Bloomberg has a very important story for Australia’s battery of China grovellers. It is this:
China’s top leadership has grown increasingly frustrated with a years-long failure to develop semiconductors that can replace US circuitry, an embarrassment capped by a flurry of anti-graft probes into top industry officials and the $9 billion rescue of Tsinghua Unigroup.
Senior officials are angry at how tens of billions of dollars funneled into the industry over the past decade haven’t produced the sorts of breakthroughs that emerged from previous national-level scientific endeavors, according to people familiar with top government officials’ thinking. Washington, which has steadily ratcheted up restraints on China, has been able to strong-arm Beijing and successfully contain its technological ambitions, they said, asking not to be identified revealing sensitive deliberations.
The importance of this story is NOT America’s leadership in technology and what that means for military pre-eminence.
It says something very significant about the two systems that are competing for hegemonic dominance. As well as something about the China grovellers that are suffering a crisis of faith about their system.
China has done a marvelous job of springboarding itself out of poverty over the last thirty years. Yet it is not an economic miracle. It followed a well-trodden path of unleashing liberal markets within its borders to engender the entrepreneurial spirit that drives economic growth.
It was following the path of Japan and Korea and the Asian Tigers before it. All transitioned from closed and centralised political economy systems to decentralised markets to unleash their human potential.
There were idiosyncrasies for each. But all nonetheless followed the path of the industrial revolution pioneered in Britain and then mastered in the United States in the 18th, 19th and 20th centuries.
China’s was a well-thought-out plan that has been delivered in spades, but it also has a problem.
Freedom is an essential ingredient in markets and China does not, and cannot, have it. Moreover, the further into development any emerging market gets, the more important freedom becomes.
The early years of development are easy. Chock full of latent productivity potential as feudal agriculture, centralised industry, and demographic windfalls are supplanted by private profit motive, competition, and aging population.
Later years require much more freedom because they depend much more on innovation. The natural course of development is to move up the value chain (except for Australia!) to more elaborately transformed manufactures and services that deliver ongoing productivity gains.
These require a number of entrenched freedoms to function.
The first is the purest form of freedom. Simply put, it is the liberty to create and prosper. This drives new ideas – sometimes greedy and sometimes altruistic – that always seek the new and more advanced and drives the system forward.
The second form of freedom is the tolerance of society for this to happen. It sometimes means inequality when outrageous successes rise to titanic heights, triggering envy and imbalance for individuals that soar.
The third form of freedom necessary is the institutional embodiment of the first two. The laws and transparency that are vital to accruing gains to successes, and the competition that gives birth to them, are guarded in the halls of democratic power.
China has none of these freedoms. As in the case of semi-conductors, it is still centralised, its rule of law is a joke, and nobody has the room to swing a risk cat lest they offend a cadre and end up with harvested organs!
Developing nations that are beleagured with these problems do not prosper beyond a certain point. By definition, they cannot. Because they do not have the inputs for the output.
What awaits them is known as the middle-income trap. It is an economic development cul des sac that bogs an economy down into a destructive feedback loop of graft, failed markets, trepidation, unnovation and government intervention. The outcome is stalled productivity, incomes, and stagnation.
Semi-conductors is a prime example. Try as it might. Accumulate patents as it does. Educate as best it can. Channel tens of billions into investment as it is. China cannot emulate, let alone overtake, US technological success because it does not have the freedoms to do it.
This is not to say that the autocratic system cannot deliver economic growth. It can. Nor is it to say that the unfettered liberal democratic system won’t commit suicide as wealthy individuals corrupt it. It could.
This is a lesson in history for those that see Communist China’s accession to global power as inevitable. They are factually wrong on any objective reading of history. Britain’s nation of whinging shopkeepers did not dominate the world any other way. Europe followed suit by embracing the British path, something they have perhaps never gotten over!
More apposite, Chinese power only rose in the last thirty because it has taken this path as well. This, in part, is why it is undertaking such enormous reforms as crushing its riotous property sector. Because it misallocates capital and ultimately drains the state of growth.
But it is doomed. The freedoms needed are not there. It can’t make the development leap because it would extinguish the CCP.
This is the irony of today’s China grovellers. The CCP has only managed its rise because it fashioned its system after that of the West. The China grovellers are suffering a doubly dark fantasy. They can’t see the Chinese system for what it is. And they are blind to the successes of their own.
China has a lot of people and will have a powerful economy, as well as military, and hegemony of autocracies.
But the only way it can defeat a free West is if it loses faith in itself.
