The Coming Collapse of China: 2012 Edition

I admit it: My prediction that the Communist Party would fall by 2011 was wrong. Still, I'm only off by a year.

In the middle of 2001, I predicted in my book, The Coming Collapse of China, that the Communist Party would fall from power in a decade, in large measure because of the changes that accession to the World Trade Organization (WTO) would cause. A decade has passed; the Communist Party is still in power. But don't think I'm taking my prediction back.

Why has China as we know it survived? First and foremost, the Chinese central government has managed to avoid adhering to many of its obligations made when it joined the WTO in 2001 to open its economy and play by the rules, and the international community maintained a generally tolerant attitude toward this noncompliant behavior. As a result, Beijing has been able to protect much of its home market from foreign competitors while ramping up exports.

By any measure, China has been phenomenally successful in developing its economy after WTO accession -- returning to the almost double-digit growth it had enjoyed before the near-recession suffered at the end of the 1990s. Many analysts assume this growth streak can continue indefinitely. For instance, Justin Yifu Lin, the World Bank's chief economist, believes the country can grow for at least two more decades at 8 percent, and the International Monetary Fund predicts China's economy will surpass America's in size by 2016.

Don't believe any of this. China outperformed other countries because it was in a three-decade upward supercycle, principally for three reasons. First, there were Deng Xiaoping's transformational "reform and opening up" policies, first implemented in the late 1970s. Second, Deng's era of change coincided with the end of the Cold War, which brought about the elimination of political barriers to international commerce. Third, all of this took place while China was benefiting from its "demographic dividend," an extraordinary bulge in the workforce.

Yet China's "sweet spot" is over because, in recent years, the conditions that created it either disappeared or will soon. First, the Communist Party has turned its back on Deng's progressive policies. Hu Jintao, the current leader, is presiding over an era marked by, on balance, the reversal of reform. There has been, especially since 2008, a partial renationalization of the economy and a marked narrowing of opportunities for foreign business. For example, Beijing blocked acquisitions by foreigners, erected new barriers like the "indigenous innovation" rules, and harassed market-leading companies like Google. Strengthening "national champion" state enterprises at the expense of others, Hu has abandoned the economic paradigm that made his country successful.

Second, the global boom of the last two decades ended in 2008 when markets around the world crashed. The tumultuous events of that year brought to a close an unusually benign period during which countries attempted to integrate China into the international system and therefore tolerated its mercantilist policies. Now, however, every nation wants to export more and, in an era of protectionism or of managed trade, China will not be able to export its way to prosperity like it did during the Asian financial crisis in the late 1990s. China is more dependent on international commerce than almost any other nation, so trade friction -- or even declining global demand -- will hurt it more than others. The country, for instance, could be the biggest victim of the eurozone crisis.

Third, China, which during its reform era had one of the best demographic profiles of any nation, will soon have one of the worst. The Chinese workforce will level off in about 2013, perhaps 2014, according to both Chinese and foreign demographers, but the effect is already being felt as wages rise, a trend that will eventually make the country's factories uncompetitive. China, strangely enough, is running out of people to move to cities, work in factories, and power its economy. Demography may not be destiny, but it will now create high barriers for growth.

At the same time that China's economy no longer benefits from these three favorable conditions, it must recover from the dislocations -- asset bubbles and inflation -- caused by Beijing's excessive pump priming in 2008 and 2009, the biggest economic stimulus program in world history (including $1 trillion-plus in 2009 alone). Since late September, economic indicators -- electricity consumption, industrial orders, export growth, car sales, property prices, you name it -- are pointing toward either a flatlining or contracting economy. Money started to leave the country in October, and Beijing's foreign reserves have been shrinking since September.

As a result, we will witness either a crash or, more probably, a Japanese-style multi-decade decline. Either way, economic troubles are occurring just as Chinese society is becoming extremely restless. It is not only that protests have spiked upwards -- there were 280,000 "mass incidents" last year according to one count -- but that they are also increasingly violent as the recent wave of uprisings, insurrections, rampages and bombings suggest. The Communist Party, unable to mediate social discontent, has chosen to step-up repression to levels not seen in two decades. The authorities have, for instance, blanketed the country's cities and villages with police and armed troops and stepped up monitoring of virtually all forms of communication and the media. It's no wonder that, in online surveys, "control" and "restrict" were voted the country's most popular words for 2011.  

