Monday, July 02, 2007

Thoughts on China

I have returned from my first business trip to China earlier this month. It was an eye-opening experience, as I got to see first hand the progress that has been made there, and better understand what is occurring in the country. The particular issue of how to deal with China is important to me. My job just became global and so I have product responsibility for some products that are sold in China. I have discussed this topic multiple times on Objectivist forums, here, here and here. It was the response to my posts on this topic by the moderator of The Forum that was behind my reason to leave it permanently. Of all of the ethical issues, beyond those in my personal life, this is probably one that is most critical to me, professionally.

When I returned home I was surprised to find two cover articles that echoed the feeling and perspective I soaked in during my visit. One was in the Atlantic, by military columnist James Fallows entitled “China Makes, The World Takes”, describing the nature of China’s Economic Development Zones, and the other in National Geographic describing the “boom towns” that have popped up all through those same zones. These are fantastic concretized descriptions corroborating what I saw. But more importantly, they give a ground level look at how capitalism is penetrating China today. I highly suggest them.

The standard Objectivist response to China seems to be something along the lines of “China is a rights-violating, cesspool of a Communist dictatorship. It is clearly our enemy. We should do everything in our power to isolate it and see it collapse completely as we did with the Soviet Union.” Rand was certainly hostile to Communism, for good reason, and openly advocated the complete isolation of Soviet Russia. In contrast, when I discuss a country such as India with Objectivists, I get a much more favorable response to dealing with that country, even though it is openly socialist and in many ways still more backward than China.

I have problems with this position. First, while this isolation strategy contributed to the collapse of the Soviet Union, I am not convinced that the aftermath in post-Soviet Russia has left us in a secure position. Russia is largely a nationalist, ganster, nuclear state, and its future course is could hardly be called stable. Second, the isolation strategy belies the current state of China. That is, maybe in 1972, when Nixon began thawing Chinese relations, the proper course would have been to continue advocating isolation. But I was all of 4 years old then and I am only now in a position to take actions that actually have ethical bearing on China. Today’s China is hardly Nixon’s China, and that is the point.

Anyone who continues to advocate that embargo of China is the best course of Westernizing it has absolutely no understanding of what good things are actually occurring there, and the scale on which it is occurring. The first thing to understand is that China is not a single country uniformly inching toward a market economy while preserving its Communist ideology. It is really two Chinas. One that is advancing slowly, remaining nominally socialist, and the other that has jumped headlong into a “wild west” form of proto-capitalism. The story of the second begins in 1980, when the Chinese government established its first Economic Development Zone in Guangdong province in the Shenzhen area, next to what was then estranged, and very capitalist, Hong Kong. Since that time, four other national zones have been established in China and the Shenzen area has been expanded into the whole Pearl River Delta. In addition, 15 free trade zones, 32 state-level economic and technological development zones, and 53 new- and high-tech industrial development zones have since been established.

These zones are booming, and the rural population is flocking to them. When you look at a map of the development zones, it appears rather small, until you realize that much of China’s 1.3billion population is concentrated on the coast, and that the zones have swallowed up all of the coastal provinces from Shandong, just north of Shanghai all the way down to Guangdong, surrounding Hong Kong. I did a quick calculation of population, and counting the five provinces and the municipalities, this is about 330 million people, all of whom are now living in a semi-free economic state. That is more than the population of the United States! According to James Fallows, the Shenzhen area by itself contains a larger manufacturing workforce than the entire manufacturing workforce of the U.S.! Estimates are that 140 million rural Chinese have moved into these zones, and another 40 million are expected in the next five years.

