Blueprint of the China edge

Do you see a silver lining in the 2008-09 financial meltdown? The answer of Aaron L. Friedberg is in the affirmative because the crisis forced Americans to alter their spending habits and has produced at least a temporary jump in personal savings, as he reasons in ‘ A Contest for Supremacy: China, America, and the struggle for mastery in Asia' ( www.wwnorton.com ).

Ruing, however, that the US government has simultaneously engaged in massive ‘dis-saving,' by running huge deficits and accumulating debts whose effects will linger for many years to come, the author observes that it may take some novel and potentially controversial long-term measures (such as the introduction of a national consumption tax or a tax on energy use) to ensure that personal savings are up while the budget deficit comes down.

Friedberg foresees that a change in American pattern of savings and consumption could help induce China to make matching adjustments of its own. “With the dissolution of many State-owned enterprises, most Chinese workers no longer have guaranteed jobs or pensions. Acting rationally in the face of these uncertainties, they have become remarkably frugal, often saving as much as 20 per cent of their incomes to guard against the day when they are too old or sick to work.”

The author is of the view that, to sustain growth as exports to the US decline, China will have to find ways to stimulate domestic demand by diverting some of these savings to consumption. And the most obvious way to do that, he says, is to create some kind of social safety net, funded with a mix of public and private contributions, which will provide protection against becoming destitute in old age.

Referring to the current fears about Chinese enterprises buying up American brand names and coveted landmarks, Friedberg feels that much of the anxiety is misplaced.

“The purchase by Chinese investors of Maytag or IBM's computer manufacturing division, and the attempted takeover of a major US oil concern, all stirred controversy in the mid-2000s, but none posed a real danger to national security,” he reasons.

In the long run, the only way to maintain a technological edge is not by holding others back but by continuing to move forward, avers Friedberg.

He explains that the blueprint for doing this is no secret, nor has it changed substantially since it was drawn up in the wake of the Second World War.

The foundations are formed by a first-class educational system, a society open and attractive to talented and ambitious immigrants, and generous public and private support for basic scientific research, begins the description of the blueprint. “Vibrant civilian industries, with ready access to capital, and a tax and legal code that reward innovation provide the scaffolding. A flexible, diverse, and competitive array of defence manufacturers, serving a well-funded and forward-looking defence establishment, complete the structure.”

According to Friedberg, China is now trying to adapt key elements of this scheme to its own purpose. He wonders, however, whether the US still has the ability and the seriousness of purpose to follow its own design.

Suggested study for a global view of the forces at work.

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