Three Billion New Capitalists: The Great Shift of Wealth and Power to the East
by Clyde Prestowitz
Basic Books, 321 pp., $26.95
China, Inc.: How the Rise of the Next Superpower Challenges America and the World
by Ted C. Fishman
Scribner, 342 pp., $26.00
The “rise” of China has suddenly become the all-absorbing topic for those professionally concerned with the future of the planet. Will the twenty-first century be the Chinese century, and, if so, in what sense? Will China’s rise be peaceful or violent? And how will this affect the United States, the current “hyperpower”? In fact, China has been “rising” for some time (after several hundred years of “fall”), but for many years its claim to notice was obscured by more exciting events. Attention in the 1990s concentrated on the fall of Soviet communism, “globalization,” the spread of democracy, and the high-tech revolution. These developments, which left America as the world’s sole economic and political superpower, seemed to belie Paul Kennedy’s prediction in 1987 of relative US decline and “more of a multipolar system.”
The attack on the World Trade Center in 2001, together with the concurrent collapse of the high-tech bubble, exposed America’s fragility, but this was masked by the hyperactivity of the Bush administration. The “war on terror” planted American armies in Afghanistan and Iraq; the Clinton surpluses were succeeded by the Bush deficits to shore up the economy and finance the military operations. However, as the Iraq escapade foundered and the deficits ballooned, the sense of relative decline reasserted itself. Unlike in 1987, there was now a clear candidate for the succession: China. This was especially so as the US economy became dependent on China’s bankrolling its huge trade deficit. The dream of an “American century” receded, to be replaced by the nightmare of a “Chinese century.”
Focus on China is overdue. For the last quarter of a century its economy has been growing by over 9 percent a year, increasing eightfold. However, it is not just this long-sustained hyper-growth rate that amazes and alarms the observer. It is the size of the economy which is growing. China’s population is officially estimated at 1.3 billion, but is probably larger—one fifth of all the people in the world. This makes its rise much more important than that, say, of Japan in the 1960s. From the economic point of view its cheap labor is much more abundant, so its cost advantage will not quickly be eliminated. The size of an economy obviously matters, too, in measuring power. The Chinese economy, in terms of the purchasing power of the Chinese people, is about two thirds the size of the US economy. If it continues to grow at 9 percent a year, it will overtake the US by 2014. Lee Kwan Yu of Singapore believes that the rise of China will shift the balance of power back to the East for the first time since Portuguese caravels arrived there in the sixteenth century.
China’s growth, simply because of its size, is bound to create problems both for itself and others. From the Chinese leadership’s point of view, the main problem is how to maintain social cohesion amid the vast socio-economic upheavals going on. Apart from the environmental degradation and rampant corruption, China’s pell-mell, and largely uncontrolled, economic growth is disturbing its domestic stability in a profound way: there is a huge floating population without settled jobs or abodes, and a development and income gap between the coastal and inland areas which is as big as between the United States and North Africa. According to one estimate, 30 percent of China’s urban workforce, or 200 million people, is currently unemployed or underemployed. The livelihood of another 100 million agricultural workers is threatened as World Trade Organization rules increase China’s dependence on foreign food supplies. The specter of chaos frightens the rulers in Beijing.
In international relations, the issue is whether China’s impact on the world will be peaceful or violent. The debate here follows disciplinary lines. “Those who focus on economics tend to see partnership, cooperation and reasons for optimism despite ten-sions, while security experts are more pessimistic and anticipate strategic conflict as the likely future for two political systems that are so different,” writes one commentator. Both views can claim some evidence in their favor. On the one hand, the concessions China made to foreign investors and corporations in order to gain entry to the WTO show a readiness to play by the established rules of the game. It has embarked on a “charm offensive” premised on its “peaceful rise.” On the other hand, its voracious appetite for oil and raw materials opens up a familiar geopolitical struggle for control of their supply. Its bid for Unocal, the ninth-largest oil company in the United States, had to be withdrawn in the face of congressional opposition. As the only country likely to counterbalance the economic and political weight of the United States, China is being wooed by those who want insurance against American domination; in turn it plays host to such unsavory characters as Robert Mugabe, president of Zimbabwe, and Islam Karimov, the brutal president of Uzbekistan. The slogan of the “peaceful rise” is challenged by Chinese nationalists in the Foreign Office and military establishment and their affiliated scholars, who argue that it encourages Taiwan to bid for independence.
