I completely agree with the argument. In spite of the positives changes happening in terms of labor law, competition, openness to foreign investment, etc. there is a fundamental missing link for the growth of private enterprise, i.e. entrepreneurship. Does China have a class of enterpreneurs, or risk takers that can provide entrepreneurial skills to setting up and running successful businesses of all types and sizes. Experience from India shows that easy availability of capital is neither a sufficient nor a necessary condition for the growth of entrepreneurial talent that invest in projects chosen from a set of competing projects. It would be interesting to see how many of the private enterprises are profitable, their source of capital and the returns on investment.

In fairness to Germany, they did have to absorb their Communist half. How well would the U.S. do if it was suddenly "reuntied" with Russia?

I wonder if in some ways China isn't already ahead of us. With a large rural population at least surviving, workers who lose their jobs in the "new" economy can go home and pitch in on the family farm to survive instead of depending on government handouts. With 98% of Americans living off the farm these days, we don't have that option anymore.

I think your comment on China's banking system is most important. China can 'cheat' its way to prosperity by ignoring patent law but the ill-gotten gains of any robber go for naught if placed outside a sound banking system. The Orient, with its 'face-saving' traditions, is not prepared to operate banks properly. China will grow quickly and then plateau like the Japanese.


Several writers have speculated that China will take military action against Taiwan after the 2008 Olympics. If China's banks are in deep trouble after the Olympics, we can probably expect a military crackdown inside China as well.


In the end, I predict that America's trade deficit with China will be a money maker for USA. Remember this: Japan was flush with cash and bought Rockefeller Center for a huge premium only to sell it back to the prior owners at a huge loss.

Becker's comment on the financing of China's state-owned industries is important and worthy of elaboration.

Popular press accounts of China's refusal to allow an appreciation of its currency against the dollar have focused on the export-driven nature of China's growth -- though dollar assets do not provide an especially good return on investment, a relatively strong dollar keeps millions of Chinese employed in industries that export to the American market. Do we know, though, to what extent foreign exchange earnings are now being recycled as loans to inefficient state-owned enterprises?

Although the matter is not quite so simple, we're talking about the difference between good investments and bad ones -- between taking on American debt in ways that make future Chinese economic growth possible and acquiring American dollars only to flush them down a rathole. As Becker says, the obvious analogy is to the poor use Japan made of the large trade supluses it ran with the United States in the 1980s. However, I will confess to not having a good handle on how much of China's trade surplus is now (or how much is projected to being in the future) recycled in the form of bad loans to state-owned industries. I'd be glad if someone could provide some data to shed light on this point.

still reading but couldn't let this comment stand:

"Richer nations could be hurt eventually if China continues to move up the product ladder. It would then produce and export more knowledge-intensive products, partly made possible by China’s disrespect for property rights, intellectual property, and patent protection laws."

Ummm... does anyone recall US treatment of (mainly British) intellectual property rights in the 19th century?

Great topic and it's always good to be skeptical toward predictions of future. The world should very much be concerned about China as an influential actor in global affairs, long before China achieves, if ever, any economic pre-eminence.

It is clear that China's government will have to play a central role in any successes or failures to come. For every inherent disadvantage, China has inherent advantages. The key shouldn't be a focus on any inherent limits on China's growth, but whether the Chinese government can manage a smooth transition to modernization without one or more of the social upheavals that China is historically known for.

It might be helpful to note, too, that China is coming of age at the same time as the rest of the world is experiencing globalization of a sort more rapid and intense than globalizing periods of the past. Whether or not China succeeds and what the limits to China's growth are will depend as much on international events and global trends as much as any factors specific to China. Increasingly, the ships of the world's economies rise and fall on the same tides.

Lastly, is it China's economy we are really worried about, or China's direction and influence? My point is that our indicators of economic development are only one set of measures when it comes to matters of global power and relevance. It would appear that to have influence in the 21st century, a country needs attitude more than ability. With regard to raw exercise of power, rich countries will likely become increasingly risk adverse in the future, so a rising power like China does not need to attain real economic or military power on par with the US in order to make real trouble for the US or others, if it so chose to.

