China in the world economy

Was the forecast about triumph of western democracy as ideal form of political economy premature?

The previous weekend’s meeting in Beijing of the Belt and Road Forum for International Cooperation (OBOR, China’s One Belt One Road initiative), just after the celebration in Japan of 50 years of the Asian Development Bank, reminded me of the long history of China in the global economy — and the symbolism of roads in it. Seven centuries before Mao’s famous “long march” that led to the communist revolution, Marco Polo had travelled the Silk Road to bring Chinese silk and other goods to Europe and established diplomatic relations with the Mongolian emperor. If his descriptions are to be believed, China was then the richest and most advanced civilisation in the world. Many historians believe the decline started in the 15th century when the then emperor destroyed China’s fleet because he believed that if China needed to trade with and rely on other countries for anything, it was the sign of a dangerous weakness. He barred all contacts with “barbarians” (shades of Donald Trump?). The decline was so rapid that in the 19th century, a small British army defeated China in the Opium Wars and forced it to remove restrictions on opium imports — from India, then ruled by the East India Company. (Trade wars have a history of at least 200 years!)

In the 18th century, the Industrial Revolution transformed manufacturing in England first, and then Europe —and Adam Smith published his book The Wealth of Nations extolling the virtues of a market economy. Workers were exploited in Dickens’ England, and Marx proclaimed the benefits of public ownership of the means of production, forecasting the death of capitalism. His model of the economy was practised by Russia in much of the 20th century, until the Soviet Union imploded in 1991. A year later, in a now famous book, The End of History and the Last Man, Francis Fukuyama proclaimed the triumph of western liberal democracy as the ideal form of political economy.

Five decades earlier, Japan had professed its intention to create the Greater East Asia Co-prosperity Sphere after under its leadership winning the war. But in 1945, it was defeated and gave up its imperial ambitions. After the war, both Germany and Japan became liberal democracies. By then the US was militarily and economically the strongest power and its Marshall Plan aid helped rebuild its war-ravaged infrastructure. Rapid economic growth followed and within a couple of decades they became rich again.

Meanwhile, China had its communist revolution in 1949, but started making its impact on the global economy only after 1980 when it opened up for foreign investment and trade. Since then its growth has been astounding, averaging about 10 per cent a year for 35 years, something unmatched in history. In the process, it has become the world’s largest economy in purchasing power parity terms, the world’s largest manufacturer and cross-border trader as also the world’s largest holder of foreign currency reserves, with huge investments in Asia, Africa, Latin America and even Europe.

China seems well on the way to restructuring its economy from export-based to domestic consumption-based, albeit at the cost of slower but still respectable growth of 6.5/7 per cent or so.

The Belt and Road Initiative and the large investments China is making in infrastructure — roads, ports, bridges, trains etc — all over Asia and even in Europe need to be looked at in this perspective. Is it a way of telling the world that China has “arrived” and is now a global power, by investing in “trophy assets”? Or does it have an economic justification?

Almost by definition, infrastructure investments have a long payback period, sometimes difficult even to calculate given the side effects, positive and negative. Much of the BRI investment is going in transport infrastructure — roads, bridges, trains etc. Can this be more economic in promoting trade over long distances as compared to shipping? Are the projects aimed at promoting Chinese exports rather than imports, trains leaving China full, but coming back empty? Will the increasing automation of manufacturing (see The Other Side, “Technology, jobs and inequality”, May 4) reduce cross-border trade? Will local residents resist the projects, leading to cost and time overruns? Too many questions, too few answers!

Meanwhile, what seems clear is that under Trump and his America First agenda, “the United States is just handing over the leadership of the multilateral (trading) system to China”, as economist Jeffrey Sachs recently told Bloomberg. Does China’s spectacular rise in the global economy suggest that Fukuyama’s forecast of the triumph of western liberal democracy as the ideal form of political economy was premature?

The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com