What the ‘Great Terror’ Taught Autocrats

The instruments of lesser terror are still routinely employed today. Vladimir Putin uses them to stay in power despite a weak economy, rising poverty and rampant corruption. The Kremlin allots state assets, government credits and university deanships to those in favor. Streaks of independence or defiance are punished by charges of corruption, confiscatory taxes and denial of business licenses. Political opponents are disqualified from the ballot, and ordinary protesters are sent to prison or put under house arrest. Anti-riot forces are given free rein to fire on demonstrators. Dissidents who become a real danger can be shot or poisoned. The murderer will never be found, despite an elaborate investigation and court proceeding.

go to Wall Street Journal

Do Alternative Estimates Show China Entering A Period Of Stagnation?

Chinese reforms seem unlikely. Premier Xi has declared the state sector the “backbone” of the economy. Party cadres have been instructed to take the teachings of Karl Marx seriously. Private businesses do not hold out hope for equal and fair treatment under Xi’s socialism with a Chinese face. Successful business owners will continue to plan their emigration to Canada or Australia before the long arm of the state and party catches up with them. China’s puzzle has been it rapid growth despite its miserable (144th) economic freedom indexranking. Perhaps China’s performance is starting to reflect the low quality of its institutions.


go to forbes.com

As The Sanctions' Noose Tightens, China Grabs Russian Energy Assets At Bargain Prices

When I wrote on August 28 that “Western sanctions are strangling the Russian economy,” I had second thoughts about using such strong language. Events of the last two weeks convince me, however, that I understated the case, especially with the introduction of new sanctions on Friday. The Russian economy faces a severe liquidity crisis, collapsing investment and a severe recession. Putin has jeopardized his “safe” European gas market and faces legal problems that he cannot avoid. His sanctions against the West have simply made his own people worse off.

go to Frobes.com

The Chinese Can't Stage a Decent Show Trial

The trial of the decade — against former party heavyweight, Bo Xilai – has become a disaster for the new Chinese leadership. The charismatic Bo’s forceful assertions of innocence against charges of petty corruption and misuse of office have enlivened his supporters and made his accusers look weak and petty.

Joseph Stalin mastered the political show trial. His first, against sixteen of Lenin’s deputies and Trotsky allies, lasted five days. His second, against seventeen party officials, lasted a week. The third, against the twenty-one members of the “Bloc of Rightists and Trotskyites,” lasted almost two weeks in the presence of invited diplomats and journalists.

Stalin orchestrated his show trials as carefully staged rituals. In each, the defendants’ confessions were extracted well before the trial. They dutifully confessed in public court to horrendous crimes of murder, espionage, and treason. Official newsreels showed the repentant traitors begging for mercy. With few exceptions the defendants received the death penalty and were shot within a day or two of the trial. The Soviet press condemned the “mad dogs” in incessant drumbeats of vitriol. Factory workers organized “spontaneous” meetings to demand the supreme penalty. Confused diplomats and journalists, many of whom did not understand Russian, sat in the court room as interpreters whispered in their ears. They concluded that the show trials had exposed real plots against a Soviet Union, which had narrowly averted overthrow by sinister forces from within and without.  What a success for Mr. Stalin!

Stalin would erupt in laughter at the pantywaist show trial of the disgraced party leader, Bo Xilai, currently underway in Beijing. It violates all of Stalin’s rules for a successful show trial.

go to forbes.com 

China Is About To Make A Mistake That May Rival Its One Child Policy

China avoided the world recession that started in 2009. The wise communist party, we are told, ramped up infrastructure spending – unimpeded by the need for licenses, court reviews, or rights of way. The government pumped in just enough infrastructure spending to maintain China’s healthy growth rate.

Skeptics of democracy and free enterprise waxed eloquent about China’s state capitalism, as directed by China’s communist party. We want more of what China is having over here – was the refrain.

Democracy and free markets indeed make mistakes. No one promised free sailing of steady growth, low unemployment, and the absence of business cycles. Bubbles and busts have been a part of the capitalist system since the Dutch Tulip Bubble of 1637. We can debate the role of government in the U. S. housing bubble and in Europe’s banking and Euro crises, but no proponent of market capitalism has promised a bubble-free, recession-free world.

