The USSR and China present us with two contrasting examples of economic/political systems in transition. When China began its transition in 1980, it retained all the controls of a communist, centrally directed political system and began gradually liberalising the economic system by moving to freer markets. Businessmen welcomed the loosening of controls. FDI rushed in torrents and set off an economic boom. Communist party diktats were going to be a thing of the past.

On the other hand, when the communist system collapsed in the USSR in 1991, Russia listened to external advisors (mostly western) who said they must open the country fully. Simultaneously, the political system moved to a democracy (sort-of) and the economic system moved to free markets (sort-of). The net result was a disaster on both fronts.

Recent developments in China suggest that their gradual opening and resultant success may have taught the political bosses some unwanted lessons. When the political and economic sectors were kept sufficiently separate the economic policies worked. Unfortunately, the success of the policies to grow the economy gave the confidence to the political wing that the economic sector can be made to serve the political interests. That’s when trouble started. The entrepreneurial tech sector began to be subjected to a lot of interference. Alibaba’s IPO was stopped. Others were told they were subject to national security concerns.

Stalling of collaborations

Increasing government involvement raised flags in the US and Europe which responded with regulations about export of so-called dual-purpose technology, and limiting Chinese investment in their domestic hi-tech. The result was a stalling of the collaborations and starving of knowhow that the Chinese tech sector was relying on.

While most major economies are raising interest rates to cool inflation and worrying about whether they have gone too far, China has been cutting rates to prevent deflation and to boost its economy which went into a slump post-Covid. When the government lifted its stringent Covid shutdowns and the economy did not respond as the government thought it would, it was a signal to the political sector that they don’t control everything.

The property sector, a target to lead recovery is not responding, stuck with a very large number of unsold homes. But the government hopes it can motivate people to own second homes with lower mortgage interest after telling them that owning multiple homes is unwanted speculation. The government now wants to boost infrastructure. But how many ring roads do you really need around Beijing?

The government’s ability to motivate people to do what the government wants has been weakened. Take population. At a time of tight controls, the government instituted its one-child policy in 1979 that worked. Then seeing demographic trends that will hurt the economy, the government thought relaxing the policy in 2016 will fix the problem, but the people are now not responding and population continues to decline.

Assurances not working

China, with its ruthless efficiency, had a tight grip on global manufacturing and a firm hand on supply chains. With the Covid experience behind them, global corporations have begun looking for other country sites to supplement (China +) or supplant their Chinese sources. Chinese assurances are not working anymore.

That brings us to the most important reason where the spillage of power from the political to the economic sector has begun to hurt. Former President Trump must be credited to waking up the Washington political establishment to see China as a rival and not just someone whom one can continue to appease while hoping for a change in policy.

Suddenly, Chinese rivalry in the tech sector, spreading military influence, efforts to undermine US influence in the developing world, efforts to infiltrate critical US sectors, have all come under the spotlight. President Biden has continued what Trump started. Rather than pivot to protect its economic success, China is now betting on more political belligerence.

The writer is an emeritus professor, Suffolk University, Boston.

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