BTW, yes, China has banking and financial sector challenges, and yes, I would agree that there are some cultural barriers to overcome if China is to fully meet current international financial norms, but don't try to use the culture argument with the Chinese in Hong Kong, Singapore, London, Vancouver, Taipei, New York, Sydney, etc.

The United States should probably be somewhat ambivalent about Chinese growth, since economic growth is accompanied by increased political and military clout. On the other hand, is it possible that the real prize isn't democracy or US military dominance, but English? If America is to maintain its economic and academic centrality, we probably want English (or maybe Spanish) to be the language of business and academia for a long time. Written Chinese is at least comprehensible to Japanese people, so if China and Japan together become economically dominant, we might find ourselves at a disadvantage.

Just one point. The population of China is four times that of the United States, and will remain nearly that much larger even if it declines. That means that China's GDP could considerably exceed that of the US, even if its per capita income is much smaller.

I am surprized to see not mention of civil rights.
Two questions: would a society with a huge GDP and huge per capita income be successful if the majority of the people were slaves (not that this is the case in China, but the question is: how important is freedom in comparision to GDP?). And, how does freedom of speach, due process of law, and etc. support economic growth?

One point I found interesting was made by Becker's colleague Tom Evans. China is a strong net lender on world markets and has a very high savings rate compared to more advanced economies. It seems like this is a quite pessimistic statement by Chinese markets themselves about future growth: countries (such as the US) with expectations of almost eternal growth borrow and spend at extremely high rates because they are confident in future growth, while those which are net lenders (such as Japan in the 1980's) seem to be saying "this is as good as it will get for us." It would seem China falls more into the second category at this point.

Becker: I believe China will become more democratic if it continues to grow rapidly

Per Tyler Cowen, there's a new study out that questions that this is a given.

As for China's future, just wait until the continent of Africa comes on line and every one jumps for the lower wage scale, multiple tax incentives, and interest free loans. Funny how history repeats itself.

Perhaps the IWW's time has finally arrived.

Being a native Chinese, I think it is really a good article to read. Even 30 minutes reading is worthy. For me, however, there is one exception of "good":

"Richer nations could be hurt eventually if China continues to move up the product ladder."

If US keeps thinking the global economy in this way, then there will always be a problem...Personally, I don't like any economy problem tighted with political issues, although they are always together. Actually, there is one thing in American's mind: "we are the best one in this world"... if American don't know how to live in this world as the "second" one, then... that day will come eventually anyway.

Thank you for this good article though.

Russia will Become the Leading Nation of the 21st Century!

Professor Becker, since you're going to be addressing more international topics, have you considered discussing de Soto's work on the importance of formalizing property rights and recent critiques? Slate recently published a scathing review, see http://slate.msn.com/Default.aspx?id=2112792&, that might be worth a response.

hyh is right. Intellectual property is created by a state to promote the state's interests. Weak IP regimes are a good deal for net IP importer countries.

The problem with China is that there are IP laws on the books which are not followed. Foriegn companies don't have the IP protections they think they do. This goes down to chinese companies ignoring contractual agreements not to copy.

I would expect that problems such as lax IP laws will gain in rigidity as the acession of China to the WTO becomes more complete--and assuming the WTO gets on the ball and holds China accountable.

I also have a suggestion for an internationally focused conversation.

Thomas P.M. Barnett wrote an article for Esquire magazine last year entitled "The Pentagon's New Map," in which he described what he believes is the new security environment that the U.S. finds itself in today.

In this article he suggested that the War Department was planning for the wrong war because it had not identified the enemy or his goals.

Barnett's map shows a swath of poverty stretching from Central America through Africa the Middle East and Central Asia. His point (my opinion) was that terrorist were not trying to export their philsophy to the US, but were trying to keep information access out of their poverty belt. They are trying to maintain positions of control and dominence.

