CHART 9.1 Chinese and US GDP ppp$: 1980–2017 (est)

SOURCE: World Economic Outlook, International Monetary Fund, April 2012.

China’s rapid growth, however, is already triggering another crucial process, Michael Spence’s middle-income transition, introduced in the last chapter. About the point at which per capita incomes rise to between $5,000 and $10,000, a broader middle class begins to take control of its future and define the tone of economic life. Since self-directed people are often unwilling to accede to petty officialdom in matters they deem important, the transition can be particularly treacherous in a state-driven economy like China’s.²

We will come back to that point, but first we will look at some of the broad similarities between America’s tactics against Great Britain in the nineteenth century and China’s catch-up strategies today.

The Pleasures of Starting in Second Place

THE JOY OF THEFT

The United States had a fine record of innovation from its earliest post-colonial days, but its inventiveness was mostly lavished on large-scale production and distribution techniques for established products. The nineteenth century’s iron and steel technology—the blast furnace, Bessemer conversion, the “basic” process, the Siemens open-hearth furnace, the cast steel of Sheffield—nearly all came from Great Britain, with some important but lesser contributions from France and elsewhere on the continent. Roughly the same could be said of textile technology, coal and coke, steam engines, chemicals, and precision machinery. Britain’s policy was to keep such technologies out of the hands of its North American colonies, which were supposed to serve as the rural hinterland of industrializing England, supplying scarce timber, grains, and ores and providing a captive market for home-country manufactures.

But once independent and determined to industrialize on their own, Americans saw this immense hoard of technology as theirs for the asking—or for the stealing. Tench Coxe was Alexander Hamilton’s deputy in the first Treasury Department, and he had no compunction about offering cash awards for stolen British textile technology and paying bounties high enough to induce craftsmen to risk prison for emigrating with trade secrets. Americans viewed Great Britain as a semihostile power, and understood that their own poorly diversified economy was a source of vulnerability. Conventional ethics do not apply in the game of nations, and the United States set out to steal whatever it could. Knowledgeable Chinese occasionally cite that history when they are criticized for their disregard of intellectual property rules.

Japan adopted a similar strategy vis-à-vis the United States in the post–World War II era, even though it was among America’s closest allies. Companies like Cummins Engine subcontracted production to companies like Komatsu in the 1960s to take advantage of Japan’s low labor costs. Within a few years, Cummins’s home diesel market was attacked by inexpensive but disconcertingly high-quality Cummins knockoffs from Komatsu.

China’s relationship with America is much like that of the fledgling United States with Great Britain. China is both the United States’ second largest trading partner (after Canada) and an avowed rival. The American navy is an intrusive presence close to its shores, and smaller countries that it views as within its sphere of influence pointedly take shelter in America’s shadow. Relations have an extra edge because the United States stands for the kind of raucous, self-indulgent democracy that China’s leaders fear could destabilize their own fragile ruling compact. So with respect to technology, much as America did, China is stealing all it can, not only from the United States but from all Western advanced economies.

A recent roundup by Businessweek listed nineteen recent convictions under American economic espionage laws for intellectual property theft by Chinese agents and company moles. The roster of victims reads like a Who’s Who of corporate America: Apple, Boeing, Chicago Mercantile Exchange, Dow Chemical, DuPont, Ford, General Motors, Goodyear, Motorola, Northrup Grumman, Sanofi-Aventis. The targets ranged from formulas for industrial fireproof paint to detailed specifications for the space shuttle and a wide range of military aircraft; from derivative trading software and algorithms to polyethylene shielding; from titanium pigments to trash management software; from advanced display technology to automobile design specifications and advanced wind turbine management software. Some of the evidence included records of government officials supplying shopping lists and offering encouragement.³