However, the theory that economic relations are the peaceful form of international relations, and geopolitics is the warlike form, is much too simple. The growth of China’s exporting power—in ten years its exports to the US have risen from $35 billion to $200 billion a year—has already produced a “bra war” with Europe and tensions over currency with the US. (The recent 2.1 percent revaluation of the renminbi has not quelled American accusations that China is deliberately undervaluing its currency to gain export advantage.) Moreover, economics and politics cannot be so easily separated. China is both an engine of globalization and a rising military power, a “Wal-Mart with an army.” The US worries that the expansion of China’s economic presence will be accompanied by the expansion of its military presence. Changes in the international distribution of global wealth, even if peacefully achieved, are bound to have implications for the distribution of global power. If China rises economically, America falls politically. The historically minded recall the years of Anglo-German trade rivalry which preceded World War I.
Concern about China’s impact on the world is heavily influenced by the nature of its regime. India, which has recently been growing as fast as China, and which will soon have even more people, hardly fills the West with the same foreboding, because it is a democracy, and, as we are continually told, democracies “never go to war with each other.”
The success of the Chinese Communist Party in retaining political control over China has dimmed the sense of Western triumphalism induced by the collapse of the Soviet empire. Twentieth-century communism, unlike nineteenth-century Marxism, promised economic development at the price of political freedom—”electrification plus the Soviets” in Lenin’s telling phrase. Wherever it triumphed, a single-party state was established, and the economy was collectivized and centrally planned. When the Communist economy failed, the Communist system was dismantled—completely in Russia and Eastern Europe. In China, the Communist Party’s paramount leader Deng Xiaoping adopted a different strategy. He realized that in order to save the Communist dictatorship, he had to create an economic system that worked. From 1978 onward, he started decollectivizing the economy. In Russia, Mikhail Gorbachev destroyed Communist Party rule in a failed effort to create a “humane” communism; in China Deng saved Communist rule by embracing capitalism.
So far his formula has worked brilliantly. Not only have tens of millions enriched themselves, as Deng told them to do, but absolute poverty, defined as living on $1 a day or less, has fallen from 64 percent to 17 percent of the population. In politics, information is controlled, dissent is ruthlessly suppressed, and continuity with the takeover of 1949 is asserted. The motto is: “We will give you freedom to make money, but politics is off limits.” Mao Zedong, exposed by Jung Chang and Jon Halliday in Mao: The Unknown Story as brutally and cynically responsible for the death of millions, remains China’s leading icon. His giant portrait dominates Tiananmen Square; his face still appears on yuan notes. He has even been rebranded to serve business needs as a kind of Chinese Colonel Sanders, advertising food products outside the restaurants in Hunan, his home province. There has been no official repudiation of Mao’s legacy, even one like the limited denunciation of Stalinism which Khrushchev undertook in 1956.
A Westerner will doubt that this duet of Party dictatorship and economic freedom can continue. Although Party monopoly over the public sphere is maintained, control over the budget has been largely decentralized to provincial and municipal levels. Optimists say that democracy will come incrementally, starting with provincial elections, as the middle class grows. Fiscal devolution could crack the monolith. Pessimists argue that the loss of control accompanying precipitous economic growth and the decline in state revenues could set off either a new bout of “warlordism” or force a paranoid regime into a new bout of political repression that will make Tiananmen Square seem like a vicar’s tea party. Whatever choices may be allowed in provincial elections, no new party will be allowed to present its case. Had China’s growth been slower, its political prospects might be more benign.
For instant expertise on China all that is required is “a rush of statistics, an occasional nod to history, a Confucian aphorism or two and, hey presto, we can all grasp the vast meaning of the Middle Kingdom’s re-emergence as a global power.” This is certainly the impression conveyed by Clyde Prestowitz, a former trade official in the Reagan administration. Though the title of his book, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, suggests a focus on Asia, it is really a “wake-up call” to America. His thesis, chattily if not wittily expressed, is that the virtually endless supply of labor in China and India, combined with the negation of time and distance by the Internet and global air delivery, portend the ruin of American manufacturing and a long-term decline in American living standards. Already America is living beyond its means.