The proponents of state capitalism and a one party system do make such promises. The Soviet Union promised that “scientific planning” would lead to steady growth, innovation, and the eventual overtaking of the United States. China’s communist leaders laud their “socialism with a Chinese face” in which sober and wise party and state officials can be counted upon to make the correct decisions.

History tells another story.  The most disastrous blunders have been committed by the scientific planners of one party states. Miscalculations and errors of the market system tend to be self-correcting if they are left alone. Even when they are mishandled, the damage is minor compared to the blunders of the state capitalists.

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Why Chinese Companies Are Withdrawing from U.S. Stock Exchanges

Chinese companies are withdrawing their listings from U.S. stock exchanges. There is no real mystery: First, Chinese companies cannot (and do not wish to) meet U.S. accounting standards. They are largely state owned or directed. They usually operate on the basis of informal agreements and must hide corruption. Second, U.S. markets are driving down their share prices.  Their withdrawal from U.S. stock markets is supported by the Chinese government which is providing loans for that purpose.

Stock markets play the role of “price discovery.” They let investors decide what companies are worth. For example, the recent debacle of the Facebook IPO revealed that Facebook’s value was less than expected.

Chinese companies are withdrawing because stock-market investors have concluded that the companies of Chinese state capitalism are worth less than what had generally been expected. Once short sellers started investigating the goings-on in Chinese companies, their share prices plummeted.

Chinese authorities must withdraw their companies quickly from this price discovery process. If it continues, it will show that Chinese companies are overvalued once their true operating practices are known.

China cannot let its image of success and growth be tarnished.

Syria, China, Russia, Reset, Magnitsky

Sunday, July 22:
The forces of Syrian dictator Basher Assad shell rebel-occupied neighborhoods of Damascus. Four young female members of a punk rock band begin their fifth month in a Moscow jail. Somewhere in China a local party boss meets with disaffected factory workers. In Washington,  the full house prepares to vote on visa restriction for Russian officials for human rights abuses. These disparate events are part of a larger mosaic, which begins in Syria.

Basher Assad, like his father before him, symbolizes unconstrained dictators prepared to do anything, no matter how odious, to stay in power. Unconstrained dictators use their secret police, militias, and armies to arrest, torture, and kill opponents. They raze whole towns. They kill innocent women and children to send a message. They are indifferent to world outrage. If Assad falls, it will not be for lack of brutality and atrocity. He may resort to chemical weapons as a last resort.

Constrained dictators, such as Mubarak, Pinochet, and the Shah, face limits imposed by moral qualms or the international community. Small protests swell, and momentum for regime change builds. Failure to use overwhelming force and efforts to compromise only embolden protesters, and eventually the constrained dictator resigns either to flee the country or to face local justice.

Two other constrained dictatorships, Russia and China, want to keep Assad in power. Both shudder at a fellow totalitarian regime falling to a disorganized opposition. They will abandon him (with great fanfare) only when it is clear that he has lost. China and Russia have their own disaffected minorities, disgruntled workers, and ideological opponents. Their one-party states lack legitimacy, and they know it. They consider themselves under constant threat, fearing the single spark that brings millions to the streets. They must snuff out any spark  — a lone barefoot lawyer or an 18 year old girl throwing a rock at security forces  –  that could conceivably ignite a Tahrir Square.

Russia and China’s one-party dictatorships face different threats. China’s Communist Party (CPC) must firefight grievance demonstrations. Putin, on the other hand, must confront direct challenges to his legitimacy.


go to forbes.com

Chinese Woman with Dead Infant After Forced State Abortion

The picture sweeping China of a bereaved Chinese woman in a hospital bed with her dead infant after a forced state abortion at seven months. The woman and her husband were unable to raise the $6,500 fine the state charges for a second child.

http://www.ministryoftofu.com/2012/06/gruesome-photos-of-forced-late-term-abortion-appall-china-challenge-one-child-policy/

Questioning China's Economic Model: One Spark?

The New York Times’ As Growth Slows, China’s Economic Model is Questioned sets a tone in marked contrast with its enthusiastic accounts of China’s prowess. One of its most respected columnists, Thomas Friedman, has been singing the praises of  Chinese infrastructure for years. In New York City, Friedman sees potholes. In China, gleaming highways. Friedman never met a cement mixer he does not like. China has plenty. We have too few because the Republicans won’t authorize an infrastructure bank. We have political stalemate, while China is run by wise technocrats dressed in muted business suits who decide what is best for the country and are not hobbled by the rule of law, property rights, and other small things that get in the way of progress.