All of those cases involved Chinese agents on site in the target companies, often in responsible positions, physically stealing or copying sensitive material. Far more widespread, most experts agree, are cyber-invasions by government-sponsored or protected hackers. For nearly a decade, Chinese hackers thoroughly compromised the data systems of the erstwhile Canadian telecommunications giant Nortel, seizing more or less complete access to all of the company’s product designs and other trade secrets. Disquietingly, there is a distinct possibility that after Nortel was broken up and sold in bankruptcy to several other technology companies, the infections were transmitted to the new hosts.⁴

Data from the US Cyber Command in the Department of Defense tabulate more than 50,000 malicious cyber-intrusions per year in recent years. It does not break out the data by country of origin, but China is clearly a major contributor. In 2011, for example, RSA, a leading vendor of security technology for corporate data systems, was itself hacked into. Subsequent analysis showed it be an extremely sophisticated attack, dubbed an “Advanced Persistent Threat.” Although it had been routed through several countries and continents, the attack appeared to emanate from China. One apparent object of the attack was to compromise the security-key systems for accessing confidential company databases, possibly including those of RSA’s customers. If it had been successful—the company said it was “confident” that it had not been, but who knows?—it would have operated as an open sesame to acres of sensitive, and highly valuable, material.⁵

EXPLOITING PARTNERS

In the early days of independence, the United States was almost entirely dependent on Great Britain for manufactured products beyond the capabilities of local seamstresses and blacksmiths. British products were consigned to coastal merchant houses that distributed them throughout the country. Typically, it was those merchants who provided the capital for local artisans to create knockoffs of the British designs and keep the profits at home.

The Chinese behave the same way. But since today’s high-value products are often far too complex to readily knock off, they exploit the eagerness of Western companies to gain entry to the vast potential Chinese market. Recently GE, anxious to land a large avionics contract (flight management software and technology) for a projected Chinese jumbo commercial jet, agreed to transfer technology developed for the Boeing 787 Dreamliner to a fifty-fifty joint venture in Shanghai. Since the technology has obvious military applications, GE says that Chinese military personnel will be excluded from the joint venture and that there will be limits on ex–project employees transferring to Chinese military programs—protections that one congressman called “laughable.”

GE stresses that the deal was vetted by both the Commerce and Defense Departments. But a deal valued at $300 million and creating at least a few hundred jobs in the United States, but many more in China, was hardly likely to be turned down in the midst of a “jobless recovery.” Four other aviation technology companies will also benefit from the contracts, and for GE, the deal came bundled with the promise of additional deals in coal gasification, energy, locomotives, and a high-speed-rail joint venture that could be worth another $1 billion.⁶ Imagine the row GE would have kicked up if the deal had been turned down.^bu

If the past is portent, the likelihood of the joint venture working out well for GE is not high. Siemens and ThyssenKrupp worked closely with a Chinese high-speed-rail consortium supplying maglev technology to its Shanghai bullet trains. China is now proceeding with maglev development elsewhere in the country without the German partners, and it may soon be competing with them for global sales. That same prospect is looming in a number of other industries—solar power, batteries, aviation, automobiles, chemical manufacture—in which Germany has supplied advanced technologies to Chinese customers and partners.⁷

Incidents like these are not random occurrences, the kind of occasional flaps that are inevitable when two companies with different cultures and languages engage as close partners in complex undertakings. Ever since the end of the Maoist Cultural Revolution, China has made no secret of its intent to move rapidly up the technology ladder by virtually any means, fair or foul. Specific plans offered as part of the regular five-year national planning cycle emphasize “indigenous innovation,” which is defined to include “enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies,” and states that “the importation of technologies without emphasizing the assimilation, absorption and re-innovation is bound to weaken the nation’s indigenous research and development capacity.” The US Chamber of Commerce said that the technology plans taken together amounted to “a blueprint for technology theft on a scale the world has never seen before.”⁸

The Chinese patent regime, according to the Chamber, has been perverted to facilitate technology theft from outsiders. Authorities expressly encourage—and even underwrite the cost of—filing “utility” patents claiming intellectual property in the application of someone else’s technology to a particular narrow use. It has become a pointed tactic for punishing Western patent holders who file suits against Chinese infringers in Western courts.

