Thoughts on China

[KendallJ]

By Kendall J from The Crucible & Column,cross-posted by MetaBlog

I have returned from my first business trip to China earlier this month. It was an eye-opening experience, as I got to see first hand the progress that has been made there, and better understand what is occurring in the country. The particular issue of how to deal with China is important to me. My job just became global and so I have product responsibility for some products that are sold in China. I have discussed this topic multiple times on Objectivist forums, here, here and here. It was the response to my posts on this topic by the moderator of The Forum that was behind my reason to leave it permanently. Of all of the ethical issues, beyond those in my personal life, this is probably one that is most critical to me, professionally.

When I returned home I was surprised to find two cover articles that echoed the feeling and perspective I soaked in during my visit. One was in the Atlantic, by military columnist James Fallows entitled “China Makes, The World Takes”, describing the nature of China’s Economic Development Zones, and the other in National Geographic describing the “boom towns” that have popped up all through those same zones. These are fantastic concretized descriptions corroborating what I saw. But more importantly, they give a ground level look at how capitalism is penetrating China today. I highly suggest them.

The standard Objectivist response to China seems to be something along the lines of “China is a rights-violating, cesspool of a Communist dictatorship. It is clearly our enemy. We should do everything in our power to isolate it and see it collapse completely as we did with the Soviet Union.” Rand was certainly hostile to Communism, for good reason, and openly advocated the complete isolation of Soviet Russia. In contrast, when I discuss a country such as India with Objectivists, I get a much more favorable response to dealing with that country, even though it is openly socialist and in many ways still more backward than China.

I have problems with this position. First, while this isolation strategy contributed to the collapse of the Soviet Union, I am not convinced that the aftermath in post-Soviet Russia has left us in a secure position. Russia is largely a nationalist, ganster, nuclear state, and its future course is could hardly be called stable. Second, the isolation strategy belies the current state of China. That is, maybe in 1972, when Nixon began thawing Chinese relations, the proper course would have been to continue advocating isolation. But I was all of 4 years old then and I am only now in a position to take actions that actually have ethical bearing on China. Today’s China is hardly Nixon’s China, and that is the point.

Anyone who continues to advocate that embargo of China is the best course of Westernizing it has absolutely no understanding of what good things are actually occurring there, and the scale on which it is occurring. The first thing to understand is that China is not a single country uniformly inching toward a market economy while preserving its Communist ideology. It is really two Chinas. One that is advancing slowly, remaining nominally socialist, and the other that has jumped headlong into a “wild west” form of proto-capitalism. The story of the second begins in 1980, when the Chinese government established its first Economic Development Zone in Guangdong province in the Shenzhen area, next to what was then estranged, and very capitalist, Hong Kong. Since that time, four other national zones have been established in China and the Shenzen area has been expanded into the whole Pearl River Delta. In addition, 15 free trade zones, 32 state-level economic and technological development zones, and 53 new- and high-tech industrial development zones have since been established.

These zones are booming, and the rural population is flocking to them. When you look at a map of the development zones, it appears rather small, until you realize that much of China’s 1.3billion population is concentrated on the coast, and that the zones have swallowed up all of the coastal provinces from Shandong, just north of Shanghai all the way down to Guangdong, surrounding Hong Kong. I did a quick calculation of population, and counting the five provinces and the municipalities, this is about 330 million people, all of whom are now living in a semi-free economic state. That is more than the population of the United States! According to James Fallows, the Shenzhen area by itself contains a larger manufacturing workforce than the entire manufacturing workforce of the U.S.! Estimates are that 140 million rural Chinese have moved into these zones, and another 40 million are expected in the next five years.

What’s going on in these zones? It’s very simple: wild-west, capitalistic, manufacturing; everything from high-tech electronics to bra rings. It is estimated that at this pace by 2020, 25% of the world’s manufacturing capacity will be in China. Make no mistake folks, this is wild-west capitalism, not too un-reminiscent of the boom towns of the American Industrial Revolution. And it appears to be working. Is there corruption? sure; crime? yes; pirating? of course; is it all done under the auspices of Communist “national planning”? yup. But what seems to be lacking is: tyranny. That is, the government largely stays out of day to day affairs. Certainly they take a cut off the top, primarily in two forms: at the beginning of the process by selling “land use rights”, the closest thing to property rights, and thus making land available for development, and then through an ongoing company income tax (which at 15-30% is lower than that of the US – but that is another post.) Beyond that, very little. Witness James Fallow’s question to an expatriate in Shenzhen who runs a company that specializes in helping foreign companies navigate the process of outsourcing to a Chinese company.

Government policy and favoritism may play a big role in China’s huge road-building and land-development policies, but they seem to be secondary factors in the outsourcing boom. For instance, when I asked Mr. China [expat Liam Casey] which officials I should try to interview in the local Shenzhen government to understand how they worked with companies, he said he didn’t know. He’d never met any.

