From my article published in Asia Times.

American elites have woken up to Beijing’s threat to global US hegemony. Now questions about China and its institutions are on everyone’s mind. Will its economy continue to expand or will it stagnate? Exactly how communist is China anyway? How stable is the regime? In sum, where is China going?

To answer these vital questions, we must examine the origins of China’s current institutional and ideological structure, which was shaped primarily by Deng Xiaoping during his leadership of the country from about 1980 to 1992. Xi Jinping inherited this structure and has not fundamentally changed it.

The future of China will follow the tracks Deng set down, through a series of institutional reforms that enabled the country’s tremendous drive for growth. As the foundations of this reform decay, so will the growth, eventually leading China into stagnation unless another successful reform is undertaken, which neither Xi nor his successors appear capable of.

Deng had two key objectives in pursuing this growth: to ensure the survival of the communist regime and to improve China’s geopolitical position. He succeeded with honors on both counts, because he understood that achieving those two objectives required dealing with a key constraint: is it possible to open up trade without ceding power to the outside world?

The political limits of trade

China’s history had shown that trade and subjugation can go hand in hand. Centuries earlier, the Ming dynasty broke trade agreements imposed by the Mongol leader Altan Khan, fearing that their gains would be outstripped by rising Mongol power. In doing so, they knew that a relative advantage is often more politically important than an absolute one. Deng knew this history well, and so his central concern was retaining sovereignty.

Scholars and decision makers today take the stability of the political system for granted and believe the market is more fundamental than other social infrastructure. In fact, the opposite is true. Societies need a large and very effective bureaucracy, either a military or a private one, to establish and maintain a market. If a government has to choose between growth and sustaining itself, it is perfectly happy to forgo growth altogether, as North Korea demonstrates today.

Over the long run, a stable society also needs live players to repair the institutions that enable markets. Every garden needs a fence, but even with a fence weeds can grow. Similarly, the market doesn’t maintain itself. It doesn’t correct for violations of market norms, like dishonest advertising or sabotaging competitors. The market mechanism is also bad at removing government distortions of various kinds. The government game isn’t made obsolete by the markets game.

Read the rest here.

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