It was the first visit to Davos by a paramount leader of the People’s Republic of China, and it could not surely have gone better. Xi Jinping would not have had in any case to work too hard to distinguish himself from the two leaders who were making news at the same time – Donald Trump, whose inauguration was fast approaching, and Teresa May, who was announcing Brexit-related details. But, even so, his speech was exceptional – one calculated to upend thinking about the global trade-based liberal order.
Even rhetorically, it was unusual. PRC leaders’ speeches are not overfull of references drawn from other global cultures, and Mr Xi himself has a well-known penchant for Chinese history and mythology. And there was much of that in the Davos speech – but it drew also from Western writers such as Charles Dickens, underlining stylistically what he was trying to convey through its substance: that the People’s Republic is ready to step up and play at least part of the role that the West is abdicating in terms of providing strategic support for globalisation.
The World Economic Forum, home of Davos Man and the Mecca of globalisation, lapped it up. As inward-looking, nativist movements sweep through the Western world, Mr Xi appeared to be presenting himself and the PRC as a champion of freer trade and more open borders, warning against “locking oneself in a dark room”.
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On one level, this should not be surprising. The decade and a half since Mr Xi’s country was admitted to the World Trade Organisation has been a miracle as far as development goes. On the back of steadily expanding global trade in the early- to mid-2000s, China repeatedly doubled its per capita income and lifted millions out of poverty. The crisis of 2008 gave the Communist Party confidence that its own system of economic and political governance was more stable and thought-out than traditional liberal capitalism. The PRC, thanks to the processes associated with globalisation, became the world’s second most influential economy and slowly began to accumulate military-strategic power to match. Naturally, it is reasonable that its leaders view an open, globalising world as in their own interests, and would seek to support it.
For other countries, such as India, who seek to benefit similarly from global trade and investment, this commitment is naturally welcome on one level. To the extent that it serves to counterbalance a movement in the West towards a more closed world, it can be used to further Indian ends.
Yet it is important, too, to not get carried away. As it stands now, the PRC cannot be either the new liberal economic hegemon – nor would we want it to be. As a successor to the role the United States has traditionally played in this respect, the PRC is fatally flawed.
The reasons are quite clear, and spring from the domestic political economy of China itself.
First, globalisation has in recent decades been partly a financial phenomenon. The flows of capital across borders have helped stimulate economic growth in wide-ranging borders and provided a multitude of efficiency gains.
Yet while China has benefited greatly from such capital flows, it is important to note two things. One, it continues to be a relatively hostile place to foreign capital it cannot completely control. The leadership in Beijing is aware of this; it was no coincidence that, almost at the same time as Mr Xi spoke in Davos, news broke that Beijing would lift some restrictions on foreign capital operating in the PRC.
Two, as a source as well as a destination of capital, it leaves much to be desired. Unlike from the West, capital does not flow out of China looking for simply the best or safest return. Because of the statist nature of the domestic financial system, the accumulated savings of the PRC’s inhabitants tends to be directed as much, perhaps more, towards investments of political and strategic worth. A country that is not properly financialised domestically, where savings cannot translate smoothly into liquid capital that follows its own reasoning, cannot step in easily to replace US capital if it, for example, returns home in response to Donald Trump’s vast infrastructure spending plans.
Second, China itself is not in a position to support world trade in the manner the West has hitherto done. Again, the reason goes back to domestic political economy. Globalisation’s driving mechanism was internal domestic competition in the economies of the West. Private companies went out and discovered efficiencies in the rest of the world that would give them a head up over their rivals. The Chinese economy does not yet work like that. In spite of a much applauded series of statements a few years ago that promised market forces would be given greater play in the domestic economy, Beijing’s leadership has been stuck on the political obstacles to achieving that end. State-owned enterprises are difficult to displace politically, even though the private sector now provides 80 per cent of jobs in the PRC. Until a level playing field is achieved at home, it is perhaps expecting too much of private Chinese companies to go out and be standard-bearers of globalisation elsewhere.
Finally, standard-bearers for globalisation have to admit it runs both ways. There are costs to being a hegemon, and the US was in the past willing to pay them – in terms of market access and preferential tariffs for poorer countries, for example. But the Chinese economy itself remains relatively closed. Work visas are not that easy to obtain; foreign companies report an ever more difficult operating environment; and services imports of the sort India would wish to provide are in effect frowned upon.
There are solid reasons to welcome Mr Xi’s robust backing of the benefits of globalisation. But it is, at the very least, premature to hail China as the new underwriter of the global liberal order. Liberal economics abroad depends crucially on open and free markets at home – and there is much that Beijing still has to do to make those a reality.
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Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...
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