I've paraphrased this, but thought it was a provocative article. I valued it because of the way maps were used to show where poverty is most concentrated. These are the areas of the world where help is needed if societies are to change. I use Internet based maps of Chicago to show where poverty and poorly performing schools are located, and where volunteers, business partners and philanthropy are needed.

Can you comment on Barnett's "new map" theory? Here's a link to the site: http://www.thomaspmbarnett.com/published/pentagonsnewmap.htm

Thank you.

I too would like to hear the Becker-Posner perspective on Thomas Barnett's " Theory of a Peacefully Rising China"

http://www.thomaspmbarnett.com/weblog/archives2/000764.html

( scroll toward the lower half of the post)

My two cents on China's role in the 21st century:

China's rise has been forecast for a very long time - going back to Brooks Adams in 1900 and the advocates of the Open Door policy. Even Napoleon a century earlier discerned China's potential as a sleeping dragon.

My expectation is that while China will become a great power in 30-50 years the current regime will not be around to enjoy it.

Beijing's political legitimacy now depends upon the deivery of extremely high real growth rates in GDP in the realm of 8-11 %. This is simply not sustainable forever and when the economy hits a major recession the noveau bourgeois of the cities will become restive and the government is going to fall unless it has reformed in the interim to become more representative.

China's history has been one of centrifugal forces - China's provinces usually form regional economies - in tension with central political control. Economic divergence between the 200-300 million Chinese citizens who enjoy a modernizing, urban economy and the 700 million + peasantry who are on the periphery is widening. The regime's use of nationalism as a centripetal counterweight has helped but that too carries risks ( to try to take Taiwan and fail may be to reprise the Falklands War).

re: de Soto / Slate

The Slate critique attempts to measure new loans against property / improvements enabled by granting title to squatters. My sense (from studying the westward migration in the US and land grants) is there's seldom this form of immediately realized value, though property will tend to be sold to those who manage it "best" (and value will be realized at that first sale). What it does do is start to break down the caste/local-strongman/governor hard- and soft-corruption that prevents the maturing of a civil-society (because of the shear volume of transactions enabled by granting title) (which is where real productivity gains happen as individual decisions supplant government).

I'm reminded that the only slums in the US exist in the presence of aggressive zoning and land-use regulation. Remove the government and the slums evaporate, and the poor do find a way (which sometimes means we find 10 adults and 20 children in a single home - generating enough income at minimum wage to create a nest-egg sufficient to buy a convenience store, assuming a government doesn't also persecute the poor by outlawing this type of cooperation / cohabitation in even expensive areas). And even in expensive areas, a person can work for one week (at minimum wage), and be able to buy a simple but nutritious diet of mostly rice-and-beans for 3-6 months.

re: more people working.

Is always good, irrespective of them "gaming the system". Simple arithmetic, right? No downside - other than if those of us affected by competition have NOT been taught young that change is guaranteed, that there are no positive welfare rights, and that we must learn to embrace change and love learning, which means we must open a book or practice a new skill regularly.

re: IPR protection.

Is no more or less a government issue than the amount of civil-society we depend on to protect the fruit-vendor's unattended cart. If civility is high, overhead costs are low and productivity higher (than otherwise). If not, intellect and sweat will focus where there are greater rewards.

I was in Vietnam a few years ago and was party to a leadership conversation where they wondered why they weren't a larger force in the software business (given how successful their immigrants to the US have been). I pointed out that they had little computer shops at every corner but all they were (able) to sell was hardware, since they chose to pirate software. Which meant that every company in Vietnam that needed localized solutions had to do it themselves or buy it from the first world. Which I pointed out was their largest import (as services). A pity, I observed, given I had hired many immigrant Vietnamese and they were often the smartest and most productive of all my employees. I recommend they take half that services trade imbalance and use it to encourage and underwrite their businesses (starting w/ state business) buying "things intellectual" and suggested that in ten years they'd find themselves a net exporter. To all of our benefit.