That tough approach has kept the regime secure up to now, but the stability it creates can only be short-term in China's increasingly modernized society, where most people appear to believe a one-party state is no longer appropriate. The regime has clearly lost the battle of ideas.

Today, social change in China is accelerating. The problem for the country's ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party's leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

This phenomenon, which has swept North Africa and the Middle East this year, tells us that the nature of political change around the world is itself changing, destabilizing even the most secure-looking authoritarian governments. China is by no means immune to this wave of popular uprising, as Beijing's overreaction to the so-called "Jasmine" protests this spring indicates. The Communist Party, once the beneficiary of global trends, is now the victim of them.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership's sluggish response in recent months -- in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad -- indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month's "open revolt" in the village of Wukan in Guangdong province, people can organize themselves quickly -- as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution.

Not long ago, everything was going well for the mandarins in Beijing. Now, nothing is. So, yes, my prediction was wrong. Instead of 2011, the mighty Communist Party of China will fall in 2012. Bet on it.

STR/AFP/Getty Images


In Praise of Brain Drain

Want to help the developing world? Hire away its best minds.

My first child was delivered by a Nigerian midwife at a hospital in London. It was an arduous labor. My wife, Emma, did not want to take a pain-soothing epidural injection until it was absolutely necessary. After several hours, when the contractions were excruciating, she asked for a jab. "Sorry, too late," she was told -- the baby was almost out.

So Emma winced and gasped and gave birth without anesthetic. The midwife was impressed. "You did OK for a Caucasian," she said.

Like many rich countries, Britain imports planeloads of medical personnel like my wife's midwife from poor countries like Nigeria; without them, Britain's hospitals could barely function. But this transfer of intellectual capital raises a troubling question: Is it fair for rich countries to poach talent from poor ones? After all, it seems intuitive that "brain drain" hurts the poor. Frank Dobson, when serving as Britain's health secretary, called it an "international disgrace." If all the best doctors and engineers move to the West, who will staff hospitals or build railways in Nigeria or Bangladesh? Simple justice, it would seem, requires that rich countries should stop recruiting doctors and engineers from poor ones.

Or does it? One of the most surprising findings in modern economics is that the brain drain reduces global poverty. On balance, the outflow of talent from poor countries to rich ones is actually good for poor countries -- and even more so for poor people, since many escape poverty by emigrating.

Migration makes poor countries better off in several ways. First, the prospect of earning big bucks working abroad spurs more people to acquire marketable skills. They scrape together college fees and stay late in the library. Having qualified as doctors or engineers, many will promptly emigrate. But many will not. Some will fail to obtain a visa; others will stay behind to look after their aging parents.

The Philippines, for instance, is the world's largest exporter of nurses. Because so many eager students pack its private nursing schools, however, it still ends up with more nurses per head than Austria. The same holds true for other brain drainees as well. A 2009 study of 127 developing countries found that overall, the loss of skills to migration is outweighed by the extra skills acquired by people contemplating it. That study's authors, however, found in an earlier study that you can have too much of a good thing: Once countries start to lose more than 20 percent of their college graduates, they reckon, brain drain starts to act as a drag on economic growth. In other words, China and India, which export only a small share of their skilled citizens, would benefit from exporting a lot more. By contrast, war-scorched disaster zones such as the Democratic Republic of the Congo, whose most talented people have fled in droves, probably wouldn't.

The second way in which brain drain benefits poor countries is that migrants often send money home. Consider the story of Haddish Welday. As a young man in Ethiopia in the 1980s, when the country was a Marxist dictatorship, Welday watched as 20 soldiers strolled into his biology class one day and dragged off his teacher. The next day, the teacher's body was found lying in the street, shot to death.

Welday lived in fear. Many days, he'd see bodies lying in the streets with paper warnings pinned to them; "Let Red Terror Rain on Me" was one slogan that stuck in his memory.

So Welday decided to emigrate. After a detour through the Soviet Union, he found his way to the United States, where he sought and received asylum. When I met him in 2010, he was working as an accountant in Arlington, Virginia. He has become American, yet he maintains close contact with his homeland. He keeps a house in the Ethiopian city of Axum and sends money to his mother every month. Sometimes he wires it to Ethiopia via Western Union; sometimes he gives envelopes of cash to visiting Ethiopian friends, who deliver it for him.

