Between the Olympic Games and the Global Economic Crisis

Federico Rampini is La Repubblica‘s Asia Chief Correspondent and Senior Global Columnist. He was invited at the National University of Seoul, South Korea, to give a lecture on the impact of the global economic crisis on US-China relations on November 10, 2008. His speech was followed by the remarks prepared by two discussants, and a Q&A session.

November 10, 2008

These days the whole world is feeling the powerful impact of two major events. The first one has been unfolding for months: it is the financial turmoil which triggered a credit meltdown and then morfed into a full-blown global recession, probably the most severe after the Great Depression of the 1930s. The second event is much more recent: it is the election of Barack Obama as the 44th president of the United States of America, a historical event because for the first time an African-American will hold the most powerful political office in the world. We can spot an inherent contradiction between these two events. On the one hand we have a crisis which highlights the imbalances and the vulnerabilities of the American economy. On the other hand the US civil society gave a powerful demonstration of the benefits of democracy: in a country where black people suffered the terrible humiliation of slavery, one of them has become the president; it is a showcase of the flexibility and mobility of American society, the resurrection of the American Dream, the vindication of a society that promises equal opportunities to all its members.

How do these two contradictions interact? Barack Obama will take office in an era when the US leadership in the world is challenged by new emerging powers, starting with China. He will take office when his first priority will be to rescue the American economy out of a severe recession. At the same time this recession has a global dimension. No rescue plan can be managed on a national scale, not even by the United States. As we saw during the most hectic days after the Lehman Brothers bankruptcy, bank bailouts and the stabilization of financial markets require an extensive international cooperation. A new organization of the world economy has to be designed. In this process, the US and the European Union must welcome new partners into the world order. China and other Asian countries will have a strong voice when the next international summit will convene in Washington DC, on November 15, in order to kick-start a presumably long round of negotiations that may lead to a Bretton Wood II.

Global financial crisis and the rise of China

Is China ready to take its new responsibility as a major player in this new global order? Certainly, the government of the People’s Republic of China is growing more and more concerned for the contagion effects of the recession. Yesterday, Beijing announced a major effort to sustain economic growth: it will spend almost 600 billion USD within the next two years, in a fiscal package to stimulate domestic consumption and industrial investments.

This decision is the latest confirmation that the threat of the recession is indeed global. As a matter of fact, here in Seoul you know perfectly well what I am saying, as your country has already experienced very powerful effects of the recession originated in the United States. Before this summer, many experts in Asia and around the world still believed that emerging countries could “decouple” from the recession. Now we all know that the “decoupling” theory was a myth. Nobody is safe, nobody is immune, and we are facing this emergency all together. But the long-term effects will not be the same for all countries.

As a matter of fact, the current crisis is somehow related to the growing influence of China. On one side, this financial distress has its origin in the fundamental imbalance of the world economy: between the huge deficit in the US foreign trade, the high debts of America, and the parallel trade surplus of Asian countries matched by the high levels of private savings in those same countries.
This financial crisis will also accelerate the rise of China as a world superpower in the course of the XXI century. What we are witnessing in these days, when we look at Wall Street, at the once all-mighty financial giants that need to be rescued through a huge bailout plan, is not the end of the world. But it is the end of a world, of a certain free market model that America exported to many other countries, including Japan and Korea, China and India. This is probably the last financial crisis that the world endures under the leadership of American capitalism.

Yes, in this year 2008 the United States still have a tremendous power to inoculate their financial weakness as a contagious disease to the rest of the world. Yes, the stock markets in London and Frankfurt, in Tokyo and Seoul, in Shanghai and Moscow and Mumbai, are still shaking under the overwhelming influence from Wall Street. But this is happening, quite probably, for the last time. The first reason why we are living through the end of an era is that the decline of America and the rise of the new superpowers will be facilitated by this financial crisis. When the United States will see the light at the end of the tunnel, when they will emerge from this crisis, after repaying their huge debts, they will be a smaller economy, less wealthy and less influential, comparatively speaking, in a new world order where other countries will have grown richer and stronger than they are now. And this crisis will undermine forever the attractiveness, the commanding role, the moral authoritativeness of the American model of capitalism as we know it. This financial crisis will mark the end of an era which started with another major economic disaster: the stock market crash of 1929, followed by the Great Depression. In order to overcome the Depression, to respond to the massive unemployment and to relieve the misery brought upon the American people, Franklin Delano Roosevelt launched new ideas, new doctrines and important reforms that were followed by the rest of the world: regulations of the financial markets, Keynesian policies to sustain growth, massive public investment to build national infrastructures. The New Deal was a beacon for the rest of the world. The beacon is no more. This crisis of 2008 will be remembered as the end of America the model, America as the paradigm that other countries wanted to replicate.

Now maybe, and I stress maybe, Barack Obama will prove to be a new Franklin Roosevelt. Maybe he will address this crisis with a strong leadership, he will restore confidence in the markets, he will reduce inequalities in the American society, he will keep his promises to reform the healthcare system, and he will invest in renewable energy and free the US from its dependence on Middle East oil. He might prove to be the president of a New New Deal, reconstructing the role of the government and public services, rebuilding infrastructures, modernizing the education system, writing new rules and regulations in order to rein in the excess of financial speculation. In this case there will be a new American model, deeply changed, very different from the one that was created after the Reagan revolution. In this very positive scenario also the prestige and credibility of the US will rise again in the rest of the world. But still, even if president Obama will prove successful in tackling these formidable challenges, the place of America in the world will never be the same after this crisis. We will not live in a unipolar world, in this century.

Success of the Beijing Olympic Games 2008: Chinese Dream?

And yes, 2008 was also, by the way, the year of the Beijing Olympic Games.