What’s going on in these zones? It’s very simple: wild-west, capitalistic, manufacturing; everything from high-tech electronics to bra rings. It is estimated that at this pace by 2020, 25% of the world’s manufacturing capacity will be in China. Make no mistake folks, this is wild-west capitalism, not too un-reminiscent of the boom towns of the American Industrial Revolution. And it appears to be working. Is there corruption? sure; crime? yes; pirating? of course; is it all done under the auspices of Communist “national planning”? yup. But what seems to be lacking is: tyranny. That is, the government largely stays out of day to day affairs. Certainly they take a cut off the top, primarily in two forms: at the beginning of the process by selling “land use rights”, the closest thing to property rights, and thus making land available for development, and then through an ongoing company income tax (which at 15-30% is lower than that of the US – but that is another post.) Beyond that, very little. Witness James Fallow’s question to an expatriate in Shenzhen who runs a company that specializes in helping foreign companies navigate the process of outsourcing to a Chinese company.
Government policy and favoritism may play a big role in China’s huge road-building and land-development policies, but they seem to be secondary factors in the outsourcing boom. For instance, when I asked Mr. China [expat Liam Casey] which officials I should try to interview in the local Shenzhen government to understand how they worked with companies, he said he didn’t know. He’d never met any.
Witness, a person who runs a local Chinese company specializing in helping other companies establish Chinese supply. He’s not helping them cut through bureaucratic red tape. There isn’t much. Instead, in this wild-west boomtown, where factories spring up daily, and there are no local directories telling you which factory has the “Good Housekeeping” seal of approval, this man specializes in knowing which factories can do what you need, and which can't. This absence of government intrusion is not the earmark of a totalitarian government, rather of a mixed economy.

The result is an economic boom, the likes of which has not been seen probably since the industrial revolution. I witnessed this first hand. I drove from Shanghai to Suzhou, two hours by car on a super highway littered with factories and new construction. Never once during that drive was I out of sight of a construction crane. A colleague of mine who began traveling to China a decade ago said that this road was unimproved in 1999 and the land was all farmland. Two hours drive! This simply can’t happen voluntarily without some element of capitalism being present in the structure of these zones. Is it perfect capitalism? No, but I don’t think it qualifies as tyranny.

Clearly a quarter of China’s population now lives in a mixed economy. What are the fundamental aspects of that life? They keep what they earn. If they save enough, they can start a business of their own. Hustle drive and hard work pays off. It infuses the population with an energy and a hope that I found contagious, almost like Chicago in the mid-nineteenth century. Conditions can be Spartan, but make no mistake, people are there voluntarily because this life offers far more opportunity and hope than their previous lives did.
“In the movie version of Balzac and the Little Chinese Seemstress, two teenaged men from the city befriend a young woman in the mountain village where they have been sent for rustication during the Cultural Revolution. One day the young woman unexpectedly leaves. She has gone to “try her luck in a big city,” her grandfather tells them. “She said she wanted a new life.” The new life is [in Economic Zone] Shenzhen.

Multiplied millions of times, and perhaps lacking the specific drama of the Balzac tale, this is the story of the factory towns.”
Witness the ideas scribbled by workers on the walls their dormitory in Lishui.
“Find success immediately.”
“Reflect on the past, consider the future.”
“Pass ever day happily! A new day begins from right now!”
“Face the future directly.”
“A person can become successful anywhere.
"swear I won’t return home until I am famous.”
I have no illusions about the possibility of reversals in China’s progress. The Chinese government has built a system of contradictions. Proper grounding and acceleration of this progress requires the right ideas, and ideologically China is adrift. It is possible that the government will reverse course, or that there will be civil unrest in the poorer, nominally Communist provinces. But to advocate for the destruction of what has happen via a policy of isolation makes no sense. It is a step backwards on a path that is already built in the right direction.

Once one understands the magnitude of what has happened and the level on which it has happened, one cannot help but consider that there are now significant barriers to a direct reversal that are strengthening every day. Most notably, a quarter of the population now sees concretely the effect of a free market, and of property rights. I have significant doubts that they will allow that to be taken away quietly. Second, I have to believe that the government, like all governments of mixed economies, see the benefits of allowing such areas to continue to exist. That is, they realize they have created a golden goose, and knowing what life was like before having it, they are hesitant to do away with it so easily. Is this principled capitalism? No, but then no mixed economy is. Instead China lives in the same sort of government parasitism of all mixed economies where the government maintains it support by appearing to improve the lot of the people, and then preserves its power and influence by skimming off the top of the productive capacity of the people. It is a self-interested but Machiavellian relationship. While China has super-power aspirations, it is much more likely to thread that path carefully rather than risk losing it in a direct confrontation. I believe that China is becoming less of a threat because has its existence highly intertwined with the U.S. economy. Unlike protectionist Japan after WWII, who chafed at foreign investment and set up local companies that would one day compete with American companies, China works to serve the U.S. market. With access to American markets necessary to fuel its economic growth, China has made significant concessions in its economic structure in order to gain Most Favored Nations status and WTO membership. Those compromises are significant victories in the effort to eliminate the Chinese threat. If its economy is a golden goose, then favorable relations with and access to U.S. markets feeds that goose.

