Platt Perspective on Business and Technology

China and our increasingly interconnected global economy – 3

Posted in macroeconomics by Timothy Platt on March 4, 2012

This is my third installment in a series that I am running on China’s industrial and business base and on its economy – and on the balance found in them between central, governmentally defined oversight and local and private sector participation and ownership (see Macroeconomics and Business, postings 48 and 52 for Parts 1 and 2.) At the end of Part 2, after offering a bullet point list of some of the details that tend to be picked up upon in the Western press, I proposed two questions that I see as essential in understanding China’s true position there. And I repeat them in this posting as I continue its discussion.

• What are the challenges that China faces that both shape its economy and that form the pressures that would prompt their government to pursue its current economic strategies and policies?
• How are their policies working, and how and where are they failing, or headed towards serious challenge?

I stated at that time that I would examine these and some related questions and I am going to at least start doing so here, with an objective of connecting this developing story to that of how China’s leadership views and is responding to the key challenges that I touched upon in my China Conundrum series (available at Ubiquitous Computing and Communications – everywhere all the time, as postings 69 and loosely following in 24 installments.)

And I want to start that by noting what I see as a very curious detail in one of the references I cited towards the beginning of Part 2: the main Wikipedia entry on the economy of the People’s Republic of China. This entry offers a great deal of information and insight, but it essentially begins in 1978, simply stating that before then and from the 1949 revolution on until the reforms of 1978, the Chinese economy had little impact beyond China’s own borders, and it was simply a part of their communist system.

In a fundamental sense, this posting and this series – and my China Conundrum series as noted above, are about the enduring legacy of those post 1949, pre-1978 policies and the historical momentum they created – a pattern that the China of today is still coming to terms with and seeking to unravel and move beyond. And I start with two brief stories: one from the days of the Great Leap Forward, and one that I have literally ripped from the news headlines of the here-and-now of today’s China. I have briefly touched on both of them in my China Conundrum series and return to them here to flesh them out a little and to explicitly draw connections between them, starting with the more historical case study here.

The attempted development of a more robust and self-sufficient metals industry during the Great Leap Forward of 1958-1961 (see China Conundrum Part 20):

• The People’s Republic of China was largely cut off from and isolated from the rest of the world at this time with its one real connection to the outside going through its ideologically and geopolitically motivated links to the then Soviet Union. This, I add, was at least as contentious and strained a relationship as it was amicable and mutually supportive, as the relationship between Soviet and Chinese interpretations and implementations of Communism were as divergent as any historical feuds between competing religious sects. And under cover of cooperative exchanges of scholars and technologists, the Russians came to view China as a direct threat for their stealing of nuclear weapons technology and they ended up aiming some of their own nuclear weapon-tipped missiles towards China. China saw Russia as meddling in their internal affairs and as seeking to take control as they had done in capturing effective ownership of their Eastern European Warsaw Pact partners. The Soviet Union saw China coveting their Siberian territories and both for room to expand into with their vast population and as a treasure trove of raw materials for growth and development. The Russo-Chinese border was heavily fortified on both sides and with frequent if generally small-scale military incidents between these two amicably adversarial sides. Their mutual suspicion and fear of the West and its intent formed a powerful component of the glue that bound them together.
• A second component to that glue was a shared understanding as to the need for fully centralized control and control according to a communist ideology and system. And that in all fairness is where the effectively-1978 starting point entered into the writing of that Wikipedia piece on China’s economy as cited above. And this brings me to the centrally mandated and ideologically driven and executed incidents that I related in brief note in China Conundrum Part 20 where I wrote about the Great Leap Forward’s attempt to develop China’s metals industry. China could not rely on any outside metals suppliers or trade partners – the Soviet Union perhaps particularly included given their love/hate relationship. Whatever they could do to shore up their metals industry and make it more self-sufficient they had to do on their own as a strictly Chinese initiative. And any such development initiative had to be based on the teachings of Mao Zedong and primarily, in places where this policy would be enacted, as that was represented within the confines of his Little Red Book.
• And this is where the story I related in the China Conundrum series began, as a matter of explanatory foundation. The Red Guards who enforced this policy – mostly little more than children themselves as teen and early twenties enforcers of political purity waved their Little Red Books and forced through threat of arms, public humiliation and prison (reeducation camps) everyone in the peasant villages they went to, to collect all of their metal goods in one place for confiscation and collective re-smelting into new and Communist metal. I relate what happened next in China Conundrum Part 20 and refer you to that for brief outline as to how that went, simply noting here that it did not go well and for anyone.

That was in the depths of the Great Leap Forward, and over before 1962 – well before the 1978 reforms that China went through as it began as a country to develop an outwardly-facing and connected economy. Some 70% of China’s business and industrial economy now resides in the private sector with entrepreneurism on the ascendance and with a marked and explicit policy of economic development and inclusion – all without social or political reform. I will come back to that point later in this series. At this point I turn to my more recent and even current set of events in the news, at least starting this case study example for now.

The attempt of private sector entrepreneurs to create new markets and capture blue ocean marketplace potential and wealth in China, in industries that catch the eye of those who hold central government authority, or who are closely connected to them (see China Conundrum Part 23):

• I have reached and passed the 1,200 word count for this installment so I am only going to start this part of my overall account here. I would recommend reading my notes on the experience of a recent startup attempt: Cathay Industrial Biotech as discussed in China Conundrum Part 20. And my goal for the next installment includes putting this story into a fuller and more detailed context.
• I will then discuss how this and my metals story connect together in a single larger ongoing framework, and directly address the questions I repeated at the top of this posting.

Meanwhile, you can find this and related postings at Macroeconomics and Business.

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