Very symbolic games. A total success, in terms of organization, effectiveness, television audience. Even the smog was less scary than we had forecast, thanks to a few tough measures to restrict car traffic and industrial pollution. Ok, the pollution is back again to its awful levels right now in Beijing, but who cares? The foreign visitors have gone.

Oh, and did I mention that China won a lot more gold medals than the United States for the first time in history?

So these games became a metaphor for a larger competition, the challenge to the American leadership in the economy, in terms of political influence, and military power. Will the Chinese Dream replace the American Dream?

That is the impression you get if you look at a very significant poll, a comparative research made every year by an American institute, the Pew Center. According to this poll, a majority of the American people are deeply dissatisfied with the course of their country, they think that America is on the wrong track; whereas the Chinese people are the most optimistic in the world: 86% are satisfied and confident about the future of their country. I should add that this poll was completed before the latest terrible scandal of the tainted milk and baby formula. I’ll talk about that later.
Anyway, the Olympic Games have undoubtedly reinforced the general atmosphere of self-confidence, patriotic pride and optimism. This is not only due to the gold medals triumph. The Games were also the stage for another triumph, the political glorification of President Hu Jintao and the communist party of China.

All the leaders of the world came to pay homage: Bush, Sarkozy, Gordon Brown, Putin, the president of Brasil Lula, Sonia Gandhi from India. Even the Pope sent a warm message of good wishes, although the Catholic Church and the People’s Republic haven’t re-established diplomatic relationships yet. It was a perfectly choreographed, gigantic demonstration to the Chinese people that their rulers are well-respected all over the world.

Make no mistake.

Notwithstanding all the criticism from Western public opinions on human rights abuses, the lack of freedom, and the brutal repression in Tibet, these Games succeeded in strengthening the support for the regime among the Chinese people.

Even the Tibetan people revolt in March, followed by the protest in Paris, London and San Francisco when the Olympic torch was travelling abroad, all these events played into the hands of the regime. Criticism from the West provoked strong nationalistic reactions in China, even xenophobia.

As I have lived in China for more than four years now, I have learned how sensitive the Chinese people can be when their country is the target of criticism coming from the West, or from Japan. They immediately recall the century of humiliations, when Imperial China was a decadent country, attacked by foreign imperial powers, and parts of its territory were invaded, first by the British, then by all European countries and the US, finally by Japan. When Chinese children go to school, since their earlier age they are indoctrinated with this very powerful narrative on the foreign aggressions and the humiliation of their country. Part of it is historical truth, part of it is exaggerated or at least skewed for propaganda purposes. The success of the Games in terms of nationalistic pride and political consensus is only one part of the story, of course. The Beijing Olympics were a total failure and a tragic disappointment for whoever hoped that they could foster political reforms and some improvement on human rights. In fact what I saw was exactly the opposite.

Perhaps you remember the story of the cute little girl with the red dress who sang a beautiful song at the inauguration ceremony, in the Bird’s Nest Stadium on August 8. As we discovered later on, the girl was not singing, she was lip-synching. The real singer was not cute enough, so she was substituted on stage with a girl who looked much nicer. This apparently trivial episode had a larger meaning. This obsessive search for perfection was a symbol of what had happened in the weeks and months before the Games. All dissidents were silenced, arrested or forbidden to speak with foreign reporters. Ethnic minorities who might want to vent their anger during the Games were deported far away from the capital city. Even migrant labourers, the poorest people who come from the countryside to do the more menial jobs in Beijing, were deported. Foreign visitors should see only the “perfect” Beijing, any ugly reality had to be hidden. This is also the reason why Tibet was almost unaccessible to foreign visitors, as it still is. Betraying all their formal commitments to the free circulation of foreign observers, reporters or diplomats, in the whole territory of China during the Games, the government denied visas to journalists who wanted to report on the situation in Tibet after the March events. I was able to circumvent the obstacles because my wife (who lives in the US) came to stay with me in Beijing during the Games. Her presence was a good cover to apply for a tourist visa. Even tourist visas to Tibet are not easy to obtain, but after many attempts we received the permit, acting as if we were just normal tourists. Our itinerary had to be approved by the local authorities under Chinese control. We had to be escorted by a government-approved tourist agency, with an appointed guide who would follow us almost always. In spite of all these restrictions, we were able to have a glimpse at Tibet as it was in July, three months after the riots. It was a terrible sight. I had been in Lhasa, the capital of Tibet, many times before. I remembered it as one of the most fascinating cities in the world, especially for the extraordinary people, the constant flow of pilgrims who come from remote area to visit the Potala Palace and other Buddhist temples and monasteries. You are surrounded by an atmosphere of spirituality and joy. I always felt very happy in my previous visits to Lhasa, although there are very visible signs of an invasion of Han people, the ethnic Chines, which is by itself a threat to the cultural identity of Tibet.

But last time, in July, I found a city under siege. Soldiers and military police were everywhere, heavily armed, in combat-ready mode. The flow of pilgrims was tiny compared to the past. The oldest neighbourhoods in the city, mostly inhabited by Tibetans, were under a curfew. In the evening you would meet military patrols and even tanks in the streets as if Lhasa was a war-zone. Some monasteries were closed or deserted. People were scared and sad, after so many of them were arrested, deported to labour camps and the so-called re-education camps. It was a dire situation, and I am afraid it has not changed since then.

I think that what happened this year, the Year of the Rat, the year of the Olympic Games, is a perfect summary of all the contradictions of China.

We may like it or not, we may fear or embrace its ascent, but what we cannot afford to do is ignore it or underevaluate.

Learning to cope with China (and India) is a priority not only for our leaders, but for every citizen of the world in the XXI century.

Let me recall briefly some of the most striking contradictions and paradoxes of China.

Contradictions and Paradoxes of China

If we measure Gross Domestic product according to the Purchasing Power Parity used by the World Bank, China is already the second biggest economy in the world. And yet, its per capita income lags behind one hundred other nations. It is the first “poor superpower” in contemporary history, a rich country full of poor people.