Schneider Electric is a mid-size French company with a global business in high-tech power management products and a rich patent portfolio. In the late 1990s, Chint, a small Chinese company that supplied the Chinese market with products similar to Schneider’s, opened shop in Europe and was sued by Schneider for a number of infringements. (Schneider won a number of cases but not all of them.) Chint had filed a utility patent on a product in Schneider’s portfolio and retaliated with an infringement suit in a Chinese court. The court found for Chint, imposing a $54 million fine. Schneider was eventually forced to merge with another local company, founded by two of the original partners in Chint. Such are the devices that go under the name of “re-innovation.”⁹

UNFAIR TRADE PRACTICES

In nineteenth-century America, the Southern secession allowed the newly dominant Republican party to push through a highly protective tariff scheme, covering iron, steel, textiles, and most manufactured products, as well as a host of commodities, including wool, sugar, flax, and others to benefit the agrarian Western interests. Such tariffs were maintained long after there was any validity to “infant industry” arguments, although the effect of the tariffs were mitigated, at least in steel, by competition between American vendors.

China joined the World Trade Organization in 2001, with the support of the United States, and does not maintain unusually onerous tariff schedules. But as Japan did during the period of its rise, China maintains a host of nontariff trade barriers and subsidies. State-owned industries typically benefit from highly subsidized electricity and fuel prices and can acquire land at far less than free-market prices. Customs barriers are intentionally Kafkaesque. Even minor changes in a product currently sold in China—like a new shade in a line of lipsticks—can be held up for months awaiting inspection and certification. Or customs rules are turned into a tool for intellectual property theft. High-technology products like firewall and smart-card software cannot be sold unless officials first examine and certify the source code, which most Western companies will not permit.

There have been a number of cases in which the government has attempted to impose Chinese-specific software solutions or standards on foreign products, so far without much success. Advanced technology vendors have frequently refused to depart from established international standards. In the few instances in which they have agreed to include the Chinese standard as an option, customers typically don’t use it, or it doesn’t work acceptably. China, however, is far from an incompetent country in high technology. One database of peer-reviewed, high-quality scientific journals shows the Chinese paper count to be in third place, behind the United States and the United Kingdom. It is abundantly clear that the government understands the importance of controlling basic architectures in most high-tech products and is resolved to move beyond the role of passive acceptor of Western paradigms. In the 1980s Japan had similar aspirations, which it has largely failed to fulfill. China, however, may be a much more entrepreneurial country than Japan, with a potential home market big enough to establish standards with global impact.

In broad strokes at least, China has been following much the same catch-up tactics as nineteenth-century America, although adapted to today’s utterly different technology environment. But Americans still had an advantage that China cannot replicate. The United States was founded in an immense, richly endowed, and barely populated new country. In effect, a select group of ambitious and adventurous people, informed by centuries of the European experience, got the chance to start over. China is in an entirely different position. Despite the talents of its people and its outstanding economic successes, the speed of its growth is beginning to throw up what may be fundamental obstacles of place and time.

Challenges

NATURAL RESOURCES

America’s fast-track development in the nineteenth century was based on prodigal consumption of resources. Much of the westward settler movement was an exercise in land spoliation. Farmers would clear land, wear it out in just a few years, pull up stakes, and move on. Forests were decimated to feed blast furnaces and steam engines. Industrial cities like Cincinnati dumped all their wastes—human, animal carcasses, iron filings, chemicals—directly into local rivers and lakes. Disease epidemics forced better sanitation toward the end of the century, but serious attempts to mitigate environmental damage got underway only in the 1950s and 1960s. The air in mid-twentieth-century Pittsburgh was much like that in most Chinese cities today: on a clear day you could see to the next corner.

