals to cooperate. On the other, a planned or unplanned unilateral change would hurt other countries that did nothing to cause the change and had no power to prevent it.

December 12, 2006 @ 6:49 am | Comment

Yeah, the Russians were a bunch of dumbasses. A minimum of 20 – 30 years would be needed to properly prepare, train, and put systems in place to make a transition from command to capitalist system. Who the hell was in charge?

While the Americans focused on forcing the Soviets to spend themselves to death during the halcyon days of the cold war, ulitimately successful in the Reagan era, the Chinese were on the sidelines, slowly experimenting, putting systems in place, and preparing (arguably the 80s were the most vital time period in their transition, laying down the foundation).

The Chinese can also not be compared to the diverse races / peoples / religions / cultures under the Soviet rule – much more homogenous (95% Han). And with “natural” traits, dare say – much more in tune with pure capitalist values (greed, wealth, an individual’s worth measured by the size of their influence and bank account), that reemerged when given a suitable environment to express.

The author has it right that the world economic lead will be returned back to the Chinese in the 21st century (150 years out of the lead will not seem like much when examined in context of 2-3,000 years). But, its hardly like the Russians are out of the race – the Russian’s steely resolve and resilency has been tested on many ocassions and they will find their footing and get back in the game after the dust settles from their first very immature foray into the exceedingly complex world of international capitalism.

December 12, 2006 @ 11:32 am | Comment

I wouldn’t call the Russians a bunch of dumbasses. I don’t expect every Russian to behave like Ivan at least. And uh, no, my best Russian friend’s name is Irina, not Yelena.

OK. Enough of that crap.

But there is a fundamental flaw to the material quoted. It presupposes political economy to be political in nature. It presupposes the market to be, instead of a spontaneous order, something that could be achieved, by men like Deng Xiaoping, etc., some organic whole with social ends.

It is this kind of romantic/paranoid view of the market that I disagree with. Maybe Neanderthal Paleocons are able to understand this China threat talk. Not this Chinaman.

December 12, 2006 @ 1:50 pm | Comment

I think it is absolute nonsense to say now thsi early in history that the Chinese got it right and Russian got it wrong and history will teach us later.China appears to be on the right track but I am not sure we can pronounced judgement on this yet as I think 20 years is too early to judge history. What China did is what we Chinese say’ we have change the soup(water in the soup) but not the ingredients’, they have kept a totalitarian government but went to to allow Chinese entrepreneurial spirit a free rein( I chosen a better word than Greed and Individualism). The problem with this is that it does not work in the longer term. As the concentration of power breeds corruption and eventually with it the efficiencies and free spirited individualism will be discouraged or the powers that be be corrupted by certain groups with guns or money( both are equally potent). It will eventually not be a competitive society in the long run. China only enter into the world economy truly the last 25 years and since they are starting from a low base like Vietnam is bound to grow at 10% pace but as it matures it will slow down and if they are not careful with all the corruptions and inefficiencies going on it can all implode on us like what South east Asia did back in 1997.

If you want stability and long term growth you need proper institutions with proper checks and balances. I do not discount the possibility of Chinese politics evolving to one of nearer to a democratic model with proper checks and balances but until that happens, no it will not be a world power to challenge USA.

How Russia will evolve is also another matter and I think under Putin they are taking ahuge step back as the democratic institutions are being restrained and surpressed where they should be allowed to evolve and grow. But what do you expect from a former KGB.

December 12, 2006 @ 6:02 pm | Comment

“I do agree with his comments that the US economy is perilously tied to China’s, and that a crisis in China’s economy could shake the world at its economic foundations.” —

I concur, but I would also flip that around: “the Chinese economy is perilously tied to that of the US and a crisis in the US…”

I see no reason why the next economic crisis could not originate in the US… thereby sparking one in China. The foundations for dollar weakness and “the end of the dollar as the linchpin of the global financial system” are pretty much of US making. China, the rest of Asia, and the Middle East are only sitting on all of those T-bonds because the US is debt-addicted.

The scale of global imbalances didn’t get this large solely because of China — it had lots of help from the Fed, Treasury and US consumers.

I do expect a massive correction in China (in many ways, it needs one) but I’m willing to bet that it will be preceded by a sharp and nasty downturn in the US.

Other than that, Richard, look forward to seeing you in Beijing next year.

December 13, 2006 @ 4:40 pm | Comment

Thanks Myrick, I agree with you. Look forward to seeing you soon.

December 13, 2006 @ 10:11 pm | Comment

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