As incomes rise, Xi will have to change his China model

Will China inexorably become the hegemon of the 21st century? Chinese President Xi Jinping at the 100th anniversary of China’s Communist Party declared that “socialism with Chinese characteristics” would beat the rest of the world. Is he right? Or, like Japan and the USSR earlier, is China about to peak just when it feels confident of becoming world No 1?

China is still only a middle-income country with a per capita income just above $10,000, one-sixth of the USA’s. It will surely keep rising for a long time. But after it becomes a high-income country with a per capita income of $20,000-30,000, it will stumble and stagnate unless its political system becomes more flexible.

China did not invent the model of autocratic politics and outward-looking market economics. In this, it followed the model of the original Four Asian Tigers — Singapore, Korea, Taiwan, and Hong Kong. Of these, Korea and Taiwan evolved into full-fledged democracies as rising income created a middle class that demanded and got democratic change. I believe that both the social and economic pressures that changed Korea and Taiwan will, in due course, affect China too, though maybe in different ways.

Xi’s boastful confidence today is strikingly like that of Soviet chief Khrushchev who told the West in the late 1950s: “Whether you like it or not, history is on our side. We will bury you.” In just 40 years after the Bolshevik revolution of 1917, said Khrushchev, the USSR had gone from a European backwater to beating Hitler in World War II, and in the 1950s becoming the first country to launch satellites and men into space.

Even anti-communists thought it had the best economic system. My college economics textbook by Paul Samuelson had a chart showing the USSR starting well below the US but rising faster and eventually overtaking it. This chart continued in subsequent editions till Samuelson withdrew it in 1989, just before the Soviet collapse.

The Chinese model is far superior to the Soviet one and will flourish much longer. Soviet ideology (and Mao’s) called for military and all possible means to convert the whole world to communism. Xi does not seek world communist hegemony. Far from seeing capitalism as a weak, doomed system (as Mao and Khrushchev did), his predecessor Deng Xiaoping embraced competitive global markets as the key to economic and technical progress. Xi has tinkered with but not abandoned that model.

Deng learned from Singapore’s success. So, he sought global trade and investment, supplemented by a strong welfare state. Deng advised punching well below weight in foreign policy, seeking western acceptance as a partner, not a threat. Xi has reversed that foreign policy posture with boastful aggression. He has made an enemy of the West, stoked a semi-Cold War, and hence faces serious hurdles in global technology, trade, and investment. This will carry economic costs.

His Uighur camps in Xinjiang remind many of Mao’s re-education camps. Xi is also imposing tougher political control of the economy, cutting to size plutocrats like Jack Ma who dared criticize party policies. But this is not a shift towards Maoism. The private sector will still drive the economy. Xi’s crackdown on oligarchs is partly political but also represents the overdue regulation of sectors that need it. Xi’s crushing of capitalists who might become power centers is autocratic but not specifically Maoist.

China’s model follows the four Asian tigers. Singapore and Hong Kong have a higher per capita income than their ex-colonial master Britain. China aims for that too. But the Tigers have shown that once a country shifts from the cheap-labor model towards the technological frontier, it slows down. China’s growth has almost halved from 12% to 6% per year. That is still excellent for a middle-income country but will slow further once it becomes a high-income country.

The political system’s boast of being a world champion in growth will erode. As incomes rise, entrepreneurs, the middle class, regional groups, and party factions will demand more political power. I don’t believe a prosperous high-income country can concentrate all political power on one autocrat while flourishing economically. Korea and Taiwan transformed gradually but smoothly from autocracy to democracy. I expect major political changes (though different from Korean or Taiwanese changes) in China too in due course.

With high prosperity, the Chinese Communist Party might well develop strong factions that clash and force changes. In 50 years, a prosperous China will not become a classic western democracy. But it could shift towards a Singaporean one. And while it will be the world’s biggest single economy, it will be far from a hegemon. The world will have multiple economic poles, including the US, Europe, and Japan. And hopefully India too.

What do you think?