Nineteenth-century Americans might be forgiven for believing that the country’s resources were inexhaustible. As the populace pushed across the Appalachians into Ohio and beyond, one of the most dangerous maladies, as Frances Trollope acutely observed, was sheer loneliness. Whatever damage early settlers inflicted on the environment seemed like mere pinpricks amid the primeval vastness.

China, by contrast, had a billion people before it began to industrialize. It is not a resource-poor country. It has ample coal and has recently virtually cornered the market on rare earths, a vital component in most semiconductor manufacturing. But it still must import vast amounts of commodities to feed its industrial machine. China now accounts for approximately one-fourth of world demand for zinc, iron and steel, lead, copper, and aluminum, and is the world’s second largest importer of oil after the United States. With its current history of trade surpluses, however, it can easily afford the external commodities required to feed its industry.

But China is running out of water, and without extraordinary action, the lack of water could jeopardize all of its economic ambitions. The country’s per capita water supply is only a quarter of the world average, and most of it is in the wrong place. Northern China produces half of GDP, contains most of the arable land and 40 percent of the population, but gets only 12 percent of the rainfall. Despite persistent water shortages, Chinese industry is a profligate consumer of water, using four to ten times more water per unit of output than other industrial countries. The biggest water consumers are agriculture, mining, and hydropower; between them, they account for more than 80 percent of national consumption and are famously inefficient. Less than half the water used for crop irrigation, for instance, actually reaches the fields. The growth of cities has also greatly increased the rate of personal water use, including display uses like lawns and golf courses, in keeping with the aspirations of the country’s nouveau riche. Hastily extended urban water systems leak away about a fifth of the supply. To make matters much worse, Chinese industry is notoriously polluting, so large portions of the available water supply is becoming unusable—a quarter of it is so polluted that it is unsuitable even for industrial purposes.

Official Chinese forecasts suggest that the country’s available water will be at the World Bank’s “scarcity” level within the foreseeable future. Already, only half the rural population has access to safe drinking water. Extreme levels of surface-water pollution has forced heavy exploitation of ground water, which is lowering water tables, causing land subsidence with collateral damage in built-up areas, and speeding the country’s desertification. Forced-draft projects to reroute rivers to divert water to agricultural and industrial areas are only making the problems worse, even as they raise tensions around the exploitation of transnational rivers and continue the destruction of the environment. One current mega-project, twice as expensive as the famous Three Gorges Dam, is diverting water from the Yangtze River in the south through three major new channels some eight hundred miles to Beijing. It has been compared to “channeling water from the Mississippi River to meet the drinking needs of Boston, New York and Washington.” It will involve forced relocations of hundreds of thousands of people, will work environmental havoc along most of its route, and will worsen already worrisome drought conditions in the south.

The Three Gorges experience does not instill confidence. Required relocations maybe four times higher than original estimates, seismic activity has risen sharply, and large areas of reservoir banks have been lost to landslides. At the same time, the Three Gorges reservoir water is becoming dangerously polluted. The government is far behind on wastewater treatment for the cities surrounding the reservoir, and tens of millions of tons of industrial and urban waste are dumped into the reservoir every year. Many of the same observations could be made with respect to China’s astonishing levels of air pollution.¹⁰

DEMOGRAPHICS

The Western press has recently highlighted a potential demographic crisis in China. The Economist magazine called it a “deadly point of unseen weakness.” ¹¹ The increased health and longevity of older Chinese, along with the long-standing national one-child policy, will inevitably create a sharp ramp-up in the aged “dependency ratio,” the number of people over age sixty-five per hundred workers. By 2050, the Chinese dependency ratio will nearly quadruple, from eleven to forty-two, while in the United States, despite the aging of the baby boomers, it will increase from the current twenty to only thirty-five.

In isolation, this indeed looks like a serious problem, but it exaggerates by using the United States as the comparison. Because of its relative receptivity to immigrants and relatively high fertility rate, America is in better shape than most advanced countries on issues of generational dependence.