China has a relatively open economy – certainly much more open than other economies were at that stage of development. Its contribution to global trade and economic growth in 2007 overcame that of the United States; it is the second recipient of foreign direct investments after the US. Its tariff and non-tariff barriers to imports are much lower than in the average emerging countries. And yet this open economy is governed under a political system that allows no opposition, no freedom of speech, no challenge to the communist party (rule).

As a symptom of the gap between its economic and technological development and its political evolution, China graduates every year 800.000 students in math, engineering and sciences, but the whole country has only 120.000 lawyers. Although many positive changes have occurred in the realm of personal freedoms – like the freedom to choose your school, your job, your wife, the freedom to travel abroad or just to interact with foreigners in your own country – some fundamental features of its political systems are the legacy of Mao Zedong. The single political party that ruled the country in 1978 when per capita income was 200 US dollar is ruling a country where per capita income is now (well) over 2.000 Us dollar. Will it be the same, can it be the same system when Chinese per capita income will increase over 3.000 or 5.000 dollars?

There is no precedent that we can use in order to evaluate the impact of China, and India, on our economies and on our societies. The economic miracles of Japan in the 60s and the 70s, then South Korea, or the south-east Asian dragons: all these countries bear no comparison with the demographic scale of China and India.

Of course we can already see some familiar patterns showing up.

Both India and China are moving up very fast along the value-added chain. In the case of India we might say that it jumped the value-added chain, specializing in high-tech industries and service sectors even before it had a strong and competitive manufacturing basis. In China you can see strains in the old model of growth; the most labour intensive productions like the textile and apparel industry already have their profit margins squeezed not only by new entrance competition (see Bangladesh and Vietnam) but also because of wages increases. In Guangdong, the most industrialized province of China, the average salary increased by 20% last year. Still, before their salaries come no-where near European or Northamerican salaries, for years to come both China and India will be able to tap into enormous and cheap labour forces. The rural population is about the same in both countries, 700 million in China and 700 million in India. Every time a peasant leaves the countryside and emigrates into a Chinese town to get a job in a factory or in a construction site, its individual contribution to GDP growth increases by 700%.

But it would be a mistake to see China and India mainly as competitors for our manufacturing industries, and as a challenge for our blue-collar workforce. Low salaries won’t be the only ingredient in the success of these emerging countries.

In 2006 China overtook Japan and every single European country for the volume of its investments in R&D. These are OECD data which include only R&D investments funded by governments or government-controlled institutions. But China and India are also attracting a growing flow of private investments for R&D, due to a number of factors: the large pool of graduates and postgraduates in scientific fields, wages that are still a fraction of American and European wages even for Ph.D.s, low or non-existing limitations in fields like stem-cell research or genetically-modified organisms, generous tax incentives offered to multinational companies that create greenfield research centers. Both India and China have recently proved successful in reversing their brain drains, luring back home many scientific and entrepreneurial talents of their diaspora who had previously emigrated to the US or to Europe.

China Scandals

2007 and 2008 have been also two years marked by terrible “made in China scandals”: tainted products, toxic foods, counterfeited drugs. The most recent one has been uncovered in September: baby formula tainted with a toxic chemical agent, melamine. At least four infants have died, more than 50,000 were hospitalized. The infants who have been fed with that baby formula may suffer severe kidney consequences. We will see more of this inevitably. The anti-Chinese mood in our countries is already shifting. They used to be seen as the bad guys who destroyed our industrial jobs. Now they are the guys who threaten our consumer’s health and safety. I think that this will expand the constituency in favour of protectionism both in the US and the EU.

China’s geopolitical stretch

Then there is the geostrategic challenge.

The People’s Republic defence budget has been growing steadily at double-digit rates for years now. The People’s Liberation Army is still the largest in the world but it is becoming leaner and more efficient. China has launched the construction of its first blue-water fleet in century. This means that Beijing aims at being able to secure naval routes that are of strategic importance for access to the Persian Gulf and other energy-rich areas of the world.

The geopolitical reach of China is expanding in Northeastern Asia (where China has replaced the US as the first economic partner both for Japan and for South Korea), in Central Asia, in the Middle East, in Africa, in Latin America.

Because Chinese trade, Chinese investments and Chinese financial aid comes with no string attached – no interferences on democracy or human rights – the Chinese governments is an excellent alternative for all the dictators or the anti-American leaders in the world: from Sudan to Venezuela, from Burma to Iran.

China, together with Russia, represents both a strategic and an intellectual challenge to our world. Here we are faced with two authoritarian and illiberal models of capitalism, which have proved successful in governing the modernization of their countries. China has a much longer record than Russia, and therefore it is even more serious as a challenge. Moreover, the Chinese leaders are selling a “theory” about the non exportability of Western-style democracy. Their theory is that liberal democracy and our concept of individualistic human rights is well tailored to our cultural tradition but it does not fit well into the mold of other societies with different sets of values, like the Asian societies shaped by Confucian values. Of course this theory could be easily contradicted by the existence of a vibrant democracy here in Korea, as well as in Japan and Taiwan, three countries with a Confucian influence in their culture. But then the Chinese leaders will object that the People’s Republic is far larger than Korea or Japan, it has not reached the same level of development, and its internal inequalities are higher.

India: Successful democracy

Thanks God there is India. Here is a country as large as China, both geographically and demographically. It is even more diverse than China if you take into account its ethnicities, its different languages and the number of religions that have followers there. India has at least the some degree of social and economic inequalities, more poverty and a higher illiteracy than China. And yet it has a vibrant democracy, the largest in the world, and a federalism which accommodates different identities into the flexible mold of a modern Indian nationalism. The sheer success of its experiment with democracy is the most effective antidote to the theory that only authoritarian regimes can foster strong growth in large emerging countries.