The Times piece raises an uncomfortable question for those who regard the Chinese model as the way of the future. Could it be that China is a house of cards, ripped apart by political infighting over political power and spoils, that is kept alive only by embattled  private enterprise?  Could it be that the polite men in dark business suits, who are feted in Washington as our equals, rob state enterprises for their personal benefit, suppress dissent because they know that one spark can destroy their party monopoly, and compete among themselves to see who can waste public savings the fastest by pouring concrete faster than their regional competitors.

go to forbes.com

Dr. Gregory's latest book can be found at Amazon.com.

Making Sense of China’s Bo Xilai Earthquake

The removal of Chongqing party boss Bo Xilai from the Politburo and the announcement that his wife is under investigation for murder are a political tsunami, the likes of which have not been seen in China since the defeat of the Gang of Four shortly after Mao’s death.

To put this in perspective: Bo’s fall is the equivalent of a RFK III and George Bush Junior announcing that Richard Daley III has been banned from politics for life and his wife, Amanda Cabot Lodge-Daley, has been placed behind bars.  All the players are the sons and daughters of the Maoist elite, many survivors of the Long March. Bo had been expected to be promoted to the elite standing committee of the Politburo, where he could have become a contender for the top position as general secretary of the CPC.

The true story behind Bo’s fall will perhaps become known with the passage of time, but here is what can be pieced  together from news accounts and from the Chinese rumor mill: 

go to Forbes.com

Kim Jong Il: The Passing Of A Tyrant And The Ensuing Power Struggle

Kim Jong Il, who died Saturday at the age of 69, was the last leader of a Stalinist state held together by a Stalin-like cult of personality, brutal repression and disposition of rents to supporters. Like Stalin, Kim Jong Il rid the North Korean leadership of any possible independent-thinking rivals. There are no Gorbachevs or Dengs in the wings. But the grooming of his chosen successor, third son Kim Jong Un, remains incomplete, and this throws something of a monkey wrench in succession plans.

Kim Jong Il leaves behind a failed economy and a starving people. He built a regime that could survive the grossest of economic failures by means of a blustering and threatening foreign policy, an oversized military that sucked up huge resources, strategic payments to key supporters in the party and military from arms and drug sales, and absolute repression of his people.

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Chinese Stock Alarm? Sino-Forest May Be the Best of the Bunch

Sino-Forest is a Wholly-Owned Foreign Enterprise that harvests, processes, and sells wood from leased or owned tree plantations in various Chinese provinces. Its international management hails from Hong Kong, China, and Canada. Sino-Forest trades on the Toronto Exchange, is audited by Ernst & Young, and its glossy annual reports boast of master agreements, huge markets, a plantation strategy, and possible a billion dollar loan from Chinese banks.

If you want to invest in China, Sino-Forest appears (or appeared) to be among your best bets.

Sino-Forest’s compelling story generated a market capitalization of six billion dollars and a share price that rose from $10 to $23 while stocks were collapsing worldwide.

That was then. A critical report sent the share price tumbling eighty percent, trading has been suspended for possible violations of security laws, and the Canadian Mounties are investigating for fraud. The company’s outside directors hired PriceWaterhouseCoopers to investigate.

The investment community finally got a clear picture of how business is done in China, did not like what it saw, and dumped the stock. It’s as simple as that.

go to Forbes.com 

If State Capitalism Is So Good, Why Are Russian And Chinese Entrepreneurs Fleeing?

State capitalism was touted by Lenin as a positive step on the road to socialism. By state capitalism, Lenin meant a “commanding heights” of large businesses and trusts controlled by a state that served the interests of the working class.

Lenin’s transitory state capitalism of the 1920s was replaced by Stalin’s command economy. Postwar France’s dirigisme and Japan’s industrial policy were both failed experiments with state capitalism, but it is alive and, some think, well in China, Russia, Brazil, and many other countries.

