295
THE AGE OF TURBULENCE
been back several times. Like all visitors, I've been impressed and often
amazed by the changes from visit to visit. The Chinese economy measured
by purchasing power parity has become the second largest behind that of
the United States. China has also emerged as the world's largest consumer
of commodities generally the second-largest consumer of oil, and the largest
steel producer, and has evolved from the bicycle economy of the 1980s
into a country that produced more than seven million motor vehicles in
2006, with planned facilities to reach far beyond that. Skyscrapers are
sprouting up in fields that for millennia went unchanged from harvest to
harvest. The drab universal dress code of generations of Chinese has yielded
to a riotous spectrum of color. And as incomes rise with prosperity a shopping
culture is emerging. Today advertising, once unknown, is one of China's
most rapidly growing industries, and international retailing giants like
Wal-Mart, Carrefour, and B&Q are vying with the newly innovative Chinese
shopkeeper.
In a land not far removed in time from the collective farm, loosely articulated
urban property rights appear to be enforced; otherwise, foreign
investment in real estate, factories, and securities would long since have
dried up. Investors behave as though they expect to get returns on their investments
and return of principal. And they have.* Chinese citizens have
been granted the right to own and sell homes, creating a major opportunity
to accumulate capital. Hernando de Soto, I assume, is pleased. And in
March 2007, the National People's Congress passed a more comprehensive
right of ownership that grants the same legal protection of property that is
granted to the state. But the right to own property still falls far short of the
status of property rights in developed countries. Property rights require not
only a statute but an administrative and judicial system that enforces the
law. In this regard, China lags. An impartial judiciary is still a goal on the
Chinese horizon. There are breaches, especially in intellectual property
rights: complaints by foreign joint-venture investors are rife that technology
*Certainly the dramatic decontrol of prices for a large segment of the retail market encouraged
foreign investment. By 1991, almost 70 percent of retail prices were market oriented—almost
double the percentage in 1987, when the early evidence appeared that central planning behind
the iron curtain was faltering. In the late 1980s, the import tax on parts and components for
building export goods eased significantly, increasing the profitability of exports.
296
THE CHOICES THAT AWAIT CHINA
brought to a new plant turns up duplicated in a plant wholly owned by
Chinese in direct competition.
An important casualty of China's growing affluence is the nation's
commitment to its Communist revolutionary roots. In the myriad meetings
I had with Chinese economic and financial officials, I do not recall ever
hearing uttered the words "Communism" or "Marx." Of course, I was dealing
largely with "liberals." I did participate in one ideological exchange—in
1994, when I "debated" free-market capitalism with Li Peng, a fervent
Marxist and Zhu's predecessor as premier. He was quite knowledgeable
about U.S. economic practice, and a formidable debater. Right from the
start, it was clear that I wasn't facing Marxist dialectic of the type I'd had
to deal with in college. Li listened intently to my carefully reasoned position
on why China should open its markets faster. He responded by asking
how, if the United States was so devoted to unregulated markets, I could
account for Nixon's wage and price controls in 1971.1 was delighted that
he knew to ask. Not only was he connected to the real world, but also, for
a reputed hard-liner, he sounded almost reasonable. I acknowledged that
price controls had been a bad policy and that their only saving grace had
been to reaffirm that such controls don't work. I added that we had not
been tempted since. I didn't expect to change his mind, however. We were
both in the sad state of government officials who engage in debate, yet even
when proved wrong lack the authority to acknowledge error. No matter
how hard I tried to convince him, or he me, neither of us could publicly
veer from his government's declared policies.
I have not spoken with Li Peng for years and can only wonder what he
must have thought when, in 2001, China joined the World Trade Organization,
the bastion of free competitive trade. I had been a staunch supporter
of legislation creating permanent normal trade relations with China, believing
that its full acceptance into the world trade system would benefit
Chinese citizens, who would see their standards of living rise, and U.S. businesses
and farmers, who would find a more welcoming and as yet untapped
market. In May 2000, at President Clinton's request, I spoke at the White
House of my hopes of bringing China fully into the global marketplace, arguing
that such a move would foster individual rights and strengthen the
rule of law. I told reporters: "History has demonstrated that implicit in any
297
THE AGE OF TURBULENCE
removal of power from central planners and broadening of market mechanisms
as would occur under WTO is a more general spread of rights to
individuals." (Underscoring the reason for my presence, Clinton added mischievously,
"We all know that when Chairman Greenspan talks, the world
listens. I just hope that Congress is listening today.")
China's involvement in the institutions of global finance brought other
benefits. Chinese central bankers now play a key role in the Bank for International
Settlements (BIS) in Switzerland, an institution long associated
with capitalist international finance. Zhou Xiaochuan, who was named
China's central bank governor in 2002, was particularly welcome at regular
BIS meetings of central bankers from major developing countries. In addition
to fluency in English and international finance, Zhou brought a candid
appraisal of what was happening in China that few of us could replicate
from other sources. He would often detail the way the Chinese financial
markets were evolving, and give me a new perspective. In 2006, after leaving
the Fed, I served with Zhou on a committee to examine financing issues
related to the International Monetary Fund. He and his colleagues, just a
few years removed from isolated central planning, have become major players
in operating the global financial system.
Significantly, China is also absorbing much Western culture. HSBC,
one of the leading international banks, has for the past two years sponsored
a multimillion-dollar golf tournament in Shanghai. Golf courses have been
popping up across China, and the surprise is not that they have but that
nobody seems to have thought it unusual.* Few sports are as symbolically
capitalist as golf. The Soviet Union had professional tennis players, but no
golfers.