Conclusion remarks

A closing remark on the impact of the global recession on the Chinese regime. The fiscal stimulus package announced yesterday in Beijing is further proof that the Chinese leaders are extremely worried. We know that there has been a growing turmoil in many areas of the country, especially in Guangdong. Thousands of businesses have gone into bankruptcy, laying off tens of thousands of workers, especially in the textile and apparel industry, and also in the toy industry. Official forecasts tell us that the Chinese GDP growth has slowed down from 11.7% last year to 9% in the last quarter. According to some estimates GDP growth could further slow down to 7% next year. Some western experts believe that a mere 7% GDP growth in China is the equivalent of a recession in the US or in Europe. We know why China desperately needs to maintain a very rapid pace of growth: on average, every year 15 million poor peasants leave the rural areas to migrate to the cities, looking for jobs. If the economy does not create enough jobs for them, this is the recipe for social instability and a threat to the political system itself.

But China cannot cure its economic ills without addressing the global roots of this recession.

Is China ready to be a full partner in a concerted global effort to sustain growth?

Until now the Chinese leaders have kept a relatively low profile on issues of global governance. At the Doha Round they often left India and Brasil be the most assertive leaders of emerging countries. When China at last raised its head, it was mainly in order to use its veto power, not to design an alternative plan for the revival of world trade. And the Chinese leaders do not seem in a hurry to enter a new and enlarged version of the G-8.

Recently, they have turned down a request by Pakistan to provide emergency funds. Instead, they advised the Pakistani government to ask for the assistance of the IMF.

Apparently the Chinese do not see many advantages in sharing global responsibilities with the US and the EU. They are probably afraid of what we may want to ask them. The Chinese leaders have certainly not forgotten that during the presidential campaign Barack Obama did not sound very enthusiastic about free trade. Furthermore, Obama has often repeated that Beijing should let its currency re-evaluate.

In the next days, starting from November 15 and the world summit in Washington, we will have the opportunity to test China, to see if it is ready to proceed to a new stadium in its rise as a global superpower.

This is indeed the long-term trend in this century, but the roadmap to a new international order is still ahead of us, and largely unknown.

Panel Discussion
Chung, Jae Ho (Professor, Department of International Studies, SNU)
Lee, Keun (Professor, Department of Economics, SNU)

Chung, Jae Ho

Thank you. I would like to thank the GSIS for inviting me to be a discussant for this very interesting essay of reflections by Mr. Rampini. Overall, I agree with much of what he said. I read the earlier version, not the later version sent to me yesterday.

Having just returned from Beijing yesterday, I couldn’t agree more on your comments on the quality of air in Beijing compared to that of Seoul. Nevertheless, I’d like to highlight a few points which I think are worthy of our close attention. There are basically five points.

First, Mr. Rampini in his presentation mentioned that the current financial crisis on a global scale may accelerate the rise of China. In my view, this whole thing might depend on two factors. First, it depends on to what extent China’s economy will be adversely affected by the current crisis. We still do not know that for sure, although we begin to see some signs. For instance, the International Monetary Fund’s forecast for China’s GDP growth rate next year was reduced to 8.5% from an earlier projection of 9.3%. Some investment banks are also lowering their earlier estimates for China’s growth rate for next year. So we begin to see some pessimistic forecasts made for China. But we have yet to see the final balance sheet at the end of the day.

The second factor I would say how fast China is willing to break out of its rule of modesty. I think Mr. Rampini mentioned that to a certain extent. China is quite interesting. Many countries tend to project their power more visibly than the amount of actual power they have. But China has been a sole exception to this. China has been modest although calculated in my view. But they wanted to shy away from being projected as a power, they wants to project a power. G-7 invited China to become a member of G-9, but China always mentioned that it is a member of the developing world, so it will not be qualified as a G-9. China always says, it’s a big but poor country. So, it is calculated modesty but whether or not China is willing to get out of that cast, that remains to be seen.
Overall, I think whether or not the current crisis will actually accelerate the rise of China depends on the two factors that I have just noted.

The second one: Mr. Rampini said that it is the end of a world. And that world has been dominated by America. So it might actually herald the demise of the American model. I think at the end of the day, America may emerge as a smaller, weaker nation than it is. But will it really signify the end of an era already? After World War One, the United Kingdom was already weaker and smaller. With its pound’s loosing the strength, but it took nearly a quarter of a century before a U.S.-led structure finally emerged. So, it might be too premature for us to assume that the end is already near us. There might be a sort of hiatus and interregnum in which the U.S. still rules, but its share in the global governance may be gradually reduced over the years. And furthermore, we still do not have something that can effectively replace what is called the Washington consensus. There might be something in the making somewhere in the world. I don’t see any substance in what is called the Beijing consensus. I have read it, there are many things there. But I’m not quite sure whether they are real substantive things that can effectively replace the items that I would list as parts of the Washington consensus.

The third one: Mr.Rampini contrasts the imminent downfall of the U.S. with the rise of a confident China. And then, he lists paraphernalia of serious problems and daunting challenges that China is facing. I agree with much of that picture. I actually agree with his use of the terms contradictions and paradoxes. But one thing that I wish to take an issue with is the characterization of China as the first poor superpower. And your emphasis on per capita indicators I think could be quite misleading. Great powers do not have to be rich in per capita terms. For instance, the Soviet Union was not really that high in terms of per capita income, particularly in its later years. But nevertheless, the Soviet Union was strong and capable enough to pose significant threat to the United States for a long time. So, per capita income, particularly when it comes to China, might not be such an effective indicator for national power.

Fourth, about the Indian story. I think what you are describing here quite resembles Fareed Zakaria’s new book, The Post-American World. Basically what Zakaria is saying is that there first was the rise of the West, then the rise of the U.S., and now we’re witnessing the rise of the rest – i.e., India, China, and so on. However, in my view, Zakaria’s accounts of India’s success are a bit inflated, maybe because he’s from India. What he doesn’t really mention in his book, in my view, is the uncertain relationship between China and India. They are bordering on each other, but that has not been mentioned in that book. So, the rest might be rising, but what kind of future holds for the rest is quite uncertain.