I spent four days in Moscow last week, attending a conference on the Gulag system and renewing old acquaintances. On my last visit three years ago, I encountered mixed opinions on Vladimir Putin. He had some strong defenders and few vehement opponents.  This time, the common response to Putin’s return to the Presidency was: “Why do we need that guy back?”

go the Forbes.com

China's Flawed Case For One-Party Rule

In democracies, leaders who make bad and even disastrous decisions are punished at the ballot box.



Robert Lawrence Kuhn, an international investment banker, biographer, corporate strategist and paid advisor to the Chinese government, is the face of China's PR campaign for the Chinese Communist Party's (CPC) 90th anniversary. The publication of his China Daily article "China 'best served'' with CPC at the helm" as two-page advertising supplements in the New York Times and Wall Street Journal shows China's desire to legitimize itself in the eyes of the international community.

Kuhn is not the only advocate of Chinese-style one-party rule. Among those joining him are New York Times journalist Thomas Friedman and investor-philanthropist George Soros. Both praise the CPC's sound and timely decision making. Some scholars also argue that "benevolent" one-party rule is better for poor countries that cannot afford "messy" democracies at early stages of development. They point to contemporary China, South Korea and Taiwan in their early years as cases in point. (Both South Korea and Taiwan transitioned to democracy within two decades. The CPC has exercised one-party rule for more than a half century with no end in sight.)

for rest of article at Forbes.com

China’s Red Campaign: Back to Mao?

In 2012, the Chinese Communist Party chooses a new Politburo. This once-in-a-decade event will set China’s course through 2025. The new Politburo must decide whether the Communist Party will continue as the dominant force in politics and society, or will China evolve towards some kind of pluralism.

China’s successes over the past three decades should give “liberals” a strong claim to a solid Politburo majority. Under a continuing “liberal” majority, private enterprise will outgrow state enterprise, China will deepen its integration into the world economy, the party will explore pluralism, at least at the local level, and Maoist philosophy will become a remnant of the past.

The “Red Campaign” offers a quite different path: The party reasserts its central role, rejects Western or universal values in favor of “red culture, enacts statist policies to replace free-wheeling capitalism, and crushes challenges with a powerful security apparatus. 

The pilgrimages of top party leaders to Chingqoing party boss Bo Xilai are much in the news. New Leftist Bo, a favorite to take one of the Politburo seats, proposes to apply his brand of patriotic TV programming, red singing shows, extra-judicial crackdowns on crime and dissent, and government spending on worker housing to all of China. Bo’s “Red Campaign” has clearly struck a responsive chord.

Why this nostalgia for the Mao era despite its horrors and China’s enormous economic successes? President Obama would have few 2012 election jitters with such an economic record. The New Leftists are, in effect, proposing dramatic changes to what the rest of the world views as a most successful policy.

Let me suggest possible explanations:

1). China’s communist party faces irrelevance under the current course. As the state enterprise share shrinks below one fifth, all pretense of China as a socialist market economy disappears. The private sector will be clearly exposed as the engine of growth, not the “wise leadership” of the Communist Party, as is currently claimed.

A market economy integrated into a global economy does not leave room for party domination. Markets replace plans and administrative allocation, and state influence is exercised through macro policy and regulation, as it is elsewhere.

To avoid redundancy in the economic sphere, the party must reestablish a statist economy based on party direction of a dominant state sector, as proposed by the Red Campaign.

2) China’s “New Left” believes that the Chinese people associate the market economy with the corruption of party officials and their Princeling offspring. They offer a  “pure” party and a statist economy as a cure.

China’s communist party finds itself in much the same position as Boris Yeltsin’s “democrats” in the 1990s.  The Soviet Communist Party was no longer around to take the fall for corruption and unpaid pensions, so democracy and capitalism got the blame.

In China, the party is still very much around to be blamed for theft, corruption, illegal land grabs, unemployment, and the Princeling Mercedes Benzes that run over workers on the streets

The Red Campaign offers a simple solution:  A return to the days of a pure party motivated not by money but by ideology. The party of Mao made disastrous mistakes, but al least it did not steal.  Although the mass starvation of 1958-1960 and the Cultural Revolution of 1965-1968 left dark shadows on millions of Chinese families, the New Left counts on such memories dimming.

Many Russians feel nostalgia for the “old days” when the party kept order, they had their jobs, and party theft was limited.  For Russians, the Stalin terror and famine lay almost a half century back. The Chinese New Left hopes to play on similar nostalgia, especially now that Mao’s excesses lie more than thirty years in the past.