In essence, Prestowitz tells the familiar tale of Western capital investing abroad to relieve squeezed margins at home. Outsourcing, contracting, and eventually offshoring were ways to reduce American corporate costs and increase sales in face of Japanese competition and the pressure of consumerism. Outsourcing begat offshore manufacturing. In the 1980s Motorola, Intel, and Texas Instruments began to transfer the labor-intensive side of their manufacturing to Malaysia, Singapore, and Taiwan. Sears Roebuck contracted with textile factories in Japan to get the best deals for their customers. East Asia became a buying center for US retailers and an assembly line for US manufacturers.
China, Prestowitz writes, was interesting for two reasons: “endless cheap labor to produce low-cost products for export, [and]…the potential to become the world’s largest market.” Retailers and manufacturers switched to China because its prices were cheaper. Building and equipping factories cost less, and low-cost labor can be substituted for machinery. Today China produces two thirds of the world’s photocopiers, shoes, toys, and microwave ovens, half of its DVD players, digital cameras, cement, and textiles, 40 percent of its socks, one third of its DVD-ROM drives and desktop computers, a fourth of its mobile telephones, TV sets, steel, car stereos, and so on. It exports 30 percent of the world’s electronic goods. In Prestowitz’s fevered imagination the United States is the Dr. Frankenstein who raised the monster destined to devour it.
India started too late to challenge China in manufacturing, but software, IT services, and medicine were virgin territory. India’s key asset was a huge pool of inexpensive but highly trained, talented, English-speaking workers, many of them educated to a high level abroad. In 1984, Rajiv Gandhi decided that India should develop a software export industry; coincidentally, Texas Instruments began satellite data link services from Bangalore, preparing the way for on-line access to global clients. With the development of the Internet, and later broadband, in the 1990s, the proportion of software work “offshored” to India increased dramatically. General Electric realized that the operations of its call centers and much office work could be transferred to India at a fraction of the cost elsewhere. Airlines could offset rising fuel costs by offshoring ticket bookings and repairs.
Prestowitz describes how in Wipo Spectramind, a twenty-four-hour call service outside Delhi, “accent neutralization” is taught to give callers the feeling that their calls are being answered in Kansas City. The collapse of the high-tech bubble in 2001 provided further cost-cutting incentives. “Medical tourism” flourishes as Indian private hospitals provide hip replacements and heart and eye surgery at a fraction of Western cost. (The Apollo Hospital in Chennai—Madras of old—does heart surgery for $4,000 as against $30,000 in the US.)
The US government helped Asia’s rise by embracing a laissez-faire ideology and floating the dollar. As a White House economic adviser quipped: “Potato chips, computer chips, what’s the difference? They’re all chips.” Prestowitz claims that, entranced by market fundamentalism, American policymakers misunderstood the sources of American innovation. US technological leadership was built not on market forces, but on an unnatural collaboration between defense and government in a “military industrial complex,” the product of two world wars. For example, IBM grew on the basis of government grants for the B-52 guidance system. The shift to laissez-faire in the 1980s, followed by the end of the cold war, dissolved this “ecosystem of interrelated companies, universities, government institutions, bankers, and, yes, lawyers.” After 1973 Americans stopped worrying about international trade, because they could print as many dollars as they wanted to pay for imports. “We handed China the money they are using to try to buy Unocal,” said Prestowitz in a recent interview. Prestowitz’s point is that “nobody is taking an interest in the health of the long-term economic structure of the country because America’s ideology says it is wrong to do so.”