So maybe instead of the Cold War isolationist strategy, barring contact with our enemy and supplying dissidents with weapons, the proper stance on China should be to acknowledge the uniqueness of the situation and the capitalist values it has achieved, and work to arm its people with the proper ideas so that they can continue that progress. It is China’s people after all that have to recognize and fight for the continuation of their progress. Maybe they need ideas in their current state more than they need weapons.

China’s manufacturing economy remains a small factory, commoditized output, fragmented economy. The next step in China’s path to capitalism will be consolidation, the creation of companies that will be capable of competing on the basis of more than just manufacturing, the building of the first companies capable of becoming true multi-national corporations. But to do this, they will need several things: adding protections for human rights most notably for intellectual property, establishing a functioning legal system, and educating management talent. It is business management talent that is sorely lacking in China right now, but this is what will open the doors to the next level of introduction of Western ideas. Today, the Chinese workingman understands concretely the potential created when he is able to keep what he earns. Tomorrow, the Chinese businessman, if he is to have any hope of running a successful multi-national must understand what conditions are necessary for running a successful business. He must understand this to be able to fight to hold onto it.

China is a complex case, and it is most certainly not a fait acompli, but I believe that if one understands the nature and scale of what has already occurred then the basis for the standard Objectivist response that isolation is the only course is not so clear cut. Certainly we must continue to advocate for change in China based upon proper philosophic principles just as we do here in the U.S. But the path between the present state and future success may have more than one road.

9 comments:

Ergo said...

This is a well-written article, and I agree with you that isolation is not the strategy; but then, neither is capitulation or compromise by American companies. What I mean is, American companies should certainly engage the Chinese market in trade--if it is to their economic benefit. But along the way, the American companies should not give in to the demands of a communist government that wishes to secure and propogate its rule. By witholding investment in China or business ventures until its demands are met, America should be aggressive in pushing the Chinese towards accepting capitalism, free trade sans regulations, and American companies as they come.

I agree with you that there is no gain to anyone in stopping the current direction in which China is headed; we should be more aggressive in pushing it further down the road to capitalism, however.

Kendall J said...

Thanks Ergo,

I agree completely. For instance I think the actions of Google in captilating to the Chinese government for censorship was an incredible mistep. It is at this time, when China is still in some ways beholding to the use that we should use our leverage to get more institutional concessions. China will be able to succeed in overtaking the US even as a mixed economy just because numbers on on their side. If they seem resistant now wait until they don't need us.

Anonymous said...

Kendall,

I've heard from other people who have visited China, and I think you're being way too generous and optimistic about the situation. For starters, I think you're underestimating the fact that you mostly saw what they let you see.

It seems that you're attributing physical, economic reforms to "proto-capitalism" and that you think this will have any effect on the essential nature or intent of China. It won't.

Only ideas can change the direction of a civilization, and what we're seeing here is no departure ideologically from the past. I'm not optimistic like you are that an economic boom is a signal of anything different for the philosophy, and therefore the ultimate direction, of China.

Think instead of the Meiji restoration of Japan.

But that may be neither here nor there. Because war with China may come sooner rather than later.

Given what I've heard from my friends military and ex-military, China is - right now - engaging in a massive buildup and preparation for war... with us. They already wage a computer and espionage war against us, which even makes headlines in the news.

Yet the Leftist establishment in this country is eager to act as China's "useful idiots," just as they did for Stalin.

All of this foreign investment, all of these "boom towns" you see... they are all weapons to be used against the West. That is how the Chinese see things. That is why they, by their own internal documents, are doing this.

To say this isn't Nixon's China is only to say that much damage has already been done. Which is not an argument for making that problem worse than it already is.

-Inspector

Kendall J said...

Thanks Inspector. Certainly the fact that China is skimming resources off of the economic success of it's proto-capitalistic markets is a concern, and it is the one argument I could see against engagement. I need the evidence however.