China in 2012 confronts the same choice as Gorbachev in 1989, but under quite different circumstances. Gorbachev in 1989 was firefighting the crisis of the collapsing command economy. The Chinese Politburo in 2012 will face a non-crisis. Even with slowing growth, China will still be among the world’s fastest growing economies and an envy of the world.

Confronted with his crisis, Gorbachev chose to end party dominance of the economy and weaken the party’s central apparatus.  His Politburo hardliners timidly acceded at first.  Their amateurish coup, launched to save the party, came too late.

If China’s 2012 Politburo attempts to implement the Red Campaign, it will discover the genie of private enterprise cannot be put back in the bottle. They can restore the dominance of state companies only through extreme favoritism and even repression of the private sector. The New Left will find themselves like a King Canute trying to hold back the sea. They cannot mount enough political power to revert back to the economic statism of earlier years.

Gorbachev did not understand that the reforms he launched would inevitably end the Soviet economic and political system. Had he understood, he would have followed the course of his predecessors. The Chinese New Left apparently sees the handwriting on the wall. They see 2012 as their last chance to save the party as they want it to be.   

The Red Campaign’s Allure: China Chooses Its Course

In 2012, the Chinese Communist Party chooses a new Politburo. This once-in-a-decade event will set China’s course through 2025. The new Politburo must decide whether the Communist Party will continue as the dominant force in politics and society, or will China evolve towards some kind of pluralism.

China’s successes over the past three decades should give “liberals” a strong claim to a solid Politburo majority. Under a continuing “liberal” majority, private enterprise will outgrow state enterprise, China will deepen its integration into the world economy, the party will explore pluralism, at least at the local level, and Maoist philosophy will become a remnant of the past.

The “Red Campaign” offers a quite different path: The party reasserts its central role, rejects Western or universal values in favor of “red culture, enacts statist policies to replace free-wheeling capitalism, and crushes challenges with a powerful security apparatus. 

The pilgrimages of top party leaders to Chingqoing party boss Bo Xilai are much in the news. New Leftist Bo, a favorite to take one of the Politburo seats, proposes to apply his brand of patriotic TV programming, red singing shows, extra-judicial crackdowns on crime and dissent, and government spending on worker housing to all of China. Bo’s “Red Campaign” has clearly struck a responsive chord.

Why this nostalgia for the Mao era despite its horrors and China’s enormous economic successes? President Obama would have few 2012 election jitters with such an economic record. The New Leftists are, in effect, proposing dramatic changes to what the rest of the world views as a most successful policy.

Let me suggest possible explanations:

1). China’s communist party faces irrelevance under the current course. As the state enterprise share shrinks below one fifth, all pretense of China as a socialist market economy disappears. The private sector will be clearly exposed as the engine of growth, not the “wise leadership” of the Communist Party, as is currently claimed.

A market economy integrated into a global economy does not leave room for party domination. Markets replace plans and administrative allocation, and state influence is exercised through macro policy and regulation, as it is elsewhere.

To avoid redundancy in the economic sphere, the party must reestablish a statist economy based on party direction of a dominant state sector, as proposed by the Red Campaign.

2) China’s “New Left” believes that the Chinese people associate the market economy with the corruption of party officials and their Princeling offspring. They offer a  “pure” party and a statist economy as a cure.

China’s communist party finds itself in much the same position as Boris Yeltsin’s “democrats” in the 1990s.  The Soviet Communist Party was no longer around to take the fall for corruption and unpaid pensions, so democracy and capitalism got the blame.

In China, the party is still very much around to be blamed for theft, corruption, illegal land grabs, unemployment, and the Princeling Mercedes Benzes that run over workers on the streets

The Red Campaign offers a simple solution:  A return to the days of a pure party motivated not by money but by ideology. The party of Mao made disastrous mistakes, but al least it did not steal.  Although the mass starvation of 1958-1960 and the Cultural Revolution of 1965-1968 left dark shadows on millions of Chinese families, the New Left counts on such memories dimming.

Many Russians feel nostalgia for the “old days” when the party kept order, they had their jobs, and party theft was limited.  For Russians, the Stalin terror and famine lay almost a half century back. The Chinese New Left hopes to play on similar nostalgia, especially now that Mao’s excesses lie more than thirty years in the past.