As Chart 9.2 shows, the projected Chinese dependency ratio is not unusually high among advanced countries. Japan is the country facing a true demographic crisis, which is arriving now, while the Chinese transition is still some time off. While China has a much less developed social security system than the advanced countries, it has been rapidly expanding the population’s access to government pensions, retirement savings plans, and health insurance, at a rate that Nicholas Lardy, a Chinese expert at the Peterson Institute, calls “impressive.” Coverage is still far narrower than it will need to be, but the current government seems determined to continue the programs’ expansion. Pension amounts are quite small by advanced country standards, but China does not yet have the per capita GDP to live up to the norms of rich nations.¹²

Changes that evolve over forty years rarely warrant the term “crisis.” Population projections are perilous, of course, but even assuming they are correct, China has ample time to prepare. If China manages to avoid a national breakdown, even if there is a marked slowdown for some time, the country should still achieve advanced-country level of per capita income by the 2030s or 2040 and should be well able to support decent lives for the aged. The Chinese will also have learned from watching how the Japanese and Germans deal with their elder booms. The Japanese in particular are seeking technological alternatives to intensive hands-on caretaking of the frail elderly. And if technology disappoints, all richer countries with large populations of dependent elderly will one way or the other increase their immigration rates.

CHART 9.2 Old-Age Dependency Ratios, Selected Countries: 2010 and FC2050

The coming shift in the Chinese age structure, then, is likely to be a serious problem only if the country’s economic progress is arrested to the extent that it fails to complete its transition to a wealthy country with a well-established, middle-income, working class. Unfortunately, China appears to be entering a dangerous stage of development fraught with risks to its continued economic success.

ECONOMIC DISTORTIONS

The Hu Jintao/ Wen Jiabao government,^bv at least since 2007, has warned that Chinese economic growth has been “unsteady, imbalanced, uncoordinated, and unsustainable,”¹³ implicitly accepting Western criticisms along much the same lines. There appears to be substantial agreement in principle on the part of the government, and among most Western economists, that over the last decade or so, China has tilted inordinately toward its manufacturing export-driven sectors at the sacrifice of building up the consumer and services sectors characteristic of countries making the middle-income transition. It should be noted, however, that loose credit policies in the United States, especially related to home equity lending during the housing bubble, played a big role in enabling the Chinese addiction to exports. (Between 2002 and 2007, America’s current account deficit and volume of net home equity withdrawal each increased in parallel by more than $4 trillion.)

Regardless of blame, the Chinese macro numbers look seriously distorted. Investment accounts for more than half of all national spending, up from about a third in 2005. All East Asian “tiger” countries invested heavy shares of national spending in investment, but never more than about a third. (United States savings rates also rose to 30 percent in the second half of the nineteenth century.) Some economists defend the very high rate of investment on the grounds of the country’s daunting infrastructure deficits. The relevant question, however, is not the scale of the infrastructure deficit but the practical limits on the number of mammoth projects a government can manage at one time. Evidence of shoddy construction and insufficient safety precautions on the new high-speed rail lines and the Three Gorges hydropower project are not reassuring.

A side effect of the investment surge is that it is yet another force repressing consumer spending. Consumption is still rising in real terms, but it has been shrinking as a percentage of GDP. Household consumption was only 34 percent of GDP in 2010, down from 50 percent in 2005, and “by far the lowest rate of any major economy in the world.” The suppression of consumer spending has been accomplished primarily at the expense of services. Since expansion of services—health care services, legal services, financial services—is usually a reliable sign of a country making a successful middle-income transition, current policies may actually be retarding the economy’s maturation.¹⁴

Patrick Chovanec, a business professor at Tsing Hua University in Beijing and a long-time China watcher, has become a leading voice in a growing chorus of analysts who are distinctly bearish on China’s near-term economic future. Chovanec suggests that the country’s response to the financial crash, while effective in the short term in maintaining employment, may have deepened the underlying problems. National banks vastly increased the supply of credit—by about 40 percent, Chovanec estimates—and much of it went into new urban apartment housing, vast swaths of which now stand empty.¹⁵

That may not be as bad as it sounds. Completed apartments in China typically contain few if any improvements like kitchen appliances, and there are no real estate taxes, so the cost of carrying vacant housing is lower than in most other countries. Private citizens have few opportunities to invest in appreciating capital assets, so the apartments may be intentionally held as a store of value. If real estate prices fall, however, which Chovanec thinks likely, the repercussions would be profound.