If such plans exist, the rationale for them is completely hidden, even from the Chinese people, and frankly I have a hard time seeing this. Keeping such intentions hidden is certainly and excruciatingly difficult thing to do, but at the same time, some endgame that requires a complete reversal of current policy will have a difficult time gaining national support without a complete closing off of all contact with the west and a subsequent propaganda campaign the likes of which we've not seen. The problem with this is that information flow out of CHina is very porous. Yes China tries to censor it, but they do a poor job. Multi-nationals have daily contact with Chinese nationals. I have colleagues I speak with daily. What is going to precipitate the decision to cut off it's largest trading partner and how is this going to be justified to the Chinese people? I'm open to the idea that China is still a threat, but I'm unconvinced it will be able t pulll it off. There were still hardliners in teh Soviet Union, even in the days of Perestroika. I'm not sure they weren't a dying breed.

Anonymous said...

Kendall,

Honestly, I don't think that these plans are particularly hidden. Certainly they're no secret in the news, and the news only hears those things which are essentially declassified anyhow.

As for their censorship being incomplete, I wouldn't be so sure about that. I read an article a bit back - and I wish I still had the link - which showed that the seemingly porous flow of information was actually an elaborate ruse shown to Westerners. In fact, the topographic infrastructure of the internet makes it extremely easy to censor in China, because all traffic in and out of the country must flow through central pipelines. If a Westerner stays in China, the internet he sees is an entirely different internet than the one the Chinese see. And Google's complicity in the matter makes the whole thing completely seamless. The Chinese government can essentially construct any internet they want at any time.

But as to China's plans. If - and I say "if" because again you are a Westerner and are only told what they want you to hear - the Chinese people are largely unaware of them, it's because they don't particularly care about such things and probably take them as a matter of course. Yes, of course all of this economic activity is being done for the greatness of China and yes of course it will be used against those imperialist foreign devils. Rather than being completely hidden, I believe the rationale for them is completely unhidden.

Here is just the latest example of what I am talking about. That spy lived in America, with all the bounty of capitalism surrounding him, for decades and yet still diligently worked toward its demise. He was completely unswayed by living in the very heart of freedom, individualism, and capitalism.

It is my contention that this spy is not some isolated, extra-brainwashed example, but rather the general rule as far as China goes.

This Chinese thing is essentially different from the Russians. Russia had no culture or tradition besides misery and tyranny. When contrasted with the West, they could see how terrible their leaders and their country were. Communism was a secular ideology for them which only promised material prosperity - and its failure signaled a quick end to any enthusiasm they might have had.

But China - China is different. They have a whole culture, a whole philosophic tradition of collectivism dating back millennia to which communism is only a fairly recent addition. They are like the Imperial Japanese which we fought against in World War II, only much more numerous. They have an entrenched ideology which hates - not envies, like the Russians - but hates and scorns the West and individualism. Like Japan was, they are more than happy to steal the material structures and rituals of the West for a few decades or even centuries in order to fight it, but everything still remains in the service of their core beliefs.

Just look at all of the rights-trampling that they've done for the Olympics. They've forcibly evicted over 1 million people. You can't just push that number of people around without some major popular support for what their government does. China is not a burgeoning bastion of freedom and individualism, yearning to throw off the chains of oppression. They're a land of entrenched, pre-historic collectivism which yearns to clap those chains on tighter.

Trade with the West will no more make them freer and less threatening than it did the Japanese.

That China and Japan would be so similar is of course not surprising, given that Japan's culture was so derivative of China's.

Those deeply-rooted indoctrinations of collectivism which are Chinese culture represent the core identity of the China and the Chinese. And this identity can't be swayed with a few economic concessions to freedom because they aren't equipped philosophically to recognize the full implications of freedom. They will simply see it as a continuation of their tradition of hard work, and feed all of its fruits into the totalitarian state which points missiles at us, sends spies to steal our secrets, and develops war plans to defeat a technological enemy. All of which they're fine with because China is Good and China is Great.

To paraphrase another collectivist, what need have they to maintain an economic socialization of farms and factories? They socialize human beings.

As evidence, the warmongering nationalists in China - from what I hear - are not in fact the dying breed of the Old Guard at all. It is the new, young, and upcoming generation who is most intent on National Greatness and preparing for war. From everything I hear, it is the dying Old Guard which is in fact the only thing holding them back.

Inspector said...

Sorry - forgot to put a byline on that. I'm still used to Blogger's old comment structure.

-Inspector

Inspector said...

Here's another recent news item. If you google cyber war china, you'll get plenty more.

Inspector said...

And More

Inspector said...

Also, follow the link here.