Date: March 10, 2009
To: Dr. Truex[DT1]
From: JT Harper, IB 8710
Subject: Write-Up #7, “Is China a special case?”
Introduction
Stanislaw & Yergin in The Commanding Heights proposed that open/freely democratic government is tantamount to having free trade and other, more restrictive, systems of governance such as socialism or communism are incompatible with free trade or open markets. Assuming the validity of Stanislaw & Yergin’s premise, how does one explain the recent success of open markets in China, a nation of over 1 billion people living in a Communist-controlled state? Does China’s success invalidate the rules proposed in Commanding Heights?
No. China’s success does not invalidate the rules proposed by Stanislaw and Yergin. Instead, China has developed novel ways of accommodating “the rules” without compromising the Communist Party’s desire to maintain its control of China’s commanding heights.[DT2]
What is the mechanism for free movement of people, goods and information?
According to page 383 of Commanding Heights, a globalized economy is characterized by having free movement of “people, goods and information” across increasingly transparent borders between nations or corporations.(Yergin & Stanislaw, 2002) According to the classic model proposed in Commanding Heights, non-democratic economic systems suffered from, “sheltered and uncompetitive industries with little incentive to improve productivity or quality”.(Yergin, p. 391). In contrast, the more democratic post-WWII countries pursued “a vision of interdependence in which trade was an engine of both growth and peace – a generator of economic and political benefits and one and the same time.”(Yergin, p. 387) For the purpose of this argument, trade will be defined as the movement of goods, information or people with specialized knowledge or skills. [DT3]
In the case of China’s government, the Communist Party restricts the flow of information, goods and citizenry to ensure the security of the state.[DT4] In order to participate in a largely unconstrained globalized economy, China established multiple, highly-autonomous Special Economic Zones (SEZs) that behave economically like democratic economies. The SEZs attract foreign direct investment (FDI) in the form of financial and intellectual capital, through joint ventures between Chinese and foreign companies. In addition to the SEZs, Chinese students and scholars regularly collaborate with non-Chinese academics through joint research efforts, study abroad and other typical academic exchanges. To summarize, China’s economy does not violate the rules because China’s rulers established SEZs, which behave like free markets and attract people, goods and information, and also through academic exchanges with educators throughout the world. [DT5]The SEZs and academic collaborations, in effect, are the mechanism to make China’s economy adhere to the Commanding Heights model.
How are national and corporate barriers to trade overcome?
In the Commanding Heights model for democratic nations, most barriers to trade are overcome through improvements in information and communications technologies leading to “continuing increases in cross-border investments by companies and the globalization of their activities”(Yergin, p. 137) and by the increased integration of financial markets throughout the world. According to the authors, “Rapid advances in telecommunications and computing, which linked markets and investors together, provided instant knowledge of performance. As a result, not only national but also global capital markets could vote not every day or every hour but every minute on stock markets… A negative vote could mean a very swift outflow of capital.”
In China’s case, the SEZs are allowed to operate largely autonomously when it comes to investments and trade, as stated earlier. The joint ventures Chinese companies establish with foreign multinational companies provide China with a degree of cross-border access to foreign capital and goods without compromising state security. China’s approach was aptly described by Stanislaw and Yergin as like a “bird in a cage” because the free market behaviors of the SEZs are constrained to exist only within those zones of the Chinese economy. Anything that challenges the Chinese government control is constrained, much like a bird that is free to fly only within its cage[DT6].
In summary, the Chinese approach to overcoming trade barriers mirrors what is done in democratic systems, only the freedoms are restricted to particular zones, or birdcages. The mechanisms within the birdcages again adhere to the rules outlined in Commanding Heights.
Are firms globally competitive (ie. Efficient and providing high-quality products)?
On page 391 of Commanding Heights, Stanislaw and Yergin stated that firms operating in state-controlled economies were inefficient, produced low-quality goods and had no incentive to improve efficiency or quality. Firms operating in democratic/open markets must perform efficiently and create high-quality products because capital market support for firms is based on the perceived performance of the company (p.137-139), as derived from available information about the company. Investors do not blindly support companies that underperform.
