Fundamental mismatches

People often make errors in diagnosing a current reality to forecast the future. First, they tend to believe their current situation is different from the past even though they show similar patterns. Second, they find..

Kim Byung-yeon The author is an economics professor and head of the Institute for Peace and Unification Studies at Seoul National University.

People often make errors in diagnosing a current reality to forecast the future. First, they tend to believe their current situation is different from the past even though they show similar patterns. Second, they find similarities between the two after ignoring structural changes. Korea appears to fall into this mistaken pattern largely because it cannot fathom the depth of the uncertainties from the ever-evolving U.S.-China rivalry.

The Sino-American rivalry can bring a critical impact to the global order not only due to their unremitting confrontation but also because of the possible coupling of the conflict and the schisms in the systems that helped sustain the two powers. The United States could emerge as a superpower thanks to the congruous combination of democracy and capitalism based on the horizontal one-person-one-vote system and market economy. As the American system does not enforce a vertical hierarchy as under dictatorships or a centrally planned economy, individuals’ liberty is guaranteed. If market activities spur economic growth and the middle class expands, it facilitates a culture of compromise