Originally Published 2010-02-01 00:00:00 Published on Feb 01, 2010
China may be growing at an astonishing pace and registering record earnings, but it is the complex financial system in America that has been utilising these earnings
Does China have feet of clay?
The west may still be struggling to recover from the scars of the financial turmoil which wreaked havoc in the developed world, but for China the picture is different. The country registered a growth rate of 10.7% in the fourth quarter of 2009. China’s burgeoning economy and its ability to shield itself from the ills which plagued the west last year, have compelled observers to conclude that the balance of economic power is shifting, and that this may be irreversible in the long run.

Other skeptics conclude that this will cause wrenching changes in the global economy. President Obama’s ’engagement approach’ and a wavering China policy have done little to placate these fears. If anything, this has only reinforced a rather gloomy picture. Yes, China is rising. But what should concern us more is the manner in which this rise will affect the international order. It is often contended that when the ’baton of power’ shifts from the U.S to China, the world might witness turmoil, conflict, and frictions in the international order. This spawns a number of questions. First, is the U.S. really declining? Second, how will China’s ascendancy challenge the supremacy of the U.S.?

America has clearly witnessed an erosion of power. Gone are the days when it was a superpower straddling the world economy. The rise of Asia has undermined, if not challenged, the preeminent position of the U.S. The recent financial crisis has exposed its fragility. But most would agree that the U.S. still exercises considerable control, and by most standards it is still a dominant hegemon; albeit waning. China may be growing at an astonishing pace and registering record earnings, but it is the complex financial system in America that has been utilising these earnings. America remains the home to the most competitive industries in the world. It boasts the largest economy in the world. It remains the nerve center of innovation, and continues to play host to the top universities in the world. The top brands in the world are American. Future innovations, most definitely, will continue to occur in the U.S. The dollar will continue to enjoy an ideological leverage which it always has in the past.

In contrast China’s financial system lacks agility. The country’s track record in building world class private companies is not impressive. The labyrinth of controls has curtailed the development of a robust private sector. The state owned model has ushered in growth in certain sectors but whether this model will be able to flourish in the knowledge economy of the future is debatable. China’s industrial base is inextricably linked to the prosperity of the west. It is also worth noting that estimates which extrapolate the current growth trends in the country assume that multinational companies will continue boosting Chinese production. But this is not sustainable as most observers points out. With the Chinese economy approaching a threshold it seems unlikely that such a growth model is sustainable in the long term.

Domestic concerns also figure prominently but are often overshadowed by the grandiose of China’s metropolitan cities. Recently released government data shows that the disparity between rural and urban incomes is growing. This income inequality is a matter of deep concern for policy makers as this could have profound implications for the health of the Chinese economy. Public protests regarding the purchase of land, unfair compensation, and property rights are ballooning. Internet and media restrictions have whipped up further discontent. Recently, search engine giant Google’s move to stand up against the Chinese state manifested a fundamental weakness in the system. The conventional wisdom was that economic engagement with China, village elections and the internet will contribute to political change. Although progress has been made in the right direction, it has not happened at the pace envisaged. Ultimately, the ’Beijing Consensus’ is rudderless, and needless to say ambiguous, if not backed by political and economic reform which fosters greater pluralism. This clearly remains an enduring challenge.

How will the international system accommodate the rise of China? The current international system, conceptualised in the aftermath of World War Two, has been remarkably successful in terms of its ability to nurture economic growth, and its capacity to diffuse security threats. Despite the barrage of criticism hailed against the liberal economic order, the truth is that it is the only system we know of which actually works. Despite its limitations, it has contributed substantially to the prosperity of the world and has played a vital role in fostering international cooperation. China is now at the big boy table at every fora, and is well aware of the benefits which have accrued to it from this liberal international economic system. Without it, it would never have been able to shed its developing country status and climb up the economic hierarchy. China’s rise in the near future will be strictly within the robust boundary of the western order which has been well established over the of six decades. However, the Copehagen Accord and the Obama visit to China have also shown the Chinese willingness to play a more assertive global role even at the expense of annoying the US. As the quest for resources and trade opportunities heat up in the region and beyond, it is difficult to fathom if China will confine itself to the current order or seek to redefine a new World Order.

America has a paramount role to play. As the leading economic and military power, it must use its unique position to embolden the norms and institutions which are the backbone of the liberal international order. It must rearticulate and realign the norms of the global economy to sustain the current system. This will ensure that China’s rise is strictly within the system. Such a move will also facilitate the accommodation of new economic powers.China is aware of the limitations which exist in its growth model, and it will have to gauge the changing contours of the global economy to define its role in the world.

Ishaan Saxena is Research Intern with ORF

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