I am not afraid of an army of lions led by a sheep, I am afraid of an army of sheep led by a lion.
--- Alexander the Great
We in the West are skeptical of the power of the government. At least, that is the position of a significant portion of our citizens. However, when we look at all the third world countries that rose to be developed nations, not only were they a very small number, they all started with strong authoritarian rules. If we remove the nations that were part of Western Europe which participated in and benefited from the original industrial revolution led by England, and remove the resource countries like Saudi Arabia, we are left with Japan, South Korea, Taiwan, Singapore and Hong Kong. All of these were ruled by strong authoritarian governments during their initial ascend. While Japan was nominally a democracy, the same party had ruled the country for fifty years. Taiwan was not a democracy until it was developed. Ironically, Taiwanese economic development stopped after it transitioned into a democracy. South Korea was run by strongmen during its initial development. Lee Kuan Yew ruled with an iron fist in Singapore. Even in Hong Kong, the locals simply did not get much of a say on how things were run. Until shortly before it was returned to China, Hong Kong was run by the British without much consultation of the locals.
This is not a coincidence. During the initial transition from a third world economy to a developed country, a strong government plays an important role.
Internally, a strong government is needed to provide infrastructure. A strong government is needed to maintain law and order. A strong government is needed to ensures a virtuous investment environment and a single accessible domestic market place. Gorbachev, with the Goldman Sachs advisers, failed to turn the Soviet economy around precisely because they did not strengthen the government. Privatization of the Soviet companies allowed the private individuals to loot the country without requiring these companies to maintain being viable and also shoulder social responsibility of the economic transition. While a fully developed economy is guided by competition, an economy in transition must be guided by a strong hand to overcome its internal contradictions and provide the public good needed for the economy to thrive. In this context, Western economic theories are inadequate to guide and explain the economy in transition. One simply cannot transplant a matured Western economic model to an economy in transition. Instead, experimentation, pragmatism and continue reforms are needed to transition the economy of a developing nation. A small government, as George W. Bush envisioned, is a luxury of the matured Western economy that a developing nation simply cannot afford.
Many people now blamed Bill Clinton for letting the Chinese into the WTO. This is easy to say in the rear view mirror. America, the strongest economic power after World War II, set up the liberal trading order not out of charity to the other nations, but out of the believe that such a system favors the American corporations. At the time of the Chinese entry into the WTO, it was fully expected that the American corporations, the lean, mean killing machines that they were, would crush the Chinese state own enterprises and occupy the high end of the value chain. The Chinese would be relegated to making textile, toys and shoes. The WTO and Most Favored Nation status that the Chinese got came with very strict strings attached. Out of the multitude of nations granted this status, only a handful of East Asian nations with the high IQ populations and strong governments made it past the mid income status. Given the decrepit state of the state own enterprises for China, that the Chinese can work within the confines of the strict terms set out for WTO entry and still beat the West was something that was not anticipated by Bill Clinton and the others in charge at the time. A strong Chinese government played a pivotal role in making the Chinese corporations competitive. By leveraging the Chinese market to trade for technology, by organizing and create companies with the critical mass to win against Western multinational behemoths and by taking the loss needed to climb the learning curve, the Chinese government had enabled the domestic companies to rise up and able to compete against the strongest from the West. By setting up barriers of outside companies until their industries are competitive, the government bought time for the domestic companies to get their acts together. Unlike their Soviet counterparts, the Chinese used the principle of the markets but did not copy the Western system wholesale. They pragmatically choose what works and took the gradual approach to their reforms. To a lesser extend, the Korean and the Japanese government did the same. To produce companies that are competitive, the Korean government actually told some of the less competitive Chaebols to exit certain businesses to make room for the more competitive Chaebols to take over, something that would be unthinkable for the United States or Europe.
The Chinese government did something else. They were able to maintain an independent foreign policy. This is hugely important for the economic and political revival of China. Something I will discuss in my next post.
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