This is the second part of my interview with Damien Ma and William Adams, co-authors of In Line Behind a Billion People: How Scarcity will Define China's Ascent in the Next Decade. In part 1 I asked Ma and Adams about the theme of their book, scarcity, and why we ought to worry about it when so many previous predictions about scarcity have proven false. Below I ask whether China's leaders have the capacity to deal with the huge problems produced by their own success.
SR: Let me again play the role of optimist here and argue that, notwithstanding the huge challenges you point to in your first answer, China’s leaders have already engineered a complete transformation of their economy in the space of two generations. So why should we think that they will be unable to manage the downsides (however daunting) of the success they have themselves brought about?
This topic is particularly interesting in light of recent rumours in the media that Xi Jinping plans to announce sweeping economic reforms at the upcoming third plenary. What do you make of such predictions, and more broadly, is China’s leadership still capable of big reforms, or has it settled into incrementalism?
DM: We have just the answer for you! The book actually concludes with a set of scenarios trying to capture various directions that China could go. Without giving the farm away, we think there's a very good chance that China will manage relatively well in overcoming what seem to be intractable challenges today.
In the economic realm, everyone knows what China needs to do, which is to retool an economic model predicated on its current comparative advantages like labour and production prowess to one that is more innovative, value-added, services-based and geared toward the domestic market. Put simply, China will have to create an economy that will grow and sustain a middle class society. It's an open blueprint that has been followed by previous East Asian tigers and other advanced economies like the US.
But unlike the Asian tigers and much more like the US, China is a diversified, continental economy that should rely on a domestic market anyhow. It's just that for the last 30 years or so, China essentially only had a coastal economy (about 1/3 of the country) that aped the East Asian model.[fold]
But for the coming decades, China will be better served to pivot to a development model that is closer to that of the US or Europe — integrating a continent, linking deeper with markets through Central Asia and to Europe. On top of it, the increasing scarcity of inputs to propel the current model, as we have discussed, is already forcing China to 'rebalance' whether it wants to or not.
Of course, many people ask: 'can they do it?' In other words, not a blueprint problem but an execution problem. This gets into issues of political will and the leadership's capacity to move a very large ship of state to embrace change. Invariably, vested interests stand in the way, as many have noted.
Without diminishing the strength and complexity of dealing with vested interests —and they are certainly formidable — it is also true that vested interests are vested until they are not. Structural reforms of this magnitude always necessitate a rearrangement of interests, doesn't matter whether it's China or the US. In our view, it's hard to see specifically why maneuvering against today's vested interests is any more insurmountable than what the Chinese have done: pivoting from revolutionary zeal to pecuniary zeal within 2-3 years after the Cultural Revolution ended, kicking the PLA out of the economy, getting the banks to behave more like commercial entities, etc.
So all of this makes the upcoming plenum on 9 November a very interesting signpost for basically the next 10 years. And we suspect many of the reforms unveiled at the meeting will fall into addressing the challenges of scarcity, not just in the economy but also on the sociopolitical side.
But at the same time, expectations of change should be grounded in the reality that change won't happen tomorrow or the next year. That will probably disappoint many, but it's much more important to wait and get a better sense of how these changes will be executed. We obviously don't have a crystal ball and are perfectly willing to revisit our views when 2022 rolls around.
WA: The pervasiveness of state power in a country like China can give the impression that the government can do anything if there is only a will to make it happen. The reality, though, is that the Chinese government is subject to the constraints of their country's relatively meager endowment of natural resources. Not everyone gets to be Australia!
As they have so many times in the past, China's leaders may play their hand far more adeptly that we give them credit for. But we should keep in mind that they are playing a fairly unfavourable hand. Sweeping economic reforms may make growth more consumer-focused and less susceptible to a sudden downturn, but we are skeptical that reforms can make China's economy less dependent on energy and other raw material inputs, at least in the short term. After all, so much of what China's newly middle-class consumers want — homes, cars, electronics — is very resource-intensive to produce.