Witness, a person who runs a local Chinese company specializing in helping other companies establish Chinese supply. He’s not helping them cut through bureaucratic red tape. There isn’t much. Instead, in this wild-west boomtown, where factories spring up daily, and there are no local directories telling you which factory has the “Good Housekeeping” seal of approval, this man specializes in knowing which factories can do what you need, and which can't. This absence of government intrusion is not the earmark of a totalitarian government, rather of a mixed economy.

The result is an economic boom, the likes of which has not been seen probably since the industrial revolution. I witnessed this first hand. I drove from Shanghai to Suzhou, two hours by car on a super highway littered with factories and new construction. Never once during that drive was I out of sight of a construction crane. A colleague of mine who began traveling to China a decade ago said that this road was unimproved in 1999 and the land was all farmland. Two hours drive! This simply can’t happen voluntarily without some element of capitalism being present in the structure of these zones. Is it perfect capitalism? No, but I don’t think it qualifies as tyranny.

Clearly a quarter of China’s population now lives in a mixed economy. What are the fundamental aspects of that life? They keep what they earn. If they save enough, they can start a business of their own. Hustle drive and hard work pays off. It infuses the population with an energy and a hope that I found contagious, almost like Chicago in the mid-nineteenth century. Conditions can be Spartan, but make no mistake, people are there voluntarily because this life offers far more opportunity and hope than their previous lives did.

“In the movie version of Balzac and the Little Chinese Seemstress, two teenaged men from the city befriend a young woman in the mountain village where they have been sent for rustication during the Cultural Revolution. One day the young woman unexpectedly leaves. She has gone to “try her luck in a big city,” her grandfather tells them. “She said she wanted a new life.” The new life is [in Economic Zone] Shenzhen.

Multiplied millions of times, and perhaps lacking the specific drama of the Balzac tale, this is the story of the factory towns.”

Witness the ideas scribbled by workers on the walls their dormitory in Lishui.

“Find success immediately.”

“Reflect on the past, consider the future.”

“Pass ever day happily! A new day begins from right now!”

“Face the future directly.”

“A person can become successful anywhere.

"swear I won’t return home until I am famous.”

I have no illusions about the possibility of reversals in China’s progress. The Chinese government has built a system of contradictions. Proper grounding and acceleration of this progress requires the right ideas, and ideologically China is adrift. It is possible that the government will reverse course, or that there will be civil unrest in the poorer, nominally Communist provinces. But to advocate for the destruction of what has happen via a policy of isolation makes no sense. It is a step backwards on a path that is already built in the right direction.

Once one understands the magnitude of what has happened and the level on which it has happened, one cannot help but consider that there are now significant barriers to a direct reversal that are strengthening every day. Most notably, a quarter of the population now sees concretely the effect of a free market, and of property rights. I have significant doubts that they will allow that to be taken away quietly. Second, I have to believe that the government, like all governments of mixed economies, see the benefits of allowing such areas to continue to exist. That is, they realize they have created a golden goose, and knowing what life was like before having it, they are hesitant to do away with it so easily. Is this principled capitalism? No, but then no mixed economy is. Instead China lives in the same sort of government parasitism of all mixed economies where the government maintains it support by appearing to improve the lot of the people, and then preserves its power and influence by skimming off the top of the productive capacity of the people. It is a self-interested but Machiavellian relationship. While China has super-power aspirations, it is much more likely to thread that path carefully rather than risk losing it in a direct confrontation. I believe that China is becoming less of a threat because has its existence highly intertwined with the U.S. economy. Unlike protectionist Japan after WWII, who chafed at foreign investment and set up local companies that would one day compete with American companies, China works to serve the U.S. market. With access to American markets necessary to fuel its economic growth, China has made significant concessions in its economic structure in order to gain Most Favored Nations status and WTO membership. Those compromises are significant victories in the effort to eliminate the Chinese threat. If its economy is a golden goose, then favorable relations with and access to U.S. markets feeds that goose.

So maybe instead of the Cold War isolationist strategy, barring contact with our enemy and supplying dissidents with weapons, the proper stance on China should be to acknowledge the uniqueness of the situation and the capitalist values it has achieved, and work to arm its people with the proper ideas so that they can continue that progress. It is China’s people after all that have to recognize and fight for the continuation of their progress. Maybe they need ideas in their current state more than they need weapons.

China’s manufacturing economy remains a small factory, commoditized output, fragmented economy. The next step in China’s path to capitalism will be consolidation, the creation of companies that will be capable of competing on the basis of more than just manufacturing, the building of the first companies capable of becoming true multi-national corporations. But to do this, they will need several things: adding protections for human rights most notably for intellectual property, establishing a functioning legal system, and educating management talent. It is business management talent that is sorely lacking in China right now, but this is what will open the doors to the next level of introduction of Western ideas. Today, the Chinese workingman understands concretely the potential created when he is able to keep what he earns. Tomorrow, the Chinese businessman, if he is to have any hope of running a successful multi-national must understand what conditions are necessary for running a successful business. He must understand this to be able to fight to hold onto it.

