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In “the West,” we’ve been raised to believe that the way forward for nations that seek progress is a state which provides strong institutions within which millions of individuals can make billions of mistakes, from which we can collectively glean the necessary lessons to build a better future. But since the crisis of 2008 (to say nothing of Brazil’s 7-1 loss to Germany in 2014) an alternative narrative has emerged: men in gray suits, with access to data and vast resources can “beat the market” through intelligent, informed decisions.
So what’s it going to be? The free market that can wander into deep crises or the intelligently planned economy that keeps things on the straight and narrow? Does China hold the secret to growth?
George Magnus is writing with the benefit of having read Acemoglu and Robinson’s answer to this important question (namely that you need both inclusive economic institutions and inclusive political institutions to achieve lasting growth, and thus that China will fail) and indeed explicitly refers to their magnum opus, “Why Nations Fail.” Regardless, he prefers to duck the question and dwell on four hurdles China will have to clear before we get to the big stuff.
Much as I’d love to hear what he’s got to say about the big questions, and much as I care a lot less about the four questions he poses than I care about (for example) why a competent Chinese scientist / artist / intellectual / teacher / dolphin trainer would want to stay in a country where machines read his every email and constantly register his whereabouts, “Red Flags” makes for persuasive reading, because it spells out four threats Xi and his party (that is rapidly displacing all other institutions of the state, Magnus alleges) face right here, right now:
1. Do they bail out the rogue lenders or do they force the already twice bailed-out local governments and banks into “balance sheet recession with Chinese characteristics?” Can the country withstand the necessary fall in GDP that will accompany the necessary refocusing away from debt-fuelled growth?
2. What gives? Free movement of capital across the Chinese border, the risk-free rate of return on assets within the Chinese economy (with the associated rate of GDP growth) or the hyper-politicized exchange rate for the Renminbi?
3. What’s to be done about the fact that China is ageing faster than any other nation on Earth? Here George Magnus, author of “The Age of Aging” does not mince words: nothing! Even the US, I seem to remember from reading that book, could re-draw its border to include Mexico and its demographics would not change in a big way. China is simply going to age, end of.
4. The middle-income trap: China’s working population has been shrinking since 2012. It will be the first country of its kind (of the kind that bootstrapped its way out of poverty via a combination of increasingly sophisticated manufacturing and protectionism) to get old before it’s gotten rich, with all that may entail for people’s sense of gratitude to the institutions of government.
This fourth “red flag” is in truth the theme of the whole book: China has reached the end of the road that started with Deng’s reforms and ended with Xi’s appointment at the top. Magnus picks up on Richard Koo’s original observation that China has reached a “Lewis turning point” in its labor market and looks for the equivalent across all institutions, to conclude that the new emperor has his work cut out.
There are bonus chapters on Chinese history, on the Belt and Road initiative and on trade, and all are written along exactly those lines: so far so good, but sometime very soon you hit a fork in the road. Not only that, but wisdom will not suffice when those choices are made: China will need luck on her side.
Makes for heavy reading. A book full of statistics with the back grounding of one of the most sophisticated countries in the world, the revolutions and wars leading to the financial difficulties and failures of the past which Xi Jinping is burying. He is determined to take China into a far more domineering and aggressive world player than Moa Zedong ever imagined. Should they ever invade Europe, they don't need to bring anything with them. We have bought everything from them.
I am not certain that Xi isn't above invading other countries to force China's repayment. After all he does have a significant percent of the earth's population. He appears to be becoming an indispensable provider of manufactured goods for much/most of the world. Do we have the habit yet?