The four groups that fooled the world on the Chinese 'economic miracle'

A few months ago, a long-time bear on the Chinese economy (since 2006) revealed to me that a so-called ‘China sceptic’ such as himself was then treated by his colleagues as a bit of a crackpot, an angry old man, or sometimes, more patronisingly, as somewhat of a curiosity.

Back then, and even up to around 2010, arguing that the Chinese model was seriously flawed was almost like denying that global warming was occurring, he said wryly. The only people on his side in those dark days were unreformed socialists who wanted the China of Mao Zedong, he quipped. But from about 2011 onwards, he has been invited to speak at more conferences and approached to write more articles in prominent publications each year than the whole of his career before 2010.

These days, the then conventional thinking that China’s double digit growth model was ‘paradigm-busting’ seems silly. The debate is now about what level of chronic slowdown China will experience.

Incidentally, the new conventional line that this is an engineered or orchestrated slowdown will be eventually exposed as nonsense. No government deliberately engineers a chronic slowdown if they can help it. Would we believe President Barack Obama if he said that slowing American economic -growth during his eight years in office was part of a grand plan? In any event, the problems of over-investment in China are now well known. But the point of this article is to ask why so many experts bought into a scarcely believable paradigm-busting story in the first place.   

In a 2005 essay on why intellectuals tend to get the big questions of their day wrong rather than right, Owen Harries, one of Australia’s greatest foreign policy figures over the last three decades, argued that intellectuals are “slaves of fashion” and that they essentially “think in herds”. So, too, do economists and policy wonks, it seems. The question, as far as the hype behind the China model is concerned, is who led the herd? I would hazard a guess and say that there are four distinct groups.

The first are those with economic interests in the continued hype surrounding the Chinese ‘economic miracle’: not just commodity companies needing a positive and ongoing growth story to attract capital and justify investment, but also their 'strategic advisers' who benefited from activity in China: investment banks who made a bundle from multi-billion-dollar deals, and consultants advising clients how to make it in this country of 1.4 billion people and unlimited possibilities. When it comes to professional services, one makes more money selling a growth story than a doom-and-gloom one. Even high-profile and very credible people who served in presidential and prime ministerial administrations got in on the act. In the latter category, think Henry Kissinger.

The second are national and NGO policymakers and wonks who have wisely advocated engagement with China in order to encourage Beijing to rise peacefully. The reward of engagement for the Chinese was said to be prosperity for all and a more peaceful and contented China that would please the rest of the developed world. No need to focus on flaws in Beijing's model when much larger political objectives were at stake.

Bear in mind that pro-engagement policy makers and NGOs were also fighting a protracted battle with those who always viewed China as primarily a threat. As a result, and for understandable reasons, the dominant pro-engagement groups wanted to argue that China’s rapid rise would continue for some time yet, and if so, we have no choice but to make the best out of it and deepen engagement with the country. The political and diplomatic logic was sound, but the economic math was never done properly by many of them.      

The third are made up of a diverse group of intellectuals (and a few malcontents) who were seeking an alternative to Western styles of capitalism as the way to go. Some took the Chinese model of “authoritarian capitalism” on good faith and saw the “Beijing Consensus” as an alternative that avoided chaos, corruption and indecision when it came to developing countries.

Others, having never bumped heads against the Chinese political-economic system, fell for the seductive fantasy that an all-knowing and powerful single-party government can avoid the short-termism, political turf wars, factionalism and other sub-optimal distractions so apparent in all democracies. Unfortunately, the inconvenient truth is that chaos, corruption and indecision (in the form of a stalled reform process) are precisely the problems with the Chinese model that have been largely ignored until now.

Finally, the fourth group -- and probably the most influential -- was the Chinese leadership. The Chinese Communist Party needed to tell a good story to attract foreign capital into the country and resist external calls to develop institutions such as more secure property and intellectual property rights and rule-of-law more generally. If China had instead found a way to grow for decades more without needing these institutions, then who could argue with that?

Most of all, the paradigm-busting growth story was for domestic consumption to keep the CCP in power. To elites, high growth means little appetite for political change as life is unlikely to be better, if not worse, under a different political system. To the poor, high growth meant that the future, or at least their children’s future, would be much better -- so why tinker with the political model when there is at least hope of a better life ahead?

Back to my old ‘China-sceptic’ friend… his views are now the new normal and he receives little credit for sticking his neck out in the past. If one is wrong but in the majority, then the consequences of not being right are few and less severe. But if one is wrong, and in the minority, then that spells trouble. At least he still has a job.

Dr. John Lee is an Adjunct Associate Professor at the University of Sydney, a senior fellow at the Hudson Institute in Washington DC, and a Director of the Kokoda Foundation defence and security think-tank in Canberra.