It is criticism by some of the 4th generation of Chinese leaders, ie accusations that they lost an opportunity to reform the Chinese economy, that has caused me to think that geopolitical issues are always multifaceted with at least two points of view. Let me explore but a few of these dilemmas to make my point.

 

Firstly, the tyranny of success is an age old problem that pervades the endeavour of individuals, organisations and countries. At a political level successful leaders are faced with a paradox: the various factors that have made a country successful in the first place create the resistance to change when altered economic circumstances necessitate adjustment.

The economic success of the fourth generation of Chinese leaders is beyond question.

Since 2002 they have overseen the continuation of one of the most remarkable economic transformations in history, taking China from the sixth-largest to the second-largest economy, behind the US. China has accumulated the largest level of foreign reserves in the world, at over US$3.5 trillion. It is the world’s largest exporter and car producer and has the world’s longest high-speed rail system.

The leadership of Hu Jintao and Wen Jiabao has lifted hundreds of millions of people out of poverty, with per capita annual income growing from US$500 to more than US$5,000 in the decade ending in 2012. In the past few years, the country has also replaced America as the biggest single contributor to global economic growth, accounting for 17 percent of the expansion in global output in 2010 and 30 percent in 2011.

Despite this success it is clear that Wen Jiabao recognized the need for change : At the height of its economic success in 2007 he presciently warned that China’s economy was increasingly, “unbalanced, unstable, uncoordinated and unsustainable.”  This quote has come to be known as the “four uns”.

Recognising the problem and knowing what to do is one thing but actually doing it in anticipation of key transition points in the development journey of a country is the challenge. The pioneering work in behavioural economics by Nobel laureates Amos Tversky and Daniel Kahneman suggest risk aversion increases with success and it is only when things go badly that people have less to lose and are forced to change. The fact that the legitimacy of the CCP is wedded to economic growth only serves to increase the stakes in a Chinese context and make risk aversion more pronounced when things are going well as they most certainly were during the decade ending in 2012.

China has attempted to remedy the “four uns” in its 12th Five Year Plan which was released in March 2011 and put into practice Hu Jintao’s Scientific Outlook on Development. The substantive task of doing – putting in place the necessary reforms, has however been left to the fifth generation of leaders. I would nevertheless tender a view that China has been well served by its fourth generation leaders and that as is so often the case with human endeavour, China’s economic success has created the current inertia which now needs to be overcome for the country to reform.

The case for change is now of course compelling as judged by depressed export markets, environmental degradation, over capacity, income inequality, to name a few, but its interpretation until recently, was far more complicated than simply saying that Hu-Wen were strong on growth but weak on reform

Another macroeconomic issue that requires a broader perspective is the sometimes vexed question of Chinese OFDI, and as it is proactively put by some to evoke maximum emotional response “is China buying the world?”

 

Some would argue that Chinese SOEs are scouring the world at the behest of the Chinese Government to secure resources, brand, technology, expertise and markets. It is clear that the SOEs have a negative stigma abroad because of their ownership by the State, national interest drivers and their perceived access to cheap finance. For example, in the 2012 Lowy Institute Poll some 56 percent of Australian respondents thought there was too much investment from China. These negative public attitudes to Chinese investment seem to be heavily influenced by the nature of China’s political and economic system, and a misunderstanding of the governance arrangements surrounding SOEs.

 

Notwithstanding the above, I side with the myth-busting proposition espoused by Professor Peter Nolan of the University of Cambridge. He filters through the media rhetoric to make a number of observations. Firstly, he observes that the important sectors of the global economy have witnessed massive industry restructuring that has led to an unprecedented degree of ownership concentration in the major sectors of global industry. One need look no further than the oil and gas industry:

 

• BP’s acquisitions of Amoco in 1998 and of ARCO in 2000

• Exxon’s merger with Mobil in 1999, forming ExxonMobil

• Total’s merger with Petrofina in 1999 and with Elf Aquitaine in 2000

• Chevron’s acquisition of Texaco in 2001

• Conoco Inc. and Phillips Petroleum Company merger in 2002

 

SOEs from China are in fact joining the world economy at a time when the concentration of business power and barriers to entry have never been higher. Nolan cites for example “that 100 giant firms all from the high-income countries account for over three-fifths of the total R&D expenditure among the world’s top 1,400 companies.” MNCs and the so-called system integrating firms (controlling global supply chains) sit at the apex of the extended global supply chain and account for a major share of the market within each segment of the supply chain.

 

Finally, given the above it is hardly surprising that China has attempted to develop and nurture “national champions” through state led industrial policy, and encouraged their foray on to the international stage through its “going out” foreign affairs policy. Nolan observes that in “different ways this is exactly what today’s high-income countries did in the past.”

 

One need only consider ownership of major companies prior to the massive privatisation programmes in the developed world that included BP, British Gas and numerous US core utilities under the stewardship of Thatcher and Reagan.

 

The final geo-political issue that is dear to the heart of classical economic theory suggests that every country is ultimately better off through the unrestrained international trade of goods and services. Each country plays to its comparative advantage – producing those goods at which it is naturally good at, and trades with others to assure efficient production internally and satisfy domestic consumption across all goods.

 

It is accepted that an open economy may lead to the contraction or even loss of some industries, even significant industries such as automobile manufacturing, and may therefore cause sectoral dislocation and pain. This localised hardship is offset by the common good gains arising from internal production efficiency and access to a broader range of cheaper goods imported from elsewhere.

 

Revered economist William Baumol has observed that such theories developed by David Ricardo in the late 18th century did not anticipate the fast-moving technology and productive capability build that each country could nowadays target, develop and nurture through education, acquisition and assimilation. Today comparative advantage is not predetermined by the endowment of natural resources as in Ricardo’s time but is also shaped by the acquired advantages each country chooses to focus on and build.

 

In the case of Australia and China our trade relationship is indeed complementary – dependent on each other’s respective endowment of people or minerals, and each other’s different stage of economic development. In the spontaneous and attractive partnership between developed and developing nations the benefits of bilateral trade are most likely to be good for both. But as development progresses and economies converge the possibility of inherent conflict increases as the industrialising country attains a level of capacity and development at which it enters and competes in a broader cross section of market sectors globally. As Baumol put it “free trade is not always and automatically benign.”

The first wave is the expansion of the mining sector that we have been experiencing to date. The second is the growing global demand for our agricultural products. And the third is the rise of the middle class in the Asia-Pacific region.

 

Nothing in geopolitics is so clear as to be black or white, or if it is today it is most certainly not in the long-run. I am reminded of the theme of the World Economic Forum 2013 “Resilient Dynamism” – which means tackling short-term and long-term challenges concurrently. Aiming for resilient dynamism goes hand in hand with the never-ending missions to achieve sustainability and competitiveness through the constant application of Schumpeter’s forces of “constructive destruction.”

Countries must restructure, and then restructure again, ad infinitum so they can compete in the world now and into the future. ■