In the Chinese SEZs, it is a near prerequisite that joint venture candidates be multinational firms, which implies that the firm is somewhat well-run in terms of producing high-quality products and is efficient with its available resources. The flexibility of managerial decisions permitted by Chinese firms within the SEZ allow those companies to operate well. Outside of the SEZs, many of Stainslaw and Yergin’s criticisms of planned economies appear valid, as evidenced by the long-running debate between Deng Xiaoping and Chen Yun over Deng’s push toward a market economy (Yergin, p.189-198), where planned agriculture and heavy industries had produced disastrous results, while the SEZ firms had prospered.
To summarize, Chinese firms within the SEZ are globally competitive due to their partnerships with established foreign multinationals. Chinese SEZ firms that are not partnered with foreign companies also have become globally competitive through their exposure to global market forces that mandate a regimen of efficiency and high-quality production.
Conclusion
China’s economic success does not invalidate Stanislaw and Yergin’s rules for having a successful open market. China has found novel ways of accommodating the required market freedoms for globalization without the Communist Party surrendering control of the country.[DT7]
Quoting page 198 of Commanding Heights, which summarizes the outcome of the running ideological battle between Deng and Chen…
“Deng’s campaign culminated in the fourteenth Party Congress in the autumn of 1992, which affirmed a new commitment to reform. It hailed Deng’s ‘brilliant thesis’ – that China should shift from a ‘socialist planned economy’ to a ‘socialist market economy.’” (Yergin & Stanislaw, 2002)
China’s economic success nearly two decades later demonstrates that Stanislaw and Yergin’s basic rules are valid[DT8], and that China’s success is because of the rules, not in spite of them. To say it plainly, China adopted the rules within the SEZs, and, as a result of accepting the required market freedoms, now has achieved its current economic heights.
Comparison of Open Markets vs. Chinese Special Economic Zones (SEZs)
Characteristic of an Open Market / The Commanding Heights model / China- What is the mechanism for free movement of people, goods and information?
- Free trade is a core policy of post-WWII democracies (implying tacit government promotion of open/free exchange of people, goods and information) (p.383, 387)
- Encouragement of joint-ventures with foreign companies in SEZs (p.195)
- Academic collaboration with peers outside of China√
- How are national and corporate barriers to trade overcome?
- Improved ICT among nations(p.137-9) leading to increased integration of markets and globalization of firms, making national and corporate barriers less relevant
- Government encouragement of FDI via largely autonomous Special Economic Zones, SEZs (p.195), which provide the desired interface between China and the world without compromising state security
- Are firms globally competitive (ie. Efficient and providing high-quality products)?
- Generally, yes. Firms within globally competitive markets must perform efficiently and provide high-quality products. Otherwise, the firm is forced out of business by competitors.
References
Yergin, D., & Stanislaw, J. (2002). The Commanding Heights : The Battle for the World Economy ([Rev. and updated ed.). New York: Simon & Schuster.
[DT1]Well written, well set agains the readings and cases. Table good, but I do understand why you left an empty cell.
Grade: A-
[DT2]Ok clear introduction. I await learning about your position.
[DT3]Ok.
[DT4]Yep.
[DT5]But where is the “increasing” transparency. In governance, in decision making, in financial reporting, in opening of internal markets…. Are there different rules here?
[DT6]A good analogy. But, given recent events and wheat we have been discussing the last several weeks we see China has not been immune to the downturn and is reverting to different strategies. What does this suggest for your main thesis?
[DT7]Good for them perhaps. How about for us?
[DT8]I don’t agree . We have been complicit in allowing China special opportunities to bend the rules, largely because they have given access to cheap lavor, highly subsidized commodities and lousy laws protecting workers, building their capital reserves and export-oriented by exploiting their own poor and relatively powerless populace. With the current changes we may all see different results of these decisions.