China: Say, whatever happened to those one billion consumers?

"In order to achieve their ends, the planners must create power -- power over men wielded by other men -- of a magnitude never before known. Their success will depend on the extent to which they achieve such power. Democracy is an obstacle to this suppression of freedom which the centralized direction of economic activity requires. Hence arises the clash between planning and democracy."
--Friedrich August von Hayek
The Road to Serfdom , 1944

"Nevertheless, the ancien régime was brought down, partly by its own rigidity in the face of a changing world, partly by the ambitions of a rising bourgeoisie, allied with aggrieved peasants and wage-earners..."
-- Causes of the French Revolution

I'll pick up from yesterday's post with the third observation made by Simon of Simon World :

The Communists (CCP) are now a party of nationalism and market economics. The leadership is kept up at nights by the thought of the 700 million peasants that are largely missing out on its economic miracle, while its support is more often coming from the rapidly growing coastal people. The growing income and living standard gap is the biggest problem the government faces.

Striking support for these observations comes from a bellwether June 13 Reuters Report by Alan Wheatley, China Economics Editor, Beijing, titled Textiles just start of a flood of Chinese goods. When read with Simon's points in mind what jumps out from the economic data is that the market-oriented communist party has planned China into a corner:

...fast-rising exports are a distress signal that demand at home has dried up. "If domestic consumption isn't there, companies look outside China because they don't have sufficient margins here." ...

"At this stage, China is a supply-side story. It has to turn into a demand-side story and start consuming more."

The figures quoted by Wheatley don't lie. So the latest happy consumer index showing Chinese to be almost as happy as Indians suggests that the poll is carefully controlled to jibe with the CCP's wishes and dreams.

Pundita is remembering back to the 1960s, when the American business community argued that one billion consumers were just waiting to buy American products, if only the US government would drop objections to normalized trade with China.

Well, here we are, 40 years later, with 700 million peasants left out of China's Shanghai Miracle. That certainly explains why China has become a supply side story. They've got the manufacturing capacity revved up but without a big domestic market for the products, they have no choice but to sell outside their shores--to increased howls from all quarters, including the South Koreans, that China is dumping.

This points to the problem with a Capitalist zone set down in a country run by a dictatorship. I think that by now von Hayek's argument has been pretty much won. Give people enough freedom, enough ownership, and allow the natural inclination to better oneself to express itself in business: the result is a reasonably strong, vibrant society. But a zone cannot be considered a nation's society; it is an enclave within the society.

In a dictatorship, those inside the enclave must have special protection against the rest of society; this coupled with the vastly better standard of life for those within the enclave breeds envy and resentment among those outside the enclave. These emotions build to anger, which builds to blind rage. The inevitable outcome is plainly described in tales of the French Revolution.

The Chinese who protested at Tiananmen Square during 1989 caved in rather quickly to the dictatorship's guns and tanks. But the blind rage wasn't there because--well, because almost everyone in China was in the same boat: poverty-stricken. They were asking for more freedom, not looking to butcher every member of the government they could find.

One look at photographs of Shanghai--Bling Bling City--tells that times have changed in China. There is, as Simon pointed out, a large and growing gap between living standards in China.

But closing the gap means conferring the same privileges on the masses that the Enclavers enjoy. The risk here is that with more freedom in the globalized era of trade it becomes harder to control information, harder to condition responses.

The dictatorship then faces a quandary. Draconian repressive measures stifle the business of doing business with the outside word. But without such measures the masses will demand more say in how they are governed.

China's ruling party says they have a way to beat the devil: Planning. First get the peasants educated, then teach them English, then put them through university where they will study nanotechnology, then gradually introduce more government reforms at the local levels....

Clearly the stepwise process assumes that dolts can't manage democracy. But look at America. First of all, we had a long tradition of only sending dolts to Washington because we couldn't spare the smart ones from their jobs. Second of all, America was a bunch of illiterates as late as....well, the IRS still writes tax forms for people with only a twelfth grade education, and still takes wall-to-wall calls around tax filing time from Americans who can't understand the forms.

Pundita suspects that the way democracy has been presented by advanced Western democracies helped create the perception in the developing world that one has to reach a certain IQ and level of character development before democracy can breed anything more than anarchy.

This view is akin to making an icon out of your electric toaster. Democracy is a form of government; it's a gizmo for managing decisions and tax money in a large complex society. One can write volumes about the beauty of toasted pop tarts and muffins. The same for democratic government. It furthers human rights and many other wonderful things. But the system itself is just that--a tool. The anarchy comes when you don't know how to work the tool. I stressed that point in the Democracy Stage Show Kit .

Many Americans don't know very much about how their government works. So when Americans are tourists and we're asked, "What is democracy?" we tend to give airy replies. When pressed for the nuts-and-bolts details of how democratic government works, most Americans tend to lapse into poetry. That might be why democracy seems mystical to many people in lands with no experience at democratic government.

But somehow Pundita thinks von Hayek would say that China's dictators are not at all mystified by democratic government.

Tomorrow I'll close this series of essays by tackling Simon's first question: "...are we witnessing a gradual emergence of an effectively liberal capitalist democracy empire, primarily directed and led by the US?"
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