The money that migrants send home is a huge source of income for poor countries. Recorded remittances to developing countries surged tenfold between 1990 and 2009, from $31 billion to $316 billion. Unrecorded ones -- those envelopes stuffed with cash -- nudge the total even higher. All told, remittances are more than double the amount of foreign aid sent to the developing world, and unlike aid, they are seldom stolen by grasping officials.

Remittances are also less volatile than other financial flows. Bad news can make ordinary investors drop a country like a wriggling porcupine. Families are not like that; Welday will not stop sending money to his mother just because Ethiopia has suffered a corruption scandal or a coup.

Remittances are not only more stable than other forms of financing; they are also countercyclical. That is, they tend to rise when other flows fall, creating a useful cushion. When financial crises hit Mexico in 1995 and Indonesia in 1998, the inflow of remittances actually increased, as worried Mexican- and Indonesian-Americans sent cash home to their struggling relatives.

Additionally, migrants often invest in their homelands. A study of 6,000 small businesses in Mexico, for instance, found that 20 percent of their capital came from remittances, mostly from Mexicans working in the United States. Diaspora investors are braver and more patient than others because they have a long-term attachment to their homeland. Short-term shocks don't worry them as much. A typical foreign investor in Nigeria would be very frightened if he thought the local currency might collapse, since he wants to convert his profits into dollars and take them home. For a Nigerian-American investor, however, the same currency crash offers a chance to buy up land cheaply and build a mansion for his eventual retirement.

Remittances also ease poverty. In Bangladesh, a country that sends tens of thousands of construction workers to toil in oil sheikhdoms, families that receive remittances typically rely on them for half their income. In nearby Nepal, household surveys suggest that remittances account for perhaps half of the country's poverty reduction in recent years.

Emigrants take their skills with them when they leave home, but the money they send back helps others learn. It does so directly, when it is spent on school fees. It also does so indirectly, when it puts food on a poor family's table. Hungry children cannot concentrate in class. Amply fed families are less likely to pull their daughters out of school and put them to work in the fields.

The third way brain drain helps poor countries is that as migrants move back and forth, they open channels for commerce. Countries trade more with countries from which they have received immigrants. This is partly because diaspora networks speed the flow of information: A Chinese trader in Malaysia who spots a demand for plastic mobile-phone pouches will quickly urge his cousin, who owns a factory in Zhejiang, to start cranking them out. Because these two Chinese businessmen know each other, they trust each other. This is hugely important -- it means they can seal a big deal with a single phone call and get their product to market before anyone else.

Diaspora networks have been around for centuries, but they have grown much more powerful of late, for three reasons. First, they are bigger than ever before. Seventy million Chinese live outside mainland China, and 22 million Indians live outside India. There are also hundreds of smaller networks, from the Lebanese in West Africa to the South Koreans in the United States. All told, there are 215 million first-generation migrants in the world, an increase of 40 percent since 1990.

Second, diaspora networks have been massively empowered by modern communications. In the old days, a transatlantic phone call might cost several months' wages. Now it is free via Skype. So migrants stay constantly and intimately in touch with the countries they came from, and with each other.

Third, the places from which migrants come, such as India, China, and Africa, are much more open to trade than they were a generation ago. When China was a closed society, overseas Chinese traders had to make do with linking one foreign port with another. Now they link the world to China and China to the world.

These merchants speak the language, understand the culture, and know whom to trust. In countries where the rule of law is unreliable -- which includes most fast-growing emerging markets -- this matters. Some 70 percent of foreign direct investment into mainland China passes through the Chinese diaspora, broadly defined. American firms that hire Chinese-Americans find it easier to do business in China without the aid of a joint venture.

Diasporas also accelerate the spread of technology to poor countries. Most Asian scientists in Silicon Valley share ideas with their friends back home. The world's cheapest refrigerator, which costs only $70, was developed through the collaboration of brainy Indians in India and brainy Indians in America. So was the software behind India's drive to give all 1.2 billion of its citizens a biometric identity, thus enabling the hundreds of millions who cannot prove who they are to open bank accounts and borrow money.

The final, and most important, argument in favor of brain drain is that migration is good for the migrants themselves. If they did not think so, they would not move. Four out of five Haitians who have pulled themselves out of poverty (if one uses a global poverty line of $10 a day) have done so by moving to America. Nearly half of the Mexicans who have achieved this modest standard of living have done so by crossing the Rio Grande. And tens of thousands of infants are prevented from dying each year by the simple fact that their parents emigrated.

In the battle against global poverty, the most powerful weapon is a welcome mat.