Column: China and America's related, but inverse, dilemmas - Ian Bremmer

Wed Jul 3, 2013 4:44pm EDT

The conductor of a military band performs during the rehearsal ahead of the opening ceremony of the Chinese People's Political Consultative Conference (CPPCC) at the Great Hall of the People in Beijing March 3, 2010. REUTERS/Jason Lee

The conductor of a military band performs during the rehearsal ahead of the opening ceremony of the Chinese People's Political Consultative Conference (CPPCC) at the Great Hall of the People in Beijing March 3, 2010.

Credit: Reuters/Jason Lee

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(Reuters) - As protests sweep the developing world and Europe struggles through an austerity hangover, China and the U.S., relative to their peers, look like the best in class.

They are both comfortable with their modest economic growth rates compared to their norms of the past decade, and are insulated from the kind of social unrest we are seeing in Egypt, Turkey or Brazil. But both countries have a deeper intractable challenge that will, in the longer-term, get worse. What's interesting is that they're the inverse of each other. In the U.S., wealth and private sector interests capture the political system. In China, politicians capture the private sector and the wealth that comes with it.

The U.S.'s struggles with lobbying, pork-barrel spending, and the corporate sector's general overlord status in Washington are well documented. Campaign finance reform is long past. Corporate personhood is well-entrenched. Super PACs are ascendant. A representative democracy is being crowded out by a capitalist one.

The cycle is hard to break. Politicians' interests become aligned with those of the corporations that help them get elected. But even more troubling is that so many American politicians are gearing up to join the lobbying machine after they retire from government. In 1974, 3.0 percent of retiring members of Congress became lobbyists. Today, the figure stands at 50 percent of senators, and 42 percent of the House.

China has a related but different problem. Its politicians control too much of the money themselves. Politicians and elites in China enrich themselves, their friends, and their families by managing and siphoning China Inc., China's state capitalist enterprise. Chinese industry is controlled by the state, and thus it is the property of the people who run the state. Last year, state-owned enterprises and affiliated businesses accounted for over half of Chinese economic output and employment. There were 70 mainland Chinese companies on the 2012 Fortune Global 500 list; 65 of those were state-owned.

As an example, look no lower than China's People's Congress. The United States' House of Representatives and Senate has no billionaires. China's parliament has 83. According to Bloomberg, "The richest 70 members of China's legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices." If you're part of the state, state capitalism is the best, even if the system is centralized, corrupt and calcified.

That is where China's trouble is: its inability to create a robust industrial sector that can spread the wealth. It is leading to severe income inequality. Reliable financial metrics can be hard to come by in China, but a survey by a Chinese university suggests the wealth gap is now well above the world's average and "10 percent of Chinese households held up to 57 percent of all disposable income."

Income inequality is of course a problem in the U.S. as well. Just this week, the New York Times reported on how medical and pharmaceutical companies have ensured that giving birth in America is costlier than anywhere else in the world. Yet the country is still sufficiently stable, resilient and wealthy. America's poor people are still well-to-do from a global perspective. China's are less so. One in ten Chinese live on the equivalent of $1.50 a day or less. In other emerging markets this has, and is, leading to mass protest. But in China what can be done to placate the masses when it comes to corruption?

Xi Jinping is very popular, and he's eager to make a show of addressing political corruption. He announced a fight against the "four forms of decadence" — formalism, bureaucracy, hedonism and extravagance. The party leadership may be priming itself for a purge, locating local and midlevel officials that are low-hanging fruit: people they can make a public example of without impacting the top of the pyramid.

As for the wealthiest, they are undergoing a PR campaign of sorts, trying to display more modesty. China's foreign minister just traded in his Audi for the same domestic model that Mao used to drive around in. Make no mistake these actions are largely cosmetic. They mitigate public dissent in the short-term, but they do not get at the root of the problem. Why is that? China's leaders cannot fundamentally go after the problem because the problem is them.

And so we are left with a world in which the two strongest countries offer mirrored visions of what it takes to get to the top. In the U.S., the biggest danger of the capitalist system is that the private sector captures the state. In China, the biggest problem with state capitalism is that the state has already captured the private sector.

This is not to say that China is doomed. It, like the U.S., is in a powerful position despite its fundamental inefficiencies. The world's two largest economies are humming along at modest clips and economic growth has a way of shading over entrenched structural concerns. Both the United States and China are positioned to kick the can down the road for the foreseeable future, but eventually they will have to face their biggest issues. And it's best that they do so sooner rather than later.

It is fascinating that the two countries with the largest economies have inverse imperfections. But will they have inverse fates?

(This column is based on a transcribed phone interview with Bremmer. Ian Bremmer is the president of Eurasia Group, the leading global political risk research and consulting firm. Bremmer created Wall Street's first global political risk index, and has authored several books, including the national bestseller, The End of the Free Market: Who Wins the War Between States and Corporations?, which details the new global phenomenon of state capitalism and its geopolitical implications. He has a PhD in political science from Stanford University (1994), and was the youngest-ever national fellow at the Hoover Institution.)

(Ian Bremmer)

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Comments (1)
Oro_Invictus wrote:
When it comes to threats to the economies of entities like the US and the PRC, both nation-states are in need of the sort of reforms described by the article; however, these reforms alone will not keep them afloat. The fundamental issue here is one of the most basic simplicity for anyone versed in sociology or ecology: Unsustainable populations.

This issue has two primary facets, quantitative and qualitative:

1) Quantitatively, it is the simple matter of there not being enough resources for as many people as there are.

2) Qualitatively, it is the principle of negative density dependence; higher population densities are simply less efficient. They consume more, produce more waste, and are less productive.

Historically, nations have tried to get around this by increasing the amounts of resources available to their population to create an “artificial resource environ”; if you place a hundred people on a small island, they’ll quickly die out, but if you then provide those people on the island with resources from a hundred other islands? They’ll live like kings. They may still be just as inefficient as before, but they have more than enough resources to make up for this.

It is this principle which constitutes the lion’s share of why the US was able to rise to global primacy and it is why the PRC is trying desperately to urbanize their population: Both seek to use increased consumption to offset the inherent downsides of large populations.
The problem is that the world was already struggling to support one US, but now the PRC seeks to attempt something similar? There’s simply no way to sustain that with the resources we have, even accounting for technological progress improving utilization. Indeed, the PRC’s urbanization drive, by worsening all the issues that come with higher population densities, is a far greater threat to their economic sustainability than their inefficient authoritarian systems; authoritarian systems simply lead to stagnation, but unsustainable economic policies like this urbanization drive are what plunge nations into squalor. The US, meanwhile, while it is not actively worsening the situation, is doing far too little. Don’t get me wrong: The US is in a far, far better position than the PRC on this issue, but that doesn’t change that it too is utilizing an engine to sustain itself that requires far more fuel than what can be replenished.

In this, while political issues may be of an inverse nature regarding the mechanisms of how they affect their economies, the overall economic trends are not. Likewise, both states face the same fate should current trends not be changed: Economic ruin, first that of the PRC and later the US. It is simply a difference in timing.

Jul 03, 2013 7:00pm EDT  --  Report as abuse
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