Chovanec’s fear is that an accumulation of real estate that is not returning any income to the owners, along with the great expanse of hasty new, stimulus-related investments undertaken by deeply corrupt local governments, has created a giant layer of zombie assets. In a true market economy those conditions would trigger a financial crash similar to the recent experience with the popping of the asset bubble in the West. That is unlikely to happen in China. Instead the banks will probably roll over the loans, which are mostly now coming due. To the degree that the huge stimulus-related credit expansion was poured into such zombie assets—it’s likely that most of it was—they will act as a long-term drag on the country’s credit capacity and inhibit the required rebalancing between investing and consumption. Attempting to submerge the problem with another big credit expansion, Chovanec suggests, could ignite dangerous inflation. He suspects that official data on national debt and price inflation already seriously understate the true picture.^bw ¹⁶

Whether or not the bearish views of China’s near-term outlook are correct, the economy continues to be seriously unbalanced, even as it faces a potentially disabling crisis in water supply, serious environmental degradation, and possibly a major real estate bubble. And those challenges loom as the nation is trying to make the difficult transition from a premodern society to a modern economy grounded in a successful middle class. Given the extreme centralization of formal power, the critical question is whether the government is up to the challenge.

Can China Cope?

In the spring of 2012, Chinese politics were roiled by the sudden scandal of Bo Xilai and his family. Bo had been an up-and-comer, a charismatic outsider who had been forcing himself into consideration for a seat on the Party Politburo. As party chief of Chongqing and previously as mayor of Dalian, he mounted vigorous anticorruption campaigns and won favor among the masses by adopting redistributionist policies out of the Maoist playbook. Bo’s career crashed when a top lieutenant, the Chongqing police chief Wang Lijun, asked for asylum in the American consulate in the nearby city of Chengdu. He believed that his life was in danger because he had uncovered the possible involvement of Bo and his wife in the murder of an English businessman, who had served as a family retainer and fixer.

That triggered a flood of noxious revelations. The famous corruption crackdowns may actually have been a wholesale looting of local businessmen, abetted by torture, arbitrary imprisonment, and other atrocities. Bo receives only a modest salary, but a large number of close relatives, including his wife, are hundred-millionaires, while his son leads the high life at Western universities. For the time being at least, Bo has disappeared.

Those stories, while not proven, are consistent with allegations surrounding a peasant uprising a few months before in Wukan, a fishing village in Guangdong Province. The villagers barricaded the roads and faced down the police and local village and party leaders, alleging that officials had been selling the peasants’ common land and fishing rights, impoverishing the people and keeping the sales proceeds for themselves. Premier Wen himself criticized the local leadership, and China’s State Council has admitted that in 2011, some 700,000 hectares were transferred illegally.

There are as many opinions about the current path and future prospects of China as there are Western scholars. China’s system of producing leaders, murky though it is, has a record of producing a number of outstanding men—well educated and well informed, quite capable of holding their own in international settings.

But there is still widespread concern that the government is too remote, too corrupt, too riven with infighting to govern effectively. For example, despite the Hu-Wen rhetorical commitment to more balanced growth, the crucial macro steps, like readjusting the relative shares of investment and consumption, may have been blocked by the industrial barons and their representatives on the Politburo and State Council. The monolithic character of the party machine, moreover, is likely to forestall significant change. Regardless of shifts in policies at the center, anything far-reaching must be accomplished through the local officialdom. All local officials have been trained for decades in a uniform way of doing business: Build! Grow! Never miss your numbers! Helping to implement a shift to a more market-driven economy, stepping away from financing decisions, no longer picking local favorites, and becoming merely neutral regulators may be beyond their capacities and likely contrary to their financial interests.

