In China's Shadowby Reed Hundt
This book begins with an eye-opening exploration of the rise of China’s economy and an assessment of its potential for further rapid growth. The implications of China’s new power are nothing short of profound, Reed Hundt contends. In China's Shadow proceeds to paint a detailed landscape of the new reality confronting American businesses and/i>… See more details below
This book begins with an eye-opening exploration of the rise of China’s economy and an assessment of its potential for further rapid growth. The implications of China’s new power are nothing short of profound, Reed Hundt contends. In China's Shadow proceeds to paint a detailed landscape of the new reality confronting American businesses and citizens. For the first time in over one hundred years, Americans face critical challenges to their economy and way of life owing not only to China’s impending economic might but also to the drift of U.S. business practices and government regulations over the past decade.
Aiming for a respectable defeat in the competition of nations will imperil not only the American Dream of an ever-increasing standard of living but also the American project itself, Hundt warns. Meeting the foreseeable challenges is not a matter of legislative strategy from the political left or right or prescriptive plans for businesses. The best chance for Americans to lead the world in job and wealth creation lies in an expanded and renewed culture of entrepreneurship. Hundt reviews the lessons of the 1990s, when the architectures of law, technology, and leadership produced a robust culture of entrepreneurship, and analyzes how entrepreneurship is being undermined today. He challenges Americans to do what they do best—adapt, invent, innovate, take risks—and points the way for a reinvigorated entrepreneurial society.
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IN CHINA'S SHADOWThe Crisis of American Entrepreneurship
By Reed Hundt
YALE UNIVERSITY PRESSCopyright © 2006 Reed Hundt
All right reserved.
Chapter OneLooking East Toward the Dawn
"Wherefore," [Kublai Khan] said, "should I become a Christian? You yourselves must perceive that the Christians of these countries are ignorant, inefficient persons, who do not possess the faculty of performing anything ... whereas you see that the idolaters can do whatever they will." -The Travels Of Marco Polo, The Venetian I would build that dome in air That sunny dome! Those caves of ice! And all who heard should see them there, And all should cry, Beware! Beware! -Samuel Taylor Coleridge, "Kubla Khan, or, A Vision in a Dream: A Fragment"
Death of a Dream? The Challenge of China China Is Near
Westerners have discovered and rediscovered China many times since Marco Polo explained the Middle Kingdom to Europeans in a narrative dictated in a Genoese jail in the thirteenth century. Polo may not even have been to China. He certainly did not see all that he described. Nonetheless, although some scoffed at its "million lies," Europeans copied Polo's Travels for the next twocenturies and passed them around like downloaded music files in the 00s. Christopher Columbus studied a copy in an effort to find his way to Asia. Like Columbus, in the 700 years since Polo dictated his stories, many Westerners convinced themselves that they could grow rich from finding China. Traders, missionaries, soldiers of fortune, and diplomats believed that Westerners could impose their religions, manufacturing output, rule of law, and military power on a vast and impressionable population of Chinese who very much needed these interventions. According to its ethical precepts, Western adventurism has always needed to justify itself.
The Chinese have rarely been empowered to explain themselves to the West. When Secretary of State Henry Kissinger "opened" China to the United States for President Richard Nixon in 1973, he told Chinese Premier Zhou Enlai that China was a "mysterious" country. Zhou responded that after several thousand years of history, the Chinese were not a mystery to themselves. Because Westerners so successfully enriched themselves in the first and second industrial revolutions, they became ever more certain that the comparatively impecunious Chinese were passive, incurious, self-centered, pliable, weak, and serene.
In truth, before the West grew rich, "in the year A.D. 1600, the empire of China was the largest and most sophisticated of all the unified realms on earth." The Manchu conquest of China in the mid-seventeenth century exceeded in difficulty and scale the European conquest of the New World. In the eighteenth and nineteenth centuries, revolutions shook, and sometimes overturned, kingly rule in the West, but the Taiping Rebellion of 1850-64 dwarfed them all in violence: 20 million died in an anti-Confucian, anti-imperial revolt-an order of magnitude greater than the aggregate casualties of the American, French, and Russian Revolutions. In the twentieth century only the German and Soviet histories compared to the misery and violence of China's experience.
Ignoring the tumult and the horror, Western businesspeople repeatedly discovered gold mines of opportunity in China. In the eighteenth century, the British imagined the mills of Manchester going "forever" if they could only "add an inch of material to every Chinaman's shirt tail"-not that anyone knew why shirts might be too short on the other side of the world. In the 1970s, and again in the early 1990s, New York financiers poured hundreds of millions of dollars into the Chinese economy. By and large, the glitter of fool's gold had lured them. China produced little wealth for itself or others in the nineteenth and twentieth centuries.