So what is to be done? Prestowitz says that the United States must abandon laissez-faire. It must renounce its crazy ambition to flood the world with dollars and instead develop a more limited dollar sphere consisting of the North American Free Trade area plus its trade with Japan. “For the United States, this deal would marry Japan’s surpluses with US deficits and create a dollar zone in trade balance with the rest of the world. It would also serve to keep Japan in the US orbit and prevent it from slipping into China’s.” Domestically, the US must restore fiscal discipline by cutting defense spending and raising taxes on consumption. It needs an energy policy which makes it independent of Middle East oil (“Just applying the mileage regulations to SUVs would significantly reduce US oil dependence”). It needs to upgrade its physical infrastructure, promote manufacturing “ecosystems” like Silicon Valley, reform Social Security to encourage labor flexibility, and boost educational performance by restoring classroom discipline and fully funding students studying science and engineering. In short, it needs an active “competition” policy. Prestowitz rejects the free trade model of globalization as harmful to US interests. He is a modern mercantilist: trade freely with your friends, and strategically with everyone else. In a world of sovereign states, this is not a bad rule.
Ted Fishman, a journalist and former commodities trader, covers much of the same ground in China, Inc.: How the Rise of the Next Superpower Challenges America and the World. There is the same touristic flavor: a trip down the Huangpu River in Shanghai reveals the garish skyscrapers and low nightlife of the new moneyed metropolis, where “nerdy Western engineers can find girls so hot their friends at home would laugh.” The main difference is that Fishman emphasizes the indigenous sources of China’s rise. Without Deng’s decision to “open up” China, American CEOs could not have solved their problems by relocating production to it.
Readers will learn about the working of the hukou, or passbook, sys-tem, by which Mao Zedong kept rural labor on the land and out of the cities; about the origins of Deng Xiaoping’s “Household Responsibility System” of 1980, which revolutionized agricultural productivity by replacing collective farms with a system of family plots; about how the “township and village enterprises” (TVEs) grew up to fill the ideologically gray area between public and private enterprise; about the extensive migration from countryside to towns, where the private economy was born “with a wink and a nod from the central government”; and about Shenzhen, China’s first Special Economic Zone, grown from a marshy fishing village to a city of ten million in twenty-five years. China, writes Fishman, “is an infinite jumble of hybrid businesses” that “conflate the sectors, often in impossibly complex, opaque ways.” Almost all business “is conducted by words, handshakes, and occasionally by written but extralegal contracts.”
Fishman tells of the orgy of city-building; of the forced demolitions and evictions to make way for new buildings and hydroelectric projects; of female workers exploited in textile and electronic factories who dream of returning to their villages; of the encroaching deserts; of pollution so intense that the “Asian Brown Cloud” wafts over to the Pacific coast of the US; of China’s great road- and railway-building program; of the spread of HIV, the abortion of unwanted girls, and much else. But his central theme is the same as Prestowitz’s: countless US businesses are being hammered by the low “China price,” which includes counterfeiting and piracy. Jobs for many more millions of US workers will disappear. Nothing, he believes, will stop the Chinese juggernaut, for China is already building “the critical masses of companies that catalyze the creative ferment that leads to rapid innovation.” Fishman foresees US– Chinese rivalry growing: “it is a slow power game, but it is afoot.”
Prestowitz’s and Fishman’s books are about the impact of China on the economy of the West. But what about the West’s impact on China? To what extent are Chinese society and politics being transformed by China’s integration into the global economy, and what might this tell us about the future of the relationship between West and East? These topics will be discussed in a second article.
—This is the first of two articles.
 Paul Kennedy, The Rise and Fall of the Great Powers (Random House, 1987), p. 534.
 Output data in national currencies must be converted to a common currency to compare the size of economies. If the conversion is done at market exchange rates (MERs), the Chinese economy is only the eighth largest in the world, one tenth the size of the US economy, and not likely to overtake it until between 2040 and 2050. However, data converted according to exchange rates are not good measures of the relative size of economies because they take into account only internationally traded goods and services and are distorted by short-term currency fluctuations. That is why economists are increasingly using purchasing power parity (PPP) converters, which measure the relative purchasing power of different countries’ currencies with regard to the same “basket” of goods in each one. This can be a much higher GDP for a developing country. On a PPP basis China’s GDP in 2006 will be $8,877 billion; on an MER basis $2,172 billion.
 Steve Lohr, “Who’s Afraid of China Inc.?” The New York Times, July 24, 2005.
 Philip Stephens, Financial Times, July 1, 2005.