28 January 2011


Chinese President Hu Jintao recently completed a triumphant visit to the United States, at least according to the Chinese media. American officials wound up looking like fools as they sat through an anti-American song played by pianist Ling Ling, to the delight and contempt of Chinese nationalists and hardliners. The prevailing narrative these days is that China is rising while America is declining. This may well be the case over the next few decades if we allow it, but there is nothing inevitable about it. If we seriously reduce our deficit and institute pro-growth policies so that the economy grows at 5% this won’t happen. But the government is a long way off from getting the economy on a solid footing. On the other hand there is no certainty that China will continue to grow at a 10% rate indefinitely any more than Japan did.

China faces a host of internal problems. There is rising inflation and a property bubble that may eventually collapse. There is misallocation of capital by state enterprises, and rising discontent amongst a population that is still overwhelmingly poor. The government’s top priority is maintaining internal order and a “harmonious society” that keeps the Communist party elites in control. This is a bit tricky insofar as they have largely scrapped communist ideology in practice, but to be logically consistent they ought to do so officially, by rejecting Marxism as a foreign ideology and returning to Confucian roots. There has already been a revival of Confucianism, and a full embrace would legitimize the government in accordance with Chinese tradition. If this is accompanied by a merit system, rather than one that favors party functionaries, the government would be on solid ground, even if not democratic.

But in the long run, China will be outpaced by India. India is like a slow-moving elephant that has a long-term consistency once it is headed in the right direction. Its population will eventually pass China’s, and will be considerably younger due to China’s one-child policy. Even at a slower rate of growth in the long-term this means a larger economy. However, neither will be anywhere near the west on a per capita basis. Nor is it inevitable that the United States will be outproduced if we get our fiscal house in order, increase saving and investment, fix our dysfunctional education system, and encourage economic growth without bureaucratic obstacles. For this to happen we need a leadership that is optimistic and inspirational to move this country out of the current doldrums.

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