China is a complex case, and it is most certainly not a fait acompli, but I believe that if one understands the nature and scale of what has already occurred then the basis for the standard Objectivist response that isolation is the only course is not so clear cut. Certainly we must continue to advocate for change in China based upon proper philosophic principles just as we do here in the U.S. But the path between the present state and future success may have more than one road.

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[DarkWaters]

Thank you for the excellent post!

[Moebius]

Whew. Where to begin. Well first of all, great post. You have a lot of astute observations and great points. I recall the my first trip to China a few months ago, and how astounded I was at the rate with which the economy was growing. One observation that really epitomized this growth for me was this: for many of the families I've seen that is now solidly part of the fast emerging Chinese middle class, a state of the art flat-screen plasma television is the first television they have ever owned. They don't even know what you're talking about when you mention an CRT television. It's almost like they skipped the entire 70s, 80s, and 90s, and out of nowhere got dropped right smack in the middle of the 21st century.

To be honest I think as China suck in more and more of the manufacturing load across the globe, it will have a short term negative impact on the United States by destroying --at an extremely fast rate-- many middle class jobs. The key word being "short term". I believe in capitalism, and I think that in the long run competition will be good for overall productivity. But "short term" in economic terms can mean a long time in human terms. In fact, it could mean several generations. It will translate into a rapid concentration of wealth and huge increase in income gaps, which would in all probability cause social problems ranging from minor to severe. Furthermore, and increase in productivity by emerging economies and, more important, an increase in their purchasing power, may also mean an erosion of the political and economic leverage of the United States. The bottom line is this -- while globalization in general and the growth of China in particular may be great for world productivity as a whole, it may not be in the best interest of the United States (at least in the short term, which as I said could mean a looong time).

So then we come back to the question of what to do. Obviously China remains an authoritarian state. But does that necessarily make them our enemy per se? Would it even be in our best interest at all to cause the collapse of the Chinese economy? Is that even within our power? I think the answer to all of those questions is no. To me the best strategy for the United States seems simple -- to bond our economy as closely as possible with the Chinese economy. The most valuable and irreplaceable aspect of the United States in terms of business is brand management. It's the one thing that is extremely difficult to surpass or replace, unlike things like management, research and development, and more abstract concepts like innovation (all of the later things China lacks currently, but can certainly cultivate themselves in a decade or two). You simply cannot easily replace a logo like Coca Cola, McDonald's, Wal-Mart, HP, Nike, or even Starbucks. The most important task is obviously to penetrate and embed the American brands into the Chinese economy. Of course, many large corporations already know this, and are on the right track in terms of their strategy. What we need now is for the government to systematically eliminate restrictions and push for the direction.

Another effect of such a strategy is more subtle, but potentially more powerful. A closer bonding of the US economy to China, means an increase in penetration of the American culture into Chinese society. This would probably mean more Chinese kids grow up watching MTV and the NBA, and it also means an osmosis of values such as freedom and respect for human rights.

[Tenure]

Moebius: I really hope the Capitalist Chinese culture manages to grow quick enough to stunt any popularity of MTV. It's already eroded the minds of Western youth, let's not unleash it upon the East as well.

Kendall: This is really cool. I'm going to be staying in Hong Kong for a couple of weeks next year, as part of my gap year. Is there anything you recommend?

[John McVey]

IIRC, in DIM Dr Peikoff said that there was a growing demand for serious business-related works by Ayn Rand in China. I hope that keeps on going and going!

JJM

[Moebius]

Moebius: I really hope the Capitalist Chinese culture manages to grow quick enough to stunt any popularity of MTV. It's already eroded the minds of Western youth, let's not unleash it upon the East as well.

Unfortunately a capitalistic culture and MTV aren't mutually exclusive.

[KendallJ]

Kendall: This is really cool. I'm going to be staying in Hong Kong for a couple of weeks next year, as part of my gap year. Is there anything you recommend?

Tenure, first thing is never ask business types what to do in any locale. Unfortunately, the only time I got to sightsee was in Beijing. Beyond that it was meetings, and dinners, and workouts, etc. I can tell you that the workout room in the Hilton is nice, and that I ate some nice dinners, but no idea where, and that is about it.

Fly in at night if you can. It is breath-taking.

Sorry I can't be of more help...

[Moebius]

I guess there is that giant buddha in Hong Kong that you could check out. But, I guess in the end it's just a really, really big buddha.

Mostly it's just shopping and dining in HK. That and looking at parks and buildings.