Finally, one point that I was expecting to see in your presentation, but I wasn’t able to is what I would call the digital dragon, i.e., the impact of digital technologies that are gradually capturing the Chinese population. The number of netizens amounts to two hundred fifty million people in China, although it is a bit lower than the world average share of the netizen population. The world average is 21%, but in China it is only 19%. But the rate of its increase is very fast. And then, we have about six hundred million Chinese people who have mobile phones. What does this mean? This really means a significant rate of destroying the distance. In other words, the cost of getting organized in China is now extremely cheap. And this could be a very serious threat, a formidable challenge to the regime, which has to maintain stability in order to get the economic reform going. Because if economic reform cannot proceed smoothly, then I think there will be enormous problems, both political and social problems in China, which in turn will lead to a legitimate problem.

Keun Lee (Professor, Department of Economics, Seoul National University)

Thank you. I received this draft in advance. Usually economists read articles with at least some tables and figures. But this one doesn’t have any table or figure. Anyway, as you noticed, it was an interesting lecture and presentation. Prof. Jeong already covered many of important issues, but as he mentioned, there are two arguments. The first one is that now we are seeing the end of the world, in other words, the world along the American style free market economic model. Secondly, he also argued that this global situation will accelerate the rise of China as a world superpower. Regarding these two aspects, professor already made very comprehensive responses. So, I’ll not dwell on to that.

Let me move to later part of his lecture. There, he mentioned three contradictions or paradoxes.
The first one is that he mentioned that China is a superpower, but is poor. So, he characterized China as a poor superpower. The second paradox, I perceive, is that he mentioned about coexistence of economic growth, and political dictatorship or one-party control by the Communist Party. Thirdly, he mentioned another paradox where we see a lot of high-tech oriented R&D expenditure, together with rising crisis in coastal regions, where increasing factories are having difficulties nowadays. I think in this later part, several paradoxes seem to be more interesting. So, let me focus on those parts.
First, he tried to mention some figures to access economic achievements of China, mentioning the PPP or Purchasing Power Parity-based comparison, describing China as one of the great economies after the U.S. But he didn’t mention the per capita level in terms of PPP estimation. So, let me provide that figure first. I have some figures as an economist. Around thirty years ago, in 1978, China’s per capita level in terms of the purchasing power parity was only less than 10% of the world average. Now, China is reaching about 50%, a half of the world average in terms of the real income level. And this is a big achievement. In comparison, as he mentioned some comparison with Korea’s performance, Korea reached 100% of the world average around 1990s, in other words, after 30 years of economic takeoff since 1960s. In that respect, although Korea is a small country, Korea did much better than China. In terms of PPP, China’s per capita GDP is nowadays around almost five thousand per capita GDP. That level is similar to the Korean level in late 1980s. That’s where Korea reached around five thousand per capita GDP in terms of year 2000 PPP level. That’s the one basic comparison of China’s performance. But more interesting part is that regarding the first paradox, in other words, economic growth combined with rising economic inequality, I think this is the weakest part of China, and less comparable to the economic performance in Korea. In other words, China seems to do much better in almost every aspect compared to Korea. China has much more favourable trade surplus from the beginning, whereas Korea used to have a lot of trade deficit throughout the first thirty years. And China accumulated a lot of foreign reserves and China maintained very high saving rate as high as 30%. That level is usually observed in advanced countries. Korea reached the saving rate of 30% only mid-1980s. But China, from the beginning of its economic takeoff, boasted such high rate of saving.

But as mentioned, the weakest part of China’s performance is the rising inequality. And this Gini coefficient, a typical indicator of inequality, now China is around 0.5, which is comparable to the level in Latin America. But in Korean case, we had only a ten-year of worsening income inequality up to early 1970s. After that, we experienced more equalizing growth, more gradual decline of Gini coefficient. In this sense, Korea did very well, but the difference between from Korea and China comes from the large size of rural surplus labour, which is more than one hundred fifty million. And that surplus level will not disappear until next 20 years. That means, until that time horizon, China will continue to have a more worsening income inequality and that’s the very serious problem. So far, I dug in the cause of inequality.

The second paradox is about the coexistence of R&D, or emphasis on high-tech versus rising crisis in coastal areas with cheap labour. And this situation is also quite familiar for Koreans. Because we also experienced that stage around late 1980s, where we experienced the rising wage rate and Koran factories had to go abroad looking for cheap wage sites. And that’s exactly the stage currently China is facing.

But in terms of R&D-wise, China is doing very well. In other words, already R&D/ GDP ratio in China is surpassing, 1.7 which is very high in terms of its per capita GDP. I take 1% of R&D/GDP as the threshold. Around mid or early 1980s, Korea and Latin American countries were same in terms of very low R&D/GDP ratio around to 0.5. At that time, Korea and Latin America also had the same GDP level. But after 20 years, Korea’s R&D/GDP ratio reached more than 2.5 whereas in Latin America, that level is still below 1%. But China already surpassed that level, reaching more than 1.5. That holds very well for the future of China as an economic or technological superpower. For the reason we can say that China might be different from Latin American countries. I perceive Latin American countries trapped as middle-income countries, actually their growth stagnated, and they’ve made no progress at all in terms of real per capita GDP between 1980s and 2000. One of reasons for that is less emphasis on R&D expenditure or technological breakthrough. But China is different in that regard so for that part, I would say China is more promising.

