2011-08-10

Is the West a Falling Star?

I had a fascinating discussion yesterday with a very intelligent group of people about whether the economic balance is shifting to China. This is a question that has been debated in the blogosphere off-and-on for about ten years. This was not the first time I had ever considered the question, but merely the first time I had had the opportunity to sit down and discuss it with so many smart people.

In general, the arguments go something like this:

The Pro-China Argument
China will eventually surpass the Western world economically because the West has become dominated by service industries and top-heavy organizations. China, in contrast, has become a hub of manufacturing and virtually every durable good is now manufactured there. China can manufacture products at a lower cost than the West can. The organizational structure of China's companies is far less top-heavy, as is its government, a fact that allows Chinese business to experience rapid change to new external forces at minimal red tape to the well-connected. China's population is gallactically large, and growing while the West's population is much smaller and actively shrinking. Chinese governments and business have invested heavily in Western resources, purchasing the means of production for a large part of what they used to rely on the West to manufacture. For all of these reasons, it is only a matter of time before China's economy surpasses that of the United States and its economic power eclipses that of the West in general.

The Anti-China Argument
While China has done a good job democratizing its political structure and investing in manufacturing, the goods they produce continue to be of a lower quality than Western products. More importantly, a large portion of what China manufactures was researched-and-developed in the West by Western minds. Therefore, China continues to be reliant on Western technology and intellectual property. The West out-sources its lower paying jobs while retaining all of its higher-paying jobs in Western headquarters for Western people. Working and living conditions in the West are vastly superior to those in China, which itself is a premium offered to Western employees. Furthermore, the West still controls the majority of raw materials which are vital to Chinese manufacturing operations. Because the West controls the manufacturing inputs, the intellectual property, and offers a superior day-to-day life for Western citizens, China would have to work for centuries to catch up to where the West is today; for China to over-take the West, the West would have to cease growing altogether during that time.

Filtering Out the Bad Arguments
Reading over the arguments above, it is easy to see how much nationalism is at play among those making them in earnest. Because China is a manufacturing hub today, Chinese nationalists and people in the East believe that such growth will continue for the foreseeable future. Because the West has greater intellectual property and freer political mechanisms today, Westerners believe such will always be the case. How wrong both sides are about such things!

On the Western side of things, it is true that at any moment, the wrong political trend could unhitch Western democracy and plunge us back into the evils of World War II. With so many Chinese students flocking to Western universities, how long can we really assume that the West will always house the brightest minds? Japan has been offering superior high technology for decades now - why not China? Or India? Or Korea? We are not safe to assume that what is the case now in the West will always be.

With regard to China, few supporters of the Chinese economic "miracle" are willing to acknowledge the extent to which it has been funded by Chinese internal public debt. While it is true that the United States has a trade deficit with China, that does not mean that the Chinese government has more money and less public debt than the USA. China has famously poured endless resources into empty construction, useless green energy, public beautification projects, and so on. Every expenditure of the Chinese government creates a temporary resource boom that eventually must crash, the same as it does in the United States. Most importantly, the bulk of Chinese economic success has yet to filter down to the average, ordinary Chinese person because the government of China is corrupt and autocratic. Every success story is a special favor given to a friend of the powers that be.

The Punchline
What strikes me most about all of this is what these two economies really have in common. Neither the West nor the East are making any effort to scale back the size and scope of their governments and allow people to invest their money as they see fit. While American kids grow up wanting to be reality TV "stars" rather than becoming great inventors or captains of industry, Chinese kids are simply prevented from seeking out that kind of work for themselves. Either way, it's not happening. Meanwhile, governments on both sides are over-expending themselves and taking on alarming amounts of debt to fund useless public works projects and interventionist strategies.

The reality is, neither economy is really doing so well, and both have a lot more in common than people seem to be willing to admit.