James McGregor: No Ancient Wisdom for China

For Yale Global, James McGregor writes about the dangers of China’s model of authoritarian capitalism both for China itself and for foreign corporations operating there. From the article introduction:

Economic growth and steady job creation stabilize societies. Yet China has unleashed a form of capitalist growth that few other nations dare follow, what author James McGregor calls “authoritarian capitalism.” The system achieves rapid economic growth based on tremendous government support for state-owned firms, led by powerful Communist Party leaders. But analysts and reformers in China argue that such growth is not sustainable, that personal ambitions and greed behind them cannot be contained. The Chinese economic model is “in danger of terminating itself – and taking the world down with it,” argues McGregor, author and businessman with long experience in China. “It is also proving incompatible with global trade and business governance, and threatening multinationals that fear losing technology and business secrets to China’s mammoth state-owned enterprises (SOEs) they are forced to partner with.” The March arrest of Bo Xilai, one-time Politburo member, exposed extensive political corruption. Secrecy and one-party rule can’t ensure accountability; reform will upend the status quo. Multinationals investing in China could be in for huge surprises.

James McGregor, a businessman and former Wall Street Journal journalist who has lived in China for 20 years, recently published a book, No Ancient Wisdom, No Followers, which expands on these ideas. The Wall Street Journal interviewed McGregor about the book:

You’ve dug deep into original Chinese sources for this book. What’s the core finding?

How much the Chinese economy has transformed since China joined the WTO in 2001. It was headed toward a more free market economy with more private companies. But the country has strongly reversed course to building up state-owned enterprise that is increasingly incompatible with global trade regimes and threatening to multinationals

When did this backward lurch begin?

There were three steps. They saw the Russian oligarchs taking over state assets as private individuals — and the party decided it would be the oligarchy. And so in 2003 they formed SASAC [State-owned Assets Supervision and Administration Commission] to bring the state shares under central control. Then in 2006 there was a directive that took about two dozen key industrial and technology sectors and made them fully state controlled or majority state controlled. Finally, you have the global financial crisis and the 600-billion-dollar stimulus program. That money flushed into SOEs — and they were off and running.

The World Bank, among others, thinks China should start dismantling SOE monopolies. How do you rate the chances of that happening?

You have so many vested interests that are threatened by change. [But] I’m optimistic because I don’t think they have any choice, because the current economic model is running out.