However, the weakness of China is coming from the fact that many R&D or the patent filed in China is not from indigenous Chinese companies but from foreign companies operating in China. That’s the weak part of China’s R&D expenditure or whatever technological strength. That part is where China differs from Korea. Korea’s almost all the R&D or patent are operated by big corporations or Jaebeols. In that respect, China is different because most of the important patents are coming from foreign companies operating in China.

But China is similar to Korea in terms of the fact that China has also produced a large number of global Fortune 500 class companies. This number represents one aspect of economic strength. Now China already has more than 25 global Fortune 500 class companies whereas Korea used to have only three or four until mid-1990s. Still now, Korea has only 14 global Fortune 500. And this 25 number of Chinese companies is already more than the number owned by Italy, France, or the U.K. In this respect, China is doing some image of superpower.

Now, regarding the third paradox about the economic growth and political authoritarianism, I think in this respect, Rampini is showing somewhat western-biased perspective about the relationship between economic growth and democracy. And from Koreans, the situation in China is quite understandable, because we already experienced the same process of growth and democracy coming only after the economic growth. In other words, there was a big debate about relations between economic growth and democracy. The western idea is that you should become democracy first, and then you can grow. That’s the main economics idea or the Washington consensus. But East Asia is a quite good counterexample to that western paradigm. South Korea, Taiwan, we all grew first, and then we introduced democracy. I would perceive democracy something very expensive. That means, don’t try to buy it unless you become rich, otherwise you’ll go bankrupt. In this respect, I’m taking a bit different perspective from Rampini’s. Even you mentioned that we are seeing the end of the world dominated by American model. But why are you trying to persuade China to adopt western style of democracy? Even though you are declaring the end of western-style democracy or American model. That’s the one paradox from your presentation I see.

Mr. Federico Rampini

Thank you. I was very interested and pleased by these remarks. I’ll try to give you a brief follow-up.
Regarding Prof. Cheong, I can understand that legitimate doubts about my thesis that this crisis will accelerate the rise of China. It might not. Maybe China will experience in its own turn, very severe consequences of this recession. We don’t know, it’s probably too soon, it’s premature to make a forecast on this. But, I would just like to explain my main hypothesis on which my forecast is based. I think, and this is not my personal opinion but a rather wide-spread opinion, that we’re entering an era of deleveraging, i.e. a reduction of the amount of debt everywhere. This is one of the major consequences of this financial meltdown.

In the last decades, in order to create one dollar additional GDP in world growth, you needed on average five dollars of financing. This will be no more. So, if we are entering the era of deleveraging, those countries that rely less on finance for their growth should be favoured and should be better positioned in the future. This is why I think that China stands a good chance to be one of the winners. China is also a net importer of raw materials, oil, and energy. And this makes it stronger as we enter an era of deflation, generalized deflation- i.e. a widespread reduction of prices of oil, metals, and agricultural commodities.

But where I suddenly agree with the spirit of the remarks is that before we can see a new world order, there can be a very long period of transition, which will be an unstable disorder. That is the lessons we can draw from the parallel with the decline of the British Empire. Certainly, you can have a decline of leadership of the number one. And yet, before other leaders emerge, there can be a period of very unstable disorder, which is not the happy scenario for us. We are living into that period.

I know that when I speak of India, it can always seem somehow overrated. But what attracts me very much in India is that somehow they seem to have built- in stability. Can it sound funny? Speaking about stability about India, which is probably the most unstable country in the world. But this is typical of democracy. They have a very flexible political system that allows for a lot of social conflicts to happen. And still the country is relatively stable.

The digital revolution, that’s a very interesting topic. There are so many Chinese now using the Internet and cell phones. But, are they willing to use this power in order to change their society or to change the political system? I think that here, we touch a very important topic in order to understand the nature of the consensus that the authoritarian regime in China has built and still enjoys today. The hard core of their consensus is the urban educated young middle class. This is a huge change compared to what China experienced in 1989, when it was precisely the students who led a revolt against the political system. You know that in 1989, if you look at the demographics in the Communist Party of China, it was still a very typical, traditional Communist Party. The most important constituencies were industrial workers and peasants. Nowadays, if you look at the demographics of the Communist Party members, which by the way have been growing to 75 million, it’s five percent of the population, the first demographic group in terms of percentage is university students. This is really a very deep change that has occurred. So, until some bad accident happens in the economic growth of China, these expectations that the young, educated, urban middle class has will prevent any uprising among the youth. Until then, the digital revolution won’t happen. Because those are the happiest people in China now. And when you have revolts, riots, unrests in China, it’s usually within the poorest areas of the population.

As for the remarks by Prof. Lee, I found extremely interesting all the parallels with Korea. This is very important because we must remember that Chinese leaders pay a lot of attention to the models of Korea and Japan. Starting with Deng Xiaoping, when they began their transition to a market economy, they precisely wanted to look deeply into what had been the economic miracle, the accomplishments of the market economy here in Korean and in Japan.

When I speak of the poor superpower that is China, it does not mean that it’s not a superpower, but being a poor superpower can be an obstacle to mutual understanding and agreements between us and them. I’m thinking especially the European Union and China. The main example I can highlight is climate change. When we discuss climate change and strategies to reduce pollution, the fact that China is a poor superpower, means that we are speaking two different languages. We, Europeans are pointing at the total amount of CO2 emissions by China, and we’re saying “You are the main culprit for climate change”. They are saying “Look at our per capita CO2 emissions. Don’t lecture us. We’re still very limited polluters compared to the European Union or the U.S.” And I agree with Prof. Lee that it is a weak spot in the Chinese model that so much R&D activity is made by foreign corporations, but I also believe that this is changing. The Chinese government is pushing very hard for their own domestic multinational corporations to become major actors in R&D.