China in 2012 confronts the same choice as Gorbachev in 1989, but under quite different circumstances. Gorbachev in 1989 was firefighting the crisis of the collapsing command economy. The Chinese Politburo in 2012 will face a non-crisis. Even with slowing growth, China will still be among the world’s fastest growing economies and an envy of the world.

Confronted with his crisis, Gorbachev chose to end party dominance of the economy and weaken the party’s central apparatus.  His Politburo hardliners timidly acceded at first.  Their amateurish coup, launched to save the party, came too late.

If China’s 2012 Politburo attempts to implement the Red Campaign, it will discover the genie of private enterprise cannot be put back in the bottle. They can restore the dominance of state companies only through extreme favoritism and even repression of the private sector. The New Left will find themselves like a King Canute trying to hold back the sea. They cannot mount enough political power to revert back to the economic statism of earlier years.

Gorbachev did not understand that the reforms he launched would inevitably end the Soviet economic and political system. Had he understood, he would have followed the course of his predecessors. The Chinese New Left apparently sees the handwriting on the wall. They see 2012 as their last chance to save the party as they want it to be.   

Why the Chinese Communists Are So Scared (Is It Time to Wither Away?)

Marx and Engels wrote that the state would wither away after the Communists Party accomplished its tasks. The Chinese Communist Party fears that someone may ask: “Is it time for us to wither away?”

The threat of a Jasmine Revolution scared the Chinese Communist Party. The Chinese Communists reacted to fear of contagion from the Arab Spring by stepping up repression, but their concerns have deeper and more permanent roots.

China is much different from the Arab Spring countries. Its economy is booming. Real incomes are rising. China is less corrupt, and people believe central authorities are relatively honest. China is said to be run by a competent government that deftly avoided the world financial crisis and created growth.

So why are the Chinese Communists so fearful? Why are informal church services, poets, film makers, artists, and nationalists of any stripe suppressed with extreme brutality? Why does every demonstration, no matter how small, strike fear into the hearts of authorities?

Why do not the Chinese Communists, with their record of achievements, feel secure?
Answer: The Chinese Communist Party no longer has a claim to legitimacy. It has no real purpose other than to keep itself in power. It is that simple.

The preamble to the Chinese Constitution illustrates the quandary: It tells of the glorious victory of the heroic Chinese Communist Party in 1949, fighting with long odds against the imperialists, the revanchists, and the nationalists to set the Chinese people on the “socialist road guided by Marxism-Leninism and Mao Zedong thought.”

After the glorious victory, the Communist Party’s role was to lead the “continuous revolution under the dictatorship of the proletariat … to achieve great victories both in socialist revolution and socialist construction.” Without the Communist Party’s leadership, the battle “between the socialist road and the capitalist road” could still be lost. The Party’s role was not limited to politics. It was needed to secure economic victory by “practicing economic planning on the basis of socialist public ownership.”

Without the Communist Party firm hand, hard-fought political and economic achievements were at risk, or so it was said.

The 1975 Constitution makes the case: The Communist Party is legitimate because the people and the party are one, and daunting task lie ahead. As Article 2 states: “The working class exercises leadership over the state through its vanguard, the Communist Party of China.”

This heroic narrative loses its glow in the haze of the constitutional amendments from 1982 to 2004, which were required by the reality of Chinese reforms.

China now aims for “socialist modernization.” Instead of “continuous revolution,” the Party advances society “along the road of Chinese-style socialism… persists in reform, improves socialist institutions, develops a socialist market economy, advances socialist democracy, improves the socialist legal system and turns China into a powerful and prosperous socialist country.” The state no longer plans the economy because "the state has put into practice a socialist market economy.” The State is reduced to “formulating economic laws, improving macro adjustment and control” like any other conventional state.

In effect, the “New deal” is that the Chinese Communist Party offers the people growth and prosperity if they refrain from asking the “withering away” question.

As the Communist Party loses its raison de etre, it is increasingly threatened by the constitutional guarantees of “freedom of speech, correspondence, the press, assembly, association, procession, demonstration and the freedom to strike, and enjoy freedom to believe in religion and freedom not to believe in religion and to propagate atheism.”

