What a car crash tells us about China’s future
If Beijing’s economy suffers a slump, the absence of a fair legal system or social safety net could be disastrous
I was in a car crash last week. As our minibus following George Osborne around China careered out of Shanghai, we smashed into some poor fellow in a hatchback.
Our driver slammed on the brakes and leapt out, leaving the minibus blocking both lanes. For about 20 minutes he stood in the middle of the road, gesticulating wildly and yelling at his hapless victim.
The most alarming element of the episode — besides the fact that we shut down a vast part of the city’s transport network — was that apparently it wasn’t pertinent in the slightest that our driver was clearly the guilty party. On the contrary, when the police arrived they actually seemed to side with him, based on the fact that he was driving the bigger vehicle.
One can learn a surprising amount about an economy by observing its roads. Germany: fast and efficient. Italy: chaotic and slightly lawless. France: blocked by protesting farmers. One might have expected China’s highways to be ordered, restrained and egalitarian, in line with Communist and Confucian ideology. In fact, the rules of the road are a bit like the law of the jungle: the higher you are up the food chain, the more likely you are to get your way.
The lowest of the low are, of course, the cyclists and pedestrians who take their lives into their hands every time they approach the road. The past few years have seen a disturbing trend of drivers deliberately attempting to kill the pedestrians they knock over.
This year a BMW driver in Guangdong province reportedly ran over a two-year-old girl. When the girl’s grandmother screamed at the car to stop, the driver paused, hit reverse and ran over the girl’s body, and then engaged drive and rolled forward over it a third time. According to a recent article in Slate magazine such episodes are so commonplace nowadays that they have a name: “double-hit cases”.
Far from being evidence of innate barbarism, they are instead an illustration of the perverse incentives thrown up by the country’s dysfunctional legal system, which makes it costlier to maim than to kill. The fines for killing a pedestrian in a traffic accident are typically in the tens of thousands of dollars while the cost of a lifetime of disability care can easily run into the millions.
Such things are worth bearing in mind, given where China is at the moment. If you accept the premise that the country will suffer a slump or, at the very least a slowdown, then its stability in the coming years will depend on whether it has the institutions to support it through the ordeal. Japan survived two decades of stagnation with nary a whiff of social chaos, in large part because of the well-established legal system and social safety net.
In crises such things matter, so it is disquieting that China has neither of the above. For all that it is still run by the Communist party, it is not, and never really was, a command economy. In fact in some ways China is already more laissez-faire than Britain, let alone the Britain of Jeremy Corbyn’s fevered imagination. The welfare state and pension provisions are far less generous than those in Europe. The health service is not free at the point of use.
Of course, the country still has a few hallmarks of communism, including a one-party state, the absence of popular elections, a twitchy, snoopy police force and public ownership of vast chunks of the economy.
This political-industrial complex of more than 100 companies, stretching from oil and financial giants to utilities, tobacco and haulage, is riddled with corruption and cronyism. The power structures are pervaded with bent politicians and common-or-garden oligarchs who have grown fat on political favours and state-endorsed monopolies. There are reckoned on average to be about 500 demonstrations around China against local corruption every day.
The graft, which President Xi has pledged to stamp out, is only one manifestation of a legal system that is not fit for purpose. Under the carapace of state protection, the country’s banks can easily disguise the terrifying extent of bad debts built up in the financial system. The staggering sums spent on investment over the past decade can flow to vested interests rather than the Chinese people. If Xi is to help China avert a slump he will need to go further, overhauling the legal system entirely and shifting money from the state into households’ pockets.
It is now fashionable to compare China today to Japan in the 1980s, before its debt bubble cut short its seemingly inexorable economic ascent. But a more intriguing comparison is the Soviet Union. Today we look back today at Nikita Khrushchev and his ilk as minor buffoons, but we forget that at the time western politicians and economists were truly terrified by them. This was not just about politics. In the early 1960s Paul Samuelson, the Nobel prize-winning economist, predicted that the Soviet Union would overtake the US as the world’s biggest economy in the 1980s or ’90s. We all know what happened next.
President Xi is desperate not to make the same mistakes as the Soviets, but the task he faces is arguably even more difficult than for glasnost Russia. Consider the historical omens. According to Michael Pettis, of Peking University, there have been perhaps 30 or 40 “growth miracles” since the Second World War. Every single one has ended either in a debt crisis or a lost decade or two of very low growth. The only different thing about China is that the levels of indebtedness and economic imbalances are greater than anything witnessed before.