I am told there are actually more Western classical symphony orchestras
in China than in the United States. And I was taken aback when President Jiang
Zemin told me that his favorite composer was Franz Schubert. This
is a very far cry from the culture that greeted President Nixon on his visit
to China in 1972.
*Tiger Woods came in second in both Shanghai tournaments. However, golf has lately been a
source of controversy at some Chinese universities, where students have protested administration
efforts to build golf "training courses" on which to teach the sport. Nonetheless, another
international golf tournament, on China's Hainan Island, was staged in March 2007.
298
THE CHOICES THAT AWAIT CHINA
I have always been of the opinion that Mikhail Gorbachev's glasnost and
perestroika were the proximate cause of the Soviet Union's demise. They
exposed the Soviet people to "liberal" values that Stalin and most of his
successors had long suppressed. After the Pandora's box was opened, given
the way ideas spread, the demise of collectivism in the USSR and its satellites
was just a matter of time. Efforts by the Chinese Communist Politburo
to control information on the Internet suggest to me that they have drawn
the same conclusion and do not wish to see history repeat itself.
In 1994, standing near the spot in Tiananmen Square where, in 1949,
Mao Zedong declared the establishment of the People's Republic of China,
I could only marvel at how difficult the Chinese transition to modernity
has been—and yet, in recent years, how successful. Here, where a freedom-
suppressing student massacre had occurred five years earlier, I also found
myself wondering how after generations of Marxist indoctrination a society
of 1.3 billion could turn abruptly and abandon the values inculcated
during the impressionable years of childhood. Perhaps, despite China's dramatic
progress, those values are more persistent than they seem. Although
change is everywhere, Chairman Mao's face still adorns China's currency, a
hint that the pull of tradition remains strong.
The Communist Party came to power through revolution, and has
from its beginnings sought political legitimacy as the purveyor of a philosophy
that was just and that offered material well-being for the whole of
the population. Material well-being, however, is only part of what human
beings strive for, and it alone cannot sustain an authoritarian regime. The
cheer of new affluence rapidly fades and, with time, becomes the base from
which additional, even higher, expectations evolve. In the last quarter century,
it has been the rapid increases in standards of living that have gained
the support of the people.
At any rate, it was just a matter of time before the inherent contradictions
of Communist ideology became manifest. The specters of Marx and
Mao, lying quiescent during the years of accelerating affluence, stirred in
2006 in the person of Liu Guoguang, a retired octogenarian Marxist economist
who derailed a proposed constitutional amendment to clarify and expand
property rights. He held up the ideological banner of the Communist
state and, by attracting unexpected support, prevailed in the National Peo
299
THE AGE OF TURBULENCE
pie's Congress. The ground had been prepared by fiery remarks by Gong
Xiantian, a professor at Beijing University Law School, which had been circulated
on the Internet. In response to the criticism from the Marxist left,
President Hu Jintao stated that China must "unshakably persist with economic
reform." It remains to be seen whether this ideological eruption is
the last gasp of an aging generation or a more fundamental undermining of
China's road to capitalism. Encouraging, as I noted, was the passage of the
amendment with only minor changes by the National People's Congress
meeting in March 2007.
For the past generation, the Chinese leadership has been quite inventive
in avoiding what virtually everyone has concluded: despite his brilliance,
Karl Marx was wrong in his analysis of the way people can organize
to successfully create value. To Marx, state ownership of the means of production
was the essential fixture in a society's ability to produce wealth
and justice. The right to virtually all property in Marx's society was thus to
rest with the state, in trust for the people. Property rights granted to individuals
were instruments of exploitation and could come only at the expense
of the "collective," that is, society as a whole. He argued for the
collectivization of the division of labor. All working together for a single
goal would be far more productive than markets collating the disparate
choices of individuals. Do human beings optimize their potential in a collectivized
society? The ultimate arbiter of all such paradigms is reality.
Does it work as proposed? Marx's economic model in practice—in the
USSR and elsewhere—could not produce wealth or justice, as is now generally
recognized. The rationale for collective ownership failed.
Socialists in the West, adjusting to the failure of Marxist economics,
have redefined socialism to no longer require that all the means of production
be owned by the state. Some simply advocate government regulation
rather than state ownership to foster societal well-being.
Deng Xiaoping, confronting Marx's fall from favor, bypassed Communist
ideology and rested Party legitimacy on its ability to meet the material
needs of over a billion people. He set in motion a process that led to an unprecedented
near-eightfold increase in real per capita GDP, a fall in infant
mortality, and greater life expectancy. But as many in the Party leadership
300
THE CHOICES THAT AWAIT CHINA
feared, replacement of government controls by market pricing began to
weaken political control by the Party.
I saw how that worked in a visit to Shanghai in 1994. A senior official
told the story of how five years earlier he had been assigned to oversee the
produce depot. He had to be present every morning at five o'clock to allocate
farm products coming into Shanghai, he told me. His job was to dictate
who got what. Though he didn't elaborate on how he made those
decisions, clearly he held considerable sway—I could imagine the favors he
must have been offered by distributors eager to cultivate his goodwill. All
the same, he said, he'd been delighted when the depot was converted to an
open market, with the distributors bidding for produce. Now, instead of
one guy deciding who got the bamboo shoots and at what price, buyers and
sellers bargained until they agreed. The market set the price, and the produce
was allocated according to demand and supply—a clear illustration of
the fundamental difference between a command economy and a market
