Letting China Be China


By William H. Overholt

Norton x 431pp x $25

Last September, Barton M. Biggs, Morgan Stanley & Co.'s stock market guru, witnessed the relentless pace of development in China and pronounced himself "maximum bullish" about the boom. But he wasn't a true believer: He reversed his assessment seven weeks later. Well, meet the real Mr. Maximum Bullish: William H. Overholt, managing director of Bankers Trust Co. in Hong Kong. For years, Overholt has been the most eloquent cheerleader for the dynamism across the border. Now, in The Rise of China: How Economic Reform is Creating a New Superpower, he has produced a provocative work that outlines the reasons to be bullish on China for years to come.

Overholt's key points are that moving only slowly toward a market economy has spared China the sort of turmoil the former Soviet Union has endured, and that greater democracy will follow naturally. While some see China's transformation as a helter-skelter 15-year process, he says Deng Xiaoping has followed a well-conceived plan to reform the state-controlled economy. First, Deng freed up China's 800 million peasants, which increased productivity as it boosted their squalid living standard. Then, he allowed the rise of small entrepreneurs. He encouraged foreign investment and backed the creation of modern financial institutions, from two fledgling stock markets to a network of foreign exchange centers.

All this he did before addressing the issue of how to privatize massive, largely unprofitable state industries. And while this cautious approach has been criticized in the West, Overholt asserts that no policy "has been more central to China's success than its gradual but steady emplacement of the foundation stones for successful privatization."

By contrast, Mikhail Gorbachev attacked the pillars of the state economy first, with an emphasis on revamping heavy industry, Overholt notes. This required huge capital investments with no quick payoffs. Ultimately, he says, Gorbachev's strategy caused production to collapse and inflation to skyrocket.

Overholt sees China as following a model set by its prosperous Asian neighbors--South Korea, Taiwan, and Singapore--which put economic reform before political liberalization. In South Korea and Taiwan in particular, repressive regimes felt they had to modernize their economies for security reasons. Once the economies were thriving, a powerful middle class arose, which demanded more participatory government.

To Overholt, forcing democratic change on developing countries is simply bad economics. The notion that political and economic liberalization can be achieved simultaneously, he writes, "has proven to be an ideological assumption in the strictest sense: a deeply held belief that has no grounding in practical historical experience." Countries such as the Philippines and the former Soviet Union, which first embraced democracy, wound up as economic basket cases.

Rather than judge China's political progress by Western standards, Overholt assesses how far Beijing has come. Just 20 years ago, China was in the throes of the Cultural Revolution--"worse than Hitler's Germany in the degree of control over individuals"--and now it's much freer. Overholt likens China today to South Korea a generation ago: "The repression is real, but the success and stability and glimmerings of freedom are real too." Maybe, but surely it's in everyone's interests to nudge the Chinese along.

All in all, Overholt's dissection of China's economic transformation is compelling. His argument about Gorbachev, though, doesn't quite work. Unlike Deng, who had a revolutionary's credentials, Gorbachev never had the institutional support needed for his reforms. When he called for local initiative--to increase private plots for farmers, say--he was stymied by bureaucrats who controlled such things as how much seed farmers get. Moreover, decades of oppression had left workers and peasants with no clue what initiative is. Frustration drove Gorbachev to put political liberalization before fundamental economic reform.

Moreover, even given Deng's economic miracles, China can't delay major structural reforms indefinitely. State enterprises are a drag on its banking system, which doles out huge loans each year to keep them afloat. In July, a new corporate law aimed at creating a modern enterprise system will go into effect. Deadbeat enterprises will have to shape up or, more likely, go under, which could cause massive joblessness.

Overholt addresses such potentially destabilizing problems as inflation, corruption, and political instability, but not in adequate depth. And he assumes that the massacre at Tiananmen Square is a historical footnote. Perhaps, but an equally convincing argument holds that after Deng, leaders will be judged by whether or not their hands are bloody.

Overholt shows how China's economy is converging with those of Taiwan and Hong Kong to form a global powerhouse. China's boom, he says, promises to "reshape the politics of Asia and perhaps the world." The U.S., he says, should stop trying to bully Beijing, since China's reform program is already headed in the right direction. My advice would be somewhat different: China has never been as outward-looking as it is today. If ever there was a time to influence Beijing, it's now.

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