The Dawn of Innovation (48 page)

Regardless of blame, the Chinese macro numbers look seriously distorted. Investment accounts for more than half of all national spending, up from about a third in 2005. All East Asian “tiger” countries invested heavy shares of national spending in investment, but never more than about a third. (United States savings rates also rose to 30 percent in the second half of the nineteenth century.) Some economists defend the very high rate of investment on the grounds of the country's daunting infrastructure deficits. The relevant question, however, is not the scale of the infrastructure deficit but the practical limits on the number of mammoth projects a government can manage at one time. Evidence of shoddy construction and insufficient safety precautions on the new high-speed rail lines and the Three Gorges hydropower project are not reassuring.

A side effect of the investment surge is that it is yet another force repressing consumer spending. Consumption is still rising in real terms, but it has been shrinking as a percentage of GDP. Household consumption was only 34 percent of GDP in 2010, down from 50 percent in 2005, and “by far the lowest rate of any major economy in the world.” The suppression of consumer spending has been accomplished primarily at the expense of services. Since expansion of services—health care services, legal services, financial services—is usually a reliable sign of a country making a successful middle-income transition, current policies may actually be retarding the economy's maturation.
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Patrick Chovanec, a business professor at Tsing Hua University in Beijing and a long-time China watcher, has become a leading voice in a growing chorus of analysts who are distinctly bearish on China's near-term economic future. Chovanec suggests that the country's response to the financial crash, while effective in the short term in maintaining employment, may have deepened the underlying problems. National banks vastly increased the supply of credit—by about 40 percent, Chovanec estimates—and much of it went into new urban apartment housing, vast swaths of which now stand empty.
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That may not be as bad as it sounds. Completed apartments in China typically contain few if any improvements like kitchen appliances, and there are no real estate taxes, so the cost of carrying vacant housing is lower than in most other countries. Private citizens have few opportunities to invest in appreciating capital assets, so the apartments may be intentionally held as a store of value. If real estate prices fall, however, which Chovanec thinks likely, the repercussions would be profound.

Chovanec's fear is that an accumulation of real estate that is not returning any income to the owners, along with the great expanse of hasty new, stimulus-related investments undertaken by deeply corrupt local governments, has created a giant layer of zombie assets. In a true market economy those conditions would trigger a financial crash similar to the recent experience with the popping of the asset bubble in the West. That is unlikely to happen in China. Instead the banks will probably roll over the loans, which are mostly now coming due. To the degree that the huge stimulus-related credit expansion was poured into such zombie assets—it's likely that most of it was—they will act as a long-term drag on the country's credit capacity and inhibit the required rebalancing between investing and consumption. Attempting to submerge the problem with another big credit expansion, Chovanec suggests, could ignite dangerous inflation. He suspects that official data on national debt and price inflation already seriously understate the true picture.
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Whether or not the bearish views of China's near-term outlook are correct, the economy continues to be seriously unbalanced, even as it faces a potentially disabling crisis in water supply, serious environmental degradation, and possibly a major real estate bubble. And those challenges loom as the nation is trying to make the difficult transition from a premodern society to a modern economy grounded in a successful middle class. Given
the extreme centralization of formal power, the critical question is whether the government is up to the challenge.

In the spring of 2012, Chinese politics were roiled by the sudden scandal of Bo Xilai and his family. Bo had been an up-and-comer, a charismatic outsider who had been forcing himself into consideration for a seat on the Party Politburo. As party chief of Chongqing and previously as mayor of Dalian, he mounted vigorous anticorruption campaigns and won favor among the masses by adopting redistributionist policies out of the Maoist playbook. Bo's career crashed when a top lieutenant, the Chongqing police chief Wang Lijun, asked for asylum in the American consulate in the nearby city of Chengdu. He believed that his life was in danger because he had uncovered the possible involvement of Bo and his wife in the murder of an English businessman, who had served as a family retainer and fixer.

That triggered a flood of noxious revelations. The famous corruption crackdowns may actually have been a wholesale looting of local businessmen, abetted by torture, arbitrary imprisonment, and other atrocities. Bo receives only a modest salary, but a large number of close relatives, including his wife, are hundred-millionaires, while his son leads the high life at Western universities. For the time being at least, Bo has disappeared.

Those stories, while not proven, are consistent with allegations surrounding a peasant uprising a few months before in Wukan, a fishing village in Guangdong Province. The villagers barricaded the roads and faced down the police and local village and party leaders, alleging that officials had been selling the peasants' common land and fishing rights, impoverishing the people and keeping the sales proceeds for themselves. Premier Wen himself criticized the local leadership, and China's State Council has admitted that in 2011, some 700,000 hectares were transferred illegally.

There are as many opinions about the current path and future prospects of China as there are Western scholars. China's system of producing leaders, murky though it is, has a record of producing a number of
outstanding men—well educated and well informed, quite capable of holding their own in international settings.

But there is still widespread concern that the government is too remote, too corrupt, too riven with infighting to govern effectively. For example, despite the Hu-Wen rhetorical commitment to more balanced growth, the crucial macro steps, like readjusting the relative shares of investment and consumption, may have been blocked by the industrial barons and their representatives on the Politburo and State Council. The monolithic character of the party machine, moreover, is likely to forestall significant change. Regardless of shifts in policies at the center, anything far-reaching must be accomplished through the local officialdom. All local officials have been trained for decades in a uniform way of doing business: Build! Grow! Never miss your numbers! Helping to implement a shift to a more market-driven economy, stepping away from financing decisions, no longer picking local favorites, and becoming merely neutral regulators may be beyond their capacities and likely contrary to their financial interests.