If people are free to gather, criticize, and express opinions, they may ask: “Why do we even need the Communist Party? If we are allowed to vote, why is there only one slate of candidates?

The asking of such questions has dire consequences. “The exercise by citizens of their freedoms and rights may not infringe upon the interests of the state, of society and of the collective, or upon the lawful freedoms and rights of other citizens.” Private correspondence can be censored according to the “needs of state security.” Citizens can complain about officials “but fabrication or distortion of facts with the intention of libel or frame-up is prohibited.”

Notice that virtually any exercise of constitutional rights can be deemed “contrary to the interests of the state or the needs of state security.” Dissidents cannot judge the consequences of their acts, although they know the reaction will be negative.

In 2012, a new majority of the Communist Party Politburo will be chosen from among leaders who were not alive in 1949. The contenders must understand that the Communist Party dictatorship has lost its reason for being. The “Maoists” will argue that China must regain its revolutionary fervor. It must return to a “pure” socialist road. The “Reformers” may decide that a “dictatorship of the proletariat” is not longer appropriate for a society of private ownership, foreign investment, and an integrated world economy.

How they decide will have a stunning impact on the world in which we live.

Are We Misinterpreting China’s Decline in Growth?

The press is filled with accounts of the “planned” decline in Chinese economic growth. The standard interpretation appears to be the following:

To confront rising raw material prices, China’s bankers have applied the brakes. There will be less lending for large state enterprises and infrastructure investment will be cut back. In the mean time, China’s growth with fall slightly, but it can resume after tight money has done its job. The decline in growth is a cyclical response by wise Chinese monetary authorities. When the emergency passes, rapid growth can resume.

I would like to offer an alternative explanation which has much longer term consequences.

The press is also filled with accounts of rising pressure on the Chinese labor market. Wages appear to be soaring everywhere. Business is moving from the coast inward, and interior areas are playing catch up. Migrant labor is drying up. Residents from the interior say they no longer need to commute long distances. The jobs have come to them. In the press, this wage inflation is, almost comically, explained as a deliberate state move to grow the Chinese consumer market. It is not. Wage inflation is the result of deep economic forces.

In a word, China’s era of unlimited supplies of labor has ended as is evidenced by the incredibly rapid wage inflation.

W. Arthur Lewis earned a Nobel Prize for his 1954 analysis of economic development with unlimited supplies of labor. With labor supply unlimited, an economy can grow by redistributing labor to the “modern sector” without driving up wages. The economy grows rapidly but only until the unlimited labor is exhausted. The signal that labor has become limited is economy-wide wage inflation. At that point, the economy reaches an inflection point, and future per capita growth is determined by technological progress and more capital per worker. No country in history has grown at China’s per capita rates based on these two factors.

Over the next months or year, we will see that China’s growth has indeed declined, but we will not know whether this is the consequences of tight money or the exhaustion of unlimited supplies of labor. We will also see less infrastructure investment as the central bank reduces lending.

But real Chinese growth occurs elsewhere. Chinese banks lend only to large state (or state connected) companies. They do not constitute China’s real credit market, which lends informally at high rates to private companies that have so far earned huge rates of return. They are the true drivers of Chinese growth. If their profits drop and their growth declines, China’s era of easy growth is over.

Dissecting Chinese Growth: How Long Will It Continue?

Academic specialists know a great deal, but they are not good at sharing their results with general readers. What we know about Chinese growth is a case in point.

There is practically no question more important than the future of Chinese growth. If it continues unabated for another decade, its GDP would be fifty percent larger than the U.S., and its per capita GDP would be a third. If growth continued two decades, its GDP would be two and a half times ours, and its per capita GDP would be half. China would be a dominant super power, its people affluent, and an economic powerhouse. As some have argued, affluence may bring with it democracy.

Other countries – Japan, the USSR, Germany – had long episodes of fast growth that came to an end. They were all high savers, but not to the extremes of China today. We all know that China’s growth spurt must eventually end, but it is vitally important to know when.

We can apply growth accounting to explain Chinese growth. (I’ll try to make it simple but the results are important).

Growth accounting divides growth into three sources:

1) The growth of capital and labor,
2) Technological progress, which allows us to produce more from the same inputs, and
3) Reallocation of inputs from less to more productive activities.