My last remark is on democracy. Of course, this is the most important topic. I’m not speaking about the Washington consensus; maybe you’re right about the Washington consensus. But we, Europeans have never believed that democracy comes first and you must have democracy first in order to have economic development. Because in our own history, we had opposite examples. Germany, my own country Italy, we had capitalism first and then democracy. So we know that there can be very different paths to democracy. And I don’t think that we want to impose any kind of western model on China. What I was saying in my presentation was that Chinese can look around them very near here in Asia, and they can find sound, functioning models of democracy, in South Korea, in Japan, in Taiwan and in India. So, they don’t have to buy any western label for democracy. They can just look very near to their borders. Thank you.

Keun Lee (Professor, Department of Economics, Seoul National University)

During late 1980s and early 1990s, at that period, Korea reached just the same level of the world average per capita GDP. If you calculate the same story to China, China needs another 15 to 20 years to reach the world average level. That’s the time horizon when I speak about democracy in China.

Q & A
Hwy Chang, Moon (Professor, Graduate School of International Studies, Seoul National University)

Thank you very much for your nice presentation. It’s really nice to hear from journalists. It’s very clear. It was like I was watching CNN. So, let me just ask one point. This is related to our last discussion I guess, the different types of empires, right? The successful model number one is the Roman Empire. Number two is the western empire. And we had like a Japan model. Now, we’re talking about the China model. It’s very interesting because you mentioned that China has been very successful economically, but politically very much unique- One political party and no opposition. The feature you mentioned again very interesting is that China has been very much negative about the international politics. They’ve been kind of veto power rather than be frontieristic. So the feature is, “Can they stay as it has been like a strong political power?” But they may have to change. I’m actually the business major, so we’re concerned about the business environment. Chinese strong political regime has been successful, kind of beneficiaries to business, but in the feature, the true strong government policy, business people may not like it.

So, my question is there might be two scenarios. Number one is Chinese political system may stay as it is, strong one political party. But the other one is the already successful China’s economy may have to push Chinese politics to change to a regime which is similar to the western world. This is exactly what Korea has experienced. We used to have a very much strong political power, but now Korea is very much democratic. So, which scenario should be right in the features, is politics or economics?

Kelvin Li (Student, Graduate School of International Studies, Joong-Ang University)

Thank you very much, Mr. Rampini for your wonderful speech. And in your speech, you have pointed out many problems China now faces. Here, I’d like to quote the words from Mark Twain, “Everybody is just like a moon. With a darker side, he does not want to others to see”. And so is true with China. Because when you point out such kind of problems, we should like to analyze the causes of such problems so that we can solve the problems more effectively.

First, I think that most of westerners use high criteria to judge the current Chinese situations. As Prof. Lee had pointed out that currently the China’s development rate is just as that in Korea at the end of 1980s. Or, if compared to Europe, the development level can be traced back to the early 20th century. Could you please imagine back to the early 20th century what westerners were doing to the whole world? They were colonizing the whole world, so what are the human rights of these developing countries, of these Third World countries? China now develops. We acknowledge that we have a lot of problems, but we want to have our own development model. That’s just as Deng Xiaoping had pointed out, we have to cross the river by touching the stones. And we will develop in a very gradual manner.

Let us examine the three questions you have raised in your thesis. The first one is the safety product. I wanted to talk about the safety product, environmental and human rights issues, but because of the time limit, I’d like to ask my last question.

I know Mr. Rampini you also joined the Italian Communist Party when you were very young, but later, the Italian Communist Party changed into the Democratic Party. According to your globalist experience, could you please share with us the differences and similarities between the Chinese Communist Party and the Italian Communist Party? And could you please give us suggestions how can China engage with the countries around the world more effectively?

Mr. Federico Rampini

To Prof. Moon, I used the term negative, veto power when I was referring to the China policy in the latest Doha round. I don’t think they are always negative in their stances in global governance. Sometimes, they are extremely positive. They’re even much more positive than us. For instance, they still tend to describe global trade as a win-win situation whereas in some western countries, even in the United States which was the free trade land for so long, now people or at least parts of the population and parts of the political leadership have much gloomier views of global trade and its impact on society. So, I think it’s a learning process. They are very cautious. They are very cautious because they’re trying to understand what kind of burden they will have to bear on their shoulders when they accept new responsibilities. This is very apparent in the G-8 enlargement issue. They know that we want them to enter the G-8. They’re wondering what price we want to exact from them when they enter the G-8. For instance, there have been very pragmatic issue, which is the refinancing of the IMF. The IMF needs money, a lot of money, because they’re bailing out Iceland, Hungary, Ukraine and maybe Pakistan. Who’s going to give this new funding to the IMF? Obviously, the U.S. and the European countries are looking to China. They are looking to their treasury of two trillion US dollar official reserves. So, China is very cautious before they accept an invitation to the club where the entrance fee will be very expensive.

Now, about the scenario for transition to democracy, if I have to make a bet, I would say that transition to democracy in China will become an actual issue again, as soon as there is a major economic crisis that will disrupt the level of consensus in the key part of the population which is the young, urban, educated, upper-middle class. This is where the real challenge can come from, and threaten the stability of their political system, not from the poor peasants, not even from industrial workers in Guangdong. But this is my bet.

Now, you made the interesting comparisons to the early 20th century. Obviously, all parallels are correct, but the Chinese development and the Chinese rise as a superpower is not happening in the early 20th century. It is happening right now. Together, when there is CNN and the Internet, so that all our differences are instantly compared by public opinions at least in the democratic countries. This is a big difference. This has an impact on China, the fact that the public opinion in other countries can compare their own political system to China. This could not happen at the beginning of the 20th century.

I repeat myself in reminding you that, obviously, Prof. Lee stresses that the transition of Korea to democratic system happened at a certain level of economic development. Do we have necessarily to wait for China to arrive to the same level? I don’t know. I think it will be up to the Chinese people to decide. I don’t think we can have a deterministic economical approach to democracy. And once again, India is the proof that you can have democracy with a much lower level of economic development than Korea or even today’s China.