The looting and rapaciousness disclosed by the Bo episode, moreover, may not be especially unusual. High position in the party is a royal road to riches. The big Hollywood studio Dream Works Animation recently opened a major studio in China. Its partner in the deal is Jiang Mainheng, who is the son of the former Communist Party leader Jiang Zemin. The younger Jiang has also been awarded serendipitous partnerships in joint ventures with Microsoft and Nokia. Big business in China involves a lot of palm-greasing with the relatives and retainers of politicians. A financial executive suggested that the way to get along with the leadership was to “just make them part of your deal; it's perfectly legal.”

So Hu Haifeng, the son of President Hu Jintao, heads a conglomeration of technical firms spun out of Tsing Hua University, benefiting from a string of government contracts. Wen Jiabao's son, Wen Yunsong, is CEO of Unihub Global Networks, a large Chinese networking company and a partner in a Chinese private equity firm that frequently works with Western investors. The son and daughter of former premier Li Peng chair,
respectively, China's largest power company and an electricity monopoly, while Levin Zhu, son of former prime minister Zhu Rongji, has long run one of China's biggest investment banks. Any important capital raise for a Chinese company in the West will nearly always have relatives of the leadership involved in the deal. Ninety-one percent of the country's multimillionaires, according to the Chinese Academy of Social Sciences, are the children of party influentials. Victor Shih, a China expert at Northwestern University, has said, “There are actually a lot of princelings out there. You've got the children of current officials, the children of previous officials, the children of local officials, central officials, military officials, police officials. We're talking about hundreds of thousands of people out there—all trying to use their connections to make money.” An inheritance-based economic nobility coupled with the depredations of local party officials, as in Wukan, reminds one of prerevolutionary France.
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The world has an enormous stake in China's successfully completing its transition to a modernized, middle-class-based country with per capita incomes and opportunity structures in the same range as other advanced countries. America has no stake in China staying poor, and the sooner it reaches true advanced-country status, the better for all of us, despite the fact that its total GDP will inevitably be greater than America's.

The next decade is likely to be a crucial one in Chinese history, for it may determine how well they can make the transition and how long it will take. The consequences of their failing could be terrible. A successful transition does not necessarily mean that the Chinese have to evolve governing structures on the pattern of Western-style liberal democracies. Francis Fukuyama, in his recent study of the evolution of modern governments, suggests that governing forms are inherently contingent. The possibility of a new type of polity “with Chinese characteristics,” in the party's phrasing, should not be ruled out. Whatever it is, Fukuyama speculates, it will have to retain some form of effective accountability of the government to the governed—which is the major advantage of democratic forms, however clumsy and slowly reacting they may be.

This brings us back to America. Perhaps the greatest advantage it had in the early days of its rise as an economic power was that it was born as a
middle-class country, settled primarily by people looking to better their lives and achieve economic independence, delighted to be freed from the encrusted ways of the countries and fellow-citizens they had left behind. In effect, the country never had to accomplish the middle-income transition because most of the first generations of immigrants had already made it simply by choosing to come—and once they got here, there were no important entrenched interests to stand in their way.

No large country with a deeply controlling, top-down government has ever successfully accomplished a middle-income transition. The struggles of Russia, with its vast natural resources, its world-class kleptocracy, and the quiet wars between the new industrial oligarchs and the
siloviki
—the Putin-linked Party stalwarts—are similar to the struggles in China, with the difference being that the Chinese have a much more entrepreneurial society. The recent history of China suggests that when the government makes mistakes, they tend to be doozies. It hadn't been that long since the Maoist Cultural Revolution. It will likely take at least another decade or so to see whether China can accomplish the national transition to a true middle-income society. The rest of the world can only hold its breath.

A
NGELA LAKWETE IS AN AUBURN UNIVERSITY HISTORIAN WHO HAS devoted a career to the antebellum cotton industry. In a recent book, she argues that Whitney's gin was of only minor importance in generating the explosive growth of the King Cotton plantation culture in the South; for as she concludes, “ginning was not a bottleneck as the nineteenth century dawned.”
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But although she never makes the specific charge, Lakwete also lays out an impressive prima facie case that, rather than invent the new gin, Whitney and Phineas Miller, his cotton gin partner, stole a gin design and patented it as their own. I've added a few details that, looked at anew, seem to strengthen the case.

There is no question that Whitney was a talented craftsman. Although many stories of his youthful inventing prowess are probably apocryphal, he was blacksmithing by his early teens and was a skilled metalworker.

When Whitney secured his tutorship in South Carolina in 1792, he traveled south with Miller. They were close in age, though Miller had graduated from Yale seven years before. Miller had gone to Georgia as the
tutor of the children of Gen. Nathanael and Catherine Greene, who lived on a rice plantation. When the general suddenly died, Miller took over as overseer of the plantation. Miller invited Whitney to stay at the plantation for a few weeks in October, before taking up his tutoring position in November. Whitney was utterly infatuated with Greene.
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(But so apparently was Miller: he and Greene married in 1796, with George Washington and his wife as witnesses.)

Nothing further is heard from Whitney until April 1793, when he reported to a friend, Josiah Stebbins, that he had not taken up his tutoring position, had never left the plantation, and had no prospects and no money. A letter to his father on the same day told the same sad tale, adding apologies for his debts. Just a few weeks later, however, on May 1, Whitney wrote another letter to Stebbins announcing that “Dame Fortune” had made him “very expert in the Hocus-Pocus line,” and that he expected shortly to have plenty of money.
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