Twenty-first-century China, however, struck Westerners as a reincarnation of nineteenth-century America. To Western eyes, the Chinese apparently embraced capitalism rambunctiously, encouraging greed as good. Chinese consumers, now eager to buy not shirts but cell phones, composed the most populous market in the history of consumption. Innumerable Chinese laborers wanted to work prodigiously hard, at dirt-cheap wages, without the intervention of unions or annoying safety and health regulations. Everyone candidly wanted to be rich, and Westerners understood that urge.
Like Marco Polo's narrative, the new Western perception of China mixed fictions and facts, with the motive of encouraging Asian adventures. The Chinese political rulers think they are, as the proverb put it, riding the back of a tiger. Numbering somewhere between 5 and 500 people at the apex of the 65-million-member Communist Party, this group can barely rule their huge population, even when collaborating with the handful of super-rich Chinese who made their fortunes outside the People's Republic. Centers of governmental and economic power are emerging in the various regions in rivalry against Beijing, as has repeatedly occurred in Chinese history. New influences threaten not only the existing order but anyone's ability to exercise order. Perhaps 30 million Chinese can taste the West's standard of living, and 500 million might hope to enjoy that life in one generation. But a billion are still trapped in desperate poverty. Powerful forces rend the social fabric: international capital, the military strength of the West, an aging population and overwhelming population shifts, the Internet's disruptive spread of information, the devastating environmental impact of development, massive energy shortages, and the ever-present risk of political instability.
Nor do the Chinese elite believe they have adopted pure capitalism. After Deng Xiaoping cemented control in 1978, in the wake of Mao Zedong's death two years earlier, the ruling group, under his leadership, began to fuse a welfare state with an integrated business-government sector. The approach resembled the European experiments in statism of the 1930s. Indeed, with its emphasis on nationalism for the masses and wealth aggregation for an elite, it smacked of fascism.
Under Mao, the Chinese ruling group aspired to control labor from cradle to grave. They regulated travel, residence, schooling, and procreation. Under Deng, however, the government eased, or lost the ability to impose, these controls. Millions of Chinese began to live outside the law. As millions began to seek money and communism's insistence on equality lost its adherents, the central government struggled to maintain control. After the Tiananmen Square massacre of 1989, the government did succeed in suppressing the growth of civil liberties. Deng and his successor Jiang Zemin channeled the energies of the young into entrepreneurship, and away from political reform. Without a legitimizing political mission, however, the party elite under Jiang and, since 2004, his successor Hu Jintao have been unable to manage the growth of domestic capitalism. They have encouraged foreign direct investment, rigged the currency to expand exports, and pursued more diplomatic engagement with other developing countries, where they have focused on securing access to national resources. However, the elite have shown no significant signs of seeking legitimacy for government by obtaining the consent of the governed. As the historian Jonathan Spence wrote in 1990, "If China was to develop as a modern nation ... those taking the chances would have to be given some role in the making of political decisions.... There would be no truly modern China until the people were given back their voices."
Nonetheless, projecting its preferences as it had done on the less-developed world since the age of discovery, the West became mesmerized by China's booming consumerism and rush to capitalism. In the late 1980s and 1990s the Chinese began buying the "Eight Bigs"-"a color television, a refrigerator, a stereo, a camera, a motorcycle, a suite of furniture, a washing machine, and an electric fan." In the 00s, they added to the list of necessities personal computers and cell phones. Businesses seeking economies of scale identified China as the biggest growth market in the world. Everyone in information technology had to sell there. To do that, they had to put plants and people in China.
In the 1980s and early 1990s, Chinese capitalism was directed about one-third toward meeting domestic demand and two-thirds toward export. In that respect, the Chinese copied some parts of the Japanese challenge to the West of the 1970s and 1980s. Japanese export businesses had perfected new efficiencies in manufacturing. They intended to supplant less efficient American manufacturing facilities. The factories of the United States had produced a very large share of global goods in the time since the Second World War ended with the United States triumphant and the rest of the world in ruins, but from Japan's perspective that era had ended. Japan's government and businesses together decided to take market share from Western firms in all global markets, most prominently including the American automobile industry. Japanese manufacturers knew that their own small domestic market could not support economies of scale. They depended on the United States for consumption.
However, unlike China in the 00s, Japan in the 70s and 80s depended on the United States for military protection against the Chinese and Soviet communist threats on the other side of the Sea of Japan. As a result, the Japanese complied when the United States forced Japanese car companies to build facilities and create jobs in the United States. The Japanese government succumbed to the American insistence on revaluing the yen-to-dollar exchange rate so as to reduce Japan's ability to export. American firms meanwhile overhauled their facilities, broke their unions, fired employees, and became much more productive. In the end, Japan fell into a recession, at least partly induced by the success of the American competitive response to Japan.