Last point, yes, I was a member of the Italian Communist Party when I was young. It would be very interesting to discuss that part of my experience but I think we are not here to discuss my personal biography. To your point, there is a major difference which explains why the Italian Communist Party became very quickly something else, something different. And now it’s called the Democratic Party. As a matter of fact, it even merged with another party. Even when I was young, and I was a member of the Communist Party, Italy was already a democratic country with pluralistic parties. So, there were many parties. And people could choose so, that was not a one-party rule. That was a big difference. And that obviously was a powerful pressure on the Communist Party itself to change and to reform.

Tae Jin, Kim (Student, Graduate School of International Studies, Seoul National University)

Hello. My name is TaeJin Kim, from GSIS. I have a question about the energy issue. When you’re talking about deleveraging, China’s economy is less dependent on finance. Instead, its resources and raw materials can be a driving force for its economic growth. But later you also mentioned that China’s CO2 emission can be a big obstacle for China’s growth. And also, I think China’s dependence on foreign resources is growing. In terms of energy issue, do you think it’s in favour of China or is against China?

Jens Vestergaard Madsen (Student, Graduate School of International Studies, Seoul National University)

I’m a student from GSIS at SNU. You mentioned that you would like the world financial system to go back to the Bretton Woods system. I’m just curious to know from the practical point of view, how do you envision that we can go back to the Bretton Woods system, and with the decline of the U.S., who do you see as the principal driver, who could or should drive that process?

Elias Quinns (Student, Graduate School of International Studies, Seoul National University)

You mentioned the nature of democracy in India, and how it’s kind of binding force despite all the different ethnicities coexisting in the subcontinent. I was wondering in your observations and experiences, given the different route that China will have to take if it does adopt democracy, do you think that democracy in China would have a similar binding effect? Or do you think maybe factors like regional autonomy may become more prevalent through China’s democratization process?

Mr. Federico Rampini

So, the first question about the energy, whether this has more favourable impact on Chinese development or is it a drag. Well, the answer has pretty much changed in a couple of months. Because if you had asked me this same question in July, when the oil barrel was worth $147, the answer was definitely different and much more negative.

Now that the price of all commodities have collapsed as a result of the general deflation, certainly this is beneficial to the Chinese economy, which is a net importer of commodities including energy. But, still in the long term, it is a problem. Although it is not as stringent as it was a few months ago, it is a problem because of its environmental problem impact. China will sooner or later encounter major obstacles to its growth due to the devastation of its natural environment. This is not only a question of economics. It’s not only a question of costs and benefits in terms of money. It is in terms of the quality of life, of health, of life expectancy for the Chinese people. The World Bank estimates that in a year, there are a half million premature deaths in China due to pollution. So, this, in the long term, becomes also a drag on your rate of economic growth.

The second question on the Bretton Woods: I am not the one who wants the Bretton Woods Two, it’s a kind of label that has been used by all kind of leaders or economists who are advocating the general reform of the rules of the system. Of the global monetary system, financial regulations, even trade rules. It doesn’t mean going back to the other Bretton Woods, which was agreed upon in 1944. It’s certainly not apt to solve today’s world problems.

But your question is quite appropriate where you wonder who will drive the design of the Bretton Woods Two, because one major feature that made the Bretton Woods One possible was the absolute leadership of the United States at that time. In 1944 World War Two had not yet ended when the Bretton Woods conference was held. Western Europe was at the utmost level of destruction, the Soviet Union was a potential challenger in terms of military power, but economically it was irrelevant. So, Franklin Delano Roosevelt and the United States at that time had really a degree of leadership the US don’t have today.

So, frankly, nobody knows who will drive the Bretton Woods Two effort. There have been interesting contributions from the European Union until now. Prime Minister Gordon Brown of Britain had a very important initiative for the bailing out of the banking system in Britain. As a matter of fact, the United States later adopted the same solution. The Paulson plan no. 2 was almost a copycat of Gordon Brown’s initiative. Nicolas Sarkozy has told interesting things, but it’s difficult to imagine who will drive this process going towards the Bretton Woods Two.

The last question: democracy in India and in China. It’s a very complex issue, but the only thing I would say is that democracy is by itself untidy. When we look on the surface of things, we have the impression that India is a very unstable country, always on the verge of collapsing. When we look on the surface of things, we have the impression that China is the most stable and solid country in the world. But, you have to look beyond these appearances. The Soviet Union looked as if it were a very stable country until one year before it collapsed. So, it is a typical feature of authoritarian regimes that they appear to be much more stable than they really are.

Mr. Hang Sik, Kim (Chairman, Jungbu City GAS)

Do the Chinese leaders value free market system and democracy? So to say, what is their goal? Do they aim individual happiness or power of mass?

Mr. Federico Rampini

They certainly value the free market system although it is a regulated free market system as in many other countries where the government still has an important role. But, this is not only true in China. We have different degrees of regulated market systems. France is pretty much regulated. Germany, too. And here in Asia, you have different models. So, I would say that since the start 30 years ago of Deng Xiaoping reforms, they have certainly valued the market economy. They have their own concept of democracy. They speak a lot about democracy if you listen to their official statements. They basically think that there can be democracy even within a one-party system if you have better checks and balances inside the party. The single party can represent various positions in the society. This is their official line.

But, let’s not forget that there was a time when the debate about democracy was much more open in China, and this was in 1989. It’s not the century ago. It was just barely 20 years ago. This was not only the students in Tiananmen Square who were discussing democracy. This was the Communist leaders, at that time there was a very open and frank debate inside the Communist Party leadership. Even their Prime Minister at that time had very advanced views about pluralistic democracy. Now, we could say that half of the Communist Party leaders at that time wanted to experiment a quick transition to a pluralistic kind of democracy. Then, the other half of the party won the debate. And nowadays the debate is much less open and vocal. But I think it is not completely finished. Thank you.


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