Michael Hicks: China is a poor and failing nation

I have long doubted claims of China’s economic and military ascendancy. Most economists share this view, as do most foreign policy experts. The past couple years of data suggests I was right. China’s economy has stalled badly, and its military capabilities hold similar doubt. This doesn’t mean China is not to be viewed as a potentially dangerous enemy, but it does change the tactics we, and our allies around the globe, use to prevent conflict.

China is a poor nation. Its GDP per capita has risen to about where the US was in the late 1930s, and that accepts what is substantial misinformation from the official statistics agency. It is a human tragedy that such a large nation languishes 80-plus years behind the world’s growth frontier. Alas, it is a self-inflicted tragedy.

China’s economy did grow substantially in the past four decades. But, very little of that growth was caused by the modest economic and political liberalization that began after Mao’s death. Nearly all the economic growth in China was due to forced urbanization. In short, the PRC government relocated a population larger than the US from subsistence farms to factories.

These were low-productivity factories. In 2018, it took 7.5 Chinese workers to produce the same value of goods that a single American did. Chinese factories and workers were about as productive as US factories in the late 1930s, but Chinese farms and farmers were even less efficient. Several hundred million Chinese farmers labored on farms that were effectively stuck in pre-industrial revolution levels of productivity.

From the 1980s to today, the forced movement of Chinese workers from farms to factories moved them from 1700 levels of agricultural productivity to early 1900s levels of industrial productivity. That movement fueled astonishing rates of economic growth, even accounting for the exaggerated claims of China’s official data. But, relocating 18th century peasants into 20th century factories cannot be a long-term strategy for growth. They have run out of peasants.

Chinese leadership is aware of this fact. They’ve tried to steal technology by ignoring patents and through industrial espionage. They’ve tried to set up their own elite universities and push STEM education. They have worked on a belt-and-road initiative that would help reduce the cost of raw materials. In fact, they’ve tried everything to boost their long-term growth prospects, except for the one thing that has worked everywhere else.

China is stuck in the middle-income trap, which means they are stuck at relatively low levels of prosperity and cannot advance beyond that. The reason for this is simple. Advanced economic growth requires a series of successful institutions that the People’s Republic of China lacks. Property rights, the rule of law, and a well-functioning civil courts system are necessary to move beyond the middle-income trap. But, that is not all it takes.

These institutions themselves must rest on the foundations of a small ‘l’ liberal order. Freedom of expression, freedom of association, representative government and protection of minorities are all necessary conditions for sustained economic growth. China has none of these, and what little glimmer of hope existed a decade ago is extinguished.

To be clear, Chinese leadership knows this full well. They are not fools. However, accepting these political changes would inevitably mean regime change in China. So, they’d far rather be poor and in power, than lose power in a modernizing China. It is the time-worn choice of dictators, and there’s no reason to suspect this will change.

The lack of free institutions makes China more dangerous. The absence of growth may also make them more dangerous. But there are worse omens of future growth. Having forced a single-child policy onto their population, China has crossed a demographic cliff that will have them lose population throughout most of the coming century. Fewer workers in a middle-income economy may be a disaster for growth that will extend deep into the middle of this century.

These conditions should make us worry about military adventurism, but they also reduce the likelihood of success. At least one prominent foreign policy expert believes China has a century-long plan to claim a place as the dominant superpower. The fact that China has yet to successfully execute any of its dozen or so five-year plans might cause some doubt on that prediction. A broad slowdown of the Chinese economy should cast even more doubt on the long-term viability of such a plan. The Chinese are aware of this, and they understand the other challenges to their desire to become the global military power.

The People’s Army is unabashedly designed on the Soviet model. The Chinese now possess a reasonably large military force that is a structural clone of the Russian Army, which is neck deep in the most humiliating defeat at arms in modern times. There is almost certainly less corruption in the People’s Army than in Putin’s armed forces. That’s faint praise; few armies anywhere have managed to be so thoroughly corrupt as the current Russian forces.

Beyond that, the similarities must terrify China’s military planners. They have no solid corps of non-commissioned officers, promotions are dictated by party loyalty not technical competence, and they spend 30% of their training time on political indoctrination. China could invade Taiwan, but it would be a costly effort, with little payoff.

China could fight the US Navy. It wouldn’t be a fight against two equal partners. We are far better, but the forces are sufficiently well-matched to ensure a bloody conflict. The Chinese Air Force is generations behind the US Air Force. China cannot win a war against the US. The best it can hope for is that both countries lose, and we decide the sacrifice is no longer worthwhile. Such a high-stakes effort would only appeal to a leadership at risk of losing its political control of the country. And, in that way, they return to the time worn playbook of dictators.

Fortunately, the US and our allies have many options. We must first demonstrate our commitment to the modern world by helping defeat Russia in Ukraine. That war is the best single investment of money and arms the United States has made since World War II. Second, we can isolate China through trade agreements. A revival of the Trans-Pacific Partnership would boost American economic prospects and strengthen those who oppose China. We can open the floodgates of immigration from China, robbing them of their best and brightest young people. Finally, we can make clear to their citizens and leaders alike that the world wishes to trade with China, not fight them.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].