Since 1978, China’s output and capital grew at exceptional rates ((9% and 12%, respectively), labor at a more normal (but fast) 2%. According to the growth-accounting formula, some two thirds of Chinese growth is due to fast labor and capital growth. The remaining one third is technological progress.

Japan (1953-1985) is the closest parallel to China. Japan’s output and capital grew 7% and 9%, respectively, and labor at 1%. Less than half of Japan’s growth was from labor and capital; more than half was from technological progress.

Germany, in the early postwar years grew at 7%, capital at 6% and more than 60% of its growth was from technological progress.

China is underperforming Japan and Germany in percentage terms in marshalling new technologies for growth, but its performance is nonetheless impressive.

Japan’s and Germany’s huge productivity growth in the early postwar period was due to the vast technology backlog that had arisen during the war. China also benefits from a backlog, not due to war but to its earlier isolation. Like Japan and Germany, its growth will drop as the backlog is worked off. China was relatively more backward than Germany or Japan when each began their move; it may take longer for China to work off the backlog.

What do such figures tell us about the future, especially in light of the newly released census results?

First, China’s labor force growth has stopped for all practical purposes. This factor should reduce China’s growth by one percentage point, still leaving enough room for continued rapid growth.

Second, urban and rural populations have reached parity and labor migration appears to have peaked. With about one fifth of Chinese productivity growth due to labor reallocation, we can knock off another 2 percent, more or less, from Chinese growth.

Third, improvements in educational achievements have been striking, but they may not be enough to offset the effects of aging in an assembly-line economy such as China.

Fourth, with the destruction of the extended family by the one-child policy, the government will increasingly have to care of the elderly. When this happens, China will suffer the growth declines characteristic of transfer economies.

Fifth, with the “easy growth” of labor expansion and migration behind it, China’s growth will depend increasingly on technology. Technology advances depend on continued inflows of foreign direct investment. If the West decides to switch its FDI to other (lower wage) countries, China will lose it major source of growth.

China is more dependent on us than many think.

Of Four 2012 Elections, Ours May be the least Significant

It is hard to imagine a more important U.S. presidential election. At long last, the two parties are taking strikingly different positions, and the choice will be clear to voters. The election result could change our country: Will we devote nearly half of our resources to government to fund a European-style welfare state? Or will this approach be rejected?

There are three other 2012 elections that have greater long-run significance, if one can imagine that.

1. The Eighteenth Congress of the Chinese Communist Party

At stake are 14 out of 25 seats on the Politburo, the supreme body that runs China. These 14 seats will go to the “princelings” – the children of the elite, who increasingly manage the party, state, and economy. The princelings appear to be split between liberals and Maoists. The current wave of arrests of dissidents, the removal of the Confucius statue from Tiananmen Square, and the “revolutionary programming” on television are subtle signs that the behind-the-scenes power struggle has begun. This election will determine China’s stances towards political reforms and foreign policy – whether China will move towards democracy and a less aggressive foreign policy or the reverse.

2. The 2012 Russian Presidential Election

The odd presidential campaign between Prime Minister Vladimir Putin and President Dmitry Medvedev has also begun. Only one will stand for election against minor opponents. The “nomination” campaign will be fought behind Kremlin walls, but the candidates have staked out their positions. Putin (the ex-KGB colonel) is the champion of a strong Russian state, an aggressive foreign policy, an intrusive state, and is not concerned about the lack of a rule of law. Medvedev (the lawyer) supports a rule of law, a more accommodating foreign policy, the rights of opposition political parties, and halting the repression of journalists who write things the Kremlin does not like. This election will determine whether Russia sinks deeper into the KGB state that Putin has created or begins to pull itself out of the swamp of thuggery and corruption.

3. The 2012 (2011) Egyptian Elections

We do not know the election rules and dates of the first “free” Egyptian election in a half century. This election, now scheduled for November 2011 but likely in early 2012, will be the true test of the “Arab Spring.” Will it result in a real democracy with multiple parties contending against each other with a free press informing the public, or will the election go to the only organized party (the Muslim Brotherhood), which then proceeds to use all means available (following the example of Chavez in Venezuela) to insure its permanent reelection? Or will a true democracy, in which liberal political parties are real contenders, be the result?