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What are the major problems China could face? Te current model is based on assump- tions that are largely exhausted at this point, assumptions about a very large cohort of workers in the 18- to 35-year- old bracket, assumptions about the capacity of the international system to keep absorbing very large increases in Chinese exports, assumptions about the capacity of the eco-system to permit China to develop now and clean up later, and assumptions about popular tolerance of corruption, inequality of wealth, and environmental degradation. All those assumptions were accurate ten years ago, but they’re now largely exhausted. Te major problem with the current model is that it’s increasingly inefficient. It’s a very resource intensive model in a country that has a real shortage of resources. But even beyond that, the big Achilles heel is that it generates social tension. And espe- cially if there’s an economic slowdown, so incomes aren’t rising rapidly, then all the other downsides – cancer villages, corruption, inequality of wealth and so on – become increasingly worrisome. Te Standing Committee and the Politburo

At the end of the day, the link between the domestic situation and foreign policy is profound, but it’s also not completely predictable

can make some changes and implement them in Beijing, such as changing interest rates at state-owned banks, required bank reserve ratios and the Qualified Foreign Institutional Investor quotas, and that all has an impact. But that doesn’t change the outcomes of the system as a whole. If structural reform fails, we’re going to be dealing with a country where extremism from both the left and the right is more likely to play a larger role, where repres- sion of civil liberties is likely to grow as instability grows, where the consequences in terms of global climate change are likely to be exacerbated, because China will not have shifted away from an

extraordinary stress on energy-intensive manufacturing.

Does US policy have any sway in that outcome? If the US adopts a highly adversarial pos- ture toward China, that’s more likely to lead China in the wrong direction. Nev- ertheless, at the end of the day the link between the domestic situation and for- eign policy is profound, but it’s also not completely predictable. You can always have someone take a foreign crisis and use it to say we must carry out major domes- tic reform to be set for the future. Or you can have someone take a foreign crisis and say we have to mobilize the military and repress dissent, and we can’t afford to diddle around with the economy. As that “great sage” [former American baseball player] Yogi Berra said, “Predictions are always difficult, especially when they’re about the future.” But if we have to place a bet, we should be betting that Chinese success is good for the US, that deep domestic failure is much more problem- atic for US interests, and that we have a greater ability to tip the balance to the downside than to foster the upside.

China Economic Review • November 2012


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