The Chinese strategy of the late 90s and early 00s more seriously threatened American firms' success and American citizens' standard of living. For all their concerns about domestic order, the Chinese ruling elite had hundreds of millions of new capitalists from the erstwhile Third World to whom their firms could sell. In the 1990s, the Chinese economy began shifting toward a domestic focus. Firms competed vigorously in every market. They used technology to build low-cost manufacturing facilities, and they put their inexhaustible supply of cheap labor to work with breathtaking rapidity. Eventually, the mass of Chinese consumers will define tastes, trends, and technological standards for much of global trade. Meanwhile, unlike the Japanese, the Chinese have no need for a military alliance with the United States. Instead, by the 00s the United States looked for Chinese help in dealing with North Korea.
The table is turning between the West and the East. Westerners wish to manufacture and hire in China. Western firms no longer want to add length to Chinese peasants' shirts; now they want to increase the length of the Wal-Mart shelf space stocked with Chinese goods. The Chinese no longer struggle for ways to resist Western encroachments on their culture. Now they are bent on enriching themselves by importing Western investment and skills, while learning enough about Western tastes to succeed in exporting to Western markets.
The Chinese Communist Party apparently plans to craft a state corporatism that will manage the Chinese economic and political strategies for the next several generations. Entrepreneurs are to be part of political leadership. Political leaders, in their own names and through family members, will take a share of entrepreneurial wealth and portions of the state-owned firms as they slowly convert to private firms. Meanwhile, the government will provide Chinese entrepreneurs with the trade policies, educational resources, transportation, and other public goods that let them take on Western rivals in the commercial battles of the century. The entrepreneurs may see the government as an unwanted partner, or even an agent of corruption. But as long as the country's economy grows at nearly 10 percent a year, everyone will make enough money for the new business leaders and old government elite both to obtain their shares of the country's wealth creation.
The Chinese leadership intends in the twenty-first century to create a host of champions not only in industrial sectors like textiles, oil, and chemicals but also in information technology. Edward Tian, in 2003 the president of one of the top four communications firms in China, had been inspired a decade earlier by a speech of Al Gore's about the information superhighway. He started a business with the plan to "wire China." By the mid-00s, his vision was far on the way to reality. China was first or second among countries in the number of broadband users, PCs, TVs, and refrigerators. China counted more than 300 million cell phone subscribers. Because fewer than 30 percent of Chinese had cell phones, the industry anticipated adding more than half a billion additional users in the future.
The Chinese leadership experienced the disasters of the Great Leap Forward and the Great Cultural Revolution. They understand that most Chinese are very poor in comparison to citizens of Japan, Korea, Taiwan and certainly the United States. To all appearances, China's history has demonstrated David Ricardo's "Iron Law of Wages"-that wages will never exceed subsistence level. The Chinese annual income per capita is only about $900, a mere one-thirtieth the American level. However, while the whole country is poor, the current Chinese paradox is that a populous segment is becoming middle class in a hurry. About 100 million Chinese workers earn at least $5,000 a year. That Chinese middle class equals in size, if not wealth, two-thirds of the total American workforce. Their standard of living in some respects approximates the average for Americans. The Chinese in their own country can buy a great deal more with a dollar-when exchanged for "the people's currency" of the renmimbi yuan-than can Americans in the United States. Shanghai apartment dwellers pay five dollars a month for cable television, and in most cities people pay about the same for telephone service. Lenovo sells PCs for less than $200. The well-off in Beijing hire help to cook, wash, clean, and run errands for between $60 and $90 a month per employee. In addition, urban Chinese, about 30 percent of the population, obtain at very low cost some level of transportation, housing, health care, and education, although many of these public goods are inferior by most Western standards. (The government provides these public goods on a much broader scale than do the U.S. national and local governments.)
Moreover, Deng's one-child policy concentrates parental and grandparental income behind a single member of the next generation. Partly for that reason, members of the youngest generation have a better education than their parents. In addition, where Chinese students in the 1960s lost much of their educational opportunities in the ravages of the Great Cultural Revolution, in the next generation the Communist Party embraced education as the path to increasing the national economy. The Chinese government continues in the 00s to encourage one child per family, especially in rural areas. Such governmental intrusion into conception in the United States would leave Americans on both sides of the abortion debate aghast. In China the policy, coupled with economic growth, has helped ensure that from 2004 to 2014 another 200 million will join the Chinese middle class-and in the decade that follows, another 300 million.
Excerpted from IN CHINA'S SHADOW by Reed Hundt Copyright © 2006 by Reed Hundt. Excerpted by permission.
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