The looting and rapaciousness disclosed by the Bo episode, moreover, may not be especially unusual. High position in the party is a royal road to riches. The big Hollywood studio Dream Works Animation recently opened a major studio in China. Its partner in the deal is Jiang Mainheng, who is the son of the former Communist Party leader Jiang Zemin. The younger Jiang has also been awarded serendipitous partnerships in joint ventures with Microsoft and Nokia. Big business in China involves a lot of palm-greasing with the relatives and retainers of politicians. A financial executive suggested that the way to get along with the leadership was to “just make them part of your deal; it’s perfectly legal.”

So Hu Haifeng, the son of President Hu Jintao, heads a conglomeration of technical firms spun out of Tsing Hua University, benefiting from a string of government contracts. Wen Jiabao’s son, Wen Yunsong, is CEO of Unihub Global Networks, a large Chinese networking company and a partner in a Chinese private equity firm that frequently works with Western investors. The son and daughter of former premier Li Peng chair, respectively, China’s largest power company and an electricity monopoly, while Levin Zhu, son of former prime minister Zhu Rongji, has long run one of China’s biggest investment banks. Any important capital raise for a Chinese company in the West will nearly always have relatives of the leadership involved in the deal. Ninety-one percent of the country’s multimillionaires, according to the Chinese Academy of Social Sciences, are the children of party influentials. Victor Shih, a China expert at Northwestern University, has said, “There are actually a lot of princelings out there. You’ve got the children of current officials, the children of previous officials, the children of local officials, central officials, military officials, police officials. We’re talking about hundreds of thousands of people out there—all trying to use their connections to make money.” An inheritance-based economic nobility coupled with the depredations of local party officials, as in Wukan, reminds one of prerevolutionary France.¹⁷

The world has an enormous stake in China’s successfully completing its transition to a modernized, middle-class-based country with per capita incomes and opportunity structures in the same range as other advanced countries. America has no stake in China staying poor, and the sooner it reaches true advanced-country status, the better for all of us, despite the fact that its total GDP will inevitably be greater than America’s.

The next decade is likely to be a crucial one in Chinese history, for it may determine how well they can make the transition and how long it will take. The consequences of their failing could be terrible. A successful transition does not necessarily mean that the Chinese have to evolve governing structures on the pattern of Western-style liberal democracies. Francis Fukuyama, in his recent study of the evolution of modern governments, suggests that governing forms are inherently contingent. The possibility of a new type of polity “with Chinese characteristics,” in the party’s phrasing, should not be ruled out. Whatever it is, Fukuyama speculates, it will have to retain some form of effective accountability of the government to the governed—which is the major advantage of democratic forms, however clumsy and slowly reacting they may be.

This brings us back to America. Perhaps the greatest advantage it had in the early days of its rise as an economic power was that it was born as a middle-class country, settled primarily by people looking to better their lives and achieve economic independence, delighted to be freed from the encrusted ways of the countries and fellow-citizens they had left behind. In effect, the country never had to accomplish the middle-income transition because most of the first generations of immigrants had already made it simply by choosing to come—and once they got here, there were no important entrenched interests to stand in their way.

No large country with a deeply controlling, top-down government has ever successfully accomplished a middle-income transition. The struggles of Russia, with its vast natural resources, its world-class kleptocracy, and the quiet wars between the new industrial oligarchs and the siloviki—the Putin-linked Party stalwarts—are similar to the struggles in China, with the difference being that the Chinese have a much more entrepreneurial society. The recent history of China suggests that when the government makes mistakes, they tend to be doozies. It hadn’t been that long since the Maoist Cultural Revolution. It will likely take at least another decade or so to see whether China can accomplish the national transition to a true middle-income society. The rest of the world can only hold its breath.