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Rising Wealth Is the Way to Fulfill China’s Revolution: View

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June 20 (Bloomberg) -- China’s rise as an economic power presents the world’s rich nations with a quandary: How should they handle an authoritarian state intent on joining their ranks? In seeking a solution, it’s important to recognize that a prosperous China is in everyone’s best interests.

Ever since free-market democracy gained ascendancy, its practitioners in the U.S. and elsewhere have worried that some other system might do better. In the last century, the Soviet Union’s command economy presented the main challenge. Now, China’s model of one-party rule, state-directed investment and limited capitalism has taken its place.

The knee-jerk tendency is to see China as a threat to democracy, as if an authoritarian state could achieve economic primacy and subject the world to its yoke. The Chinese government’s recent crackdown on the country’s Jasmine Revolution, and the jailing of critics such as artist Ai Weiwei, add to the sense of trepidation.

History suggests such worries are misplaced. In a world in which the best minds gravitate toward open societies, where those with talent and drive can excel, oppressive states can’t compete in the long run. With the exception of a few Middle Eastern countries that rely on exploiting non-renewable natural resources, no authoritarian government has ever made its people rich by today’s standards.

Hitting the Wall

Two economists at the INSEAD business school in Fontainebleau, France, have found that in states without political freedom, secure property rights, impartial courts and other elements of good governance, living standards run into a barrier. The “Great Wall” stands at an annual per capita output of $10,000 to $15,000, adjusted for the purchasing power of different currencies. That compares with roughly $47,000 in the U.S.

Countries that stick with authoritarian forms of government invariably hit the wall. The Soviet Union, after a strong spurt of growth through the early 1970s, peaked at an output per person of about $12,500 in today’s dollars.

By contrast, nations that change their form of government can become rich, though the process often involves painful upheaval. Japan and Germany both emerged from the horror of World War II to join the ranks of the world’s wealthy. South Korea shifted to a more democratic system after a series of sometimes bloody clashes in the 1980s, and has since reached an output per person of about $30,000.

Becoming No. 2

China may have surpassed Japan to become the world’s second-largest economy, but it’s still very far from rich. Its output per capita stood at about $7,500 in 2010, less than one-sixth the level in the U.S. The government has done an impressive job of lifting many of its people out of poverty, and its well-honed model could take living standards higher than the level other authoritarian states have achieved. Still, the next leg of the path to prosperity will be tougher.

Standing by and waiting for China to fail isn’t the right solution. A poorer China means a poorer and less secure world. In the short term, a hard landing in the Chinese economy could derail an already weak global recovery. In the longer term, Soviet-style stagnation could breed the kind of nationalist policies and insecurities that would make China a greater military threat.

To encourage the best possible outcome, U.S. officials in particular will have to display an unusual degree of humility and long-term thinking. Many years may pass before China is ripe for political change, and foreign powers will never have much influence over that process. That doesn’t mean the free world should stay silent when China punishes its people for taking a stand against oppression. Those brave enough to do so need to know the international community is watching.

Offering Encouragement

On the economic front, wealthy nations should do what they can to ensure China joins their ranks as smoothly as possible. China’s inclusion in the Group of 20 developed and developing nations has already had a positive impact, helping avert the protectionist policies that could have arisen amid the global recession. Encouraging China’s greater involvement in the World Trade Organization might speed progress toward removing barriers to the free flow of goods and services. Efforts to ease the trade imbalance between the U.S. and China can go beyond sterile talks about exchange rates to deeper structural changes, such as curbing incentives for U.S. consumers to take on debt and removing barriers to Chinese consumption.

Our fates are entwined. The wealthier China becomes, the better off we are all likely to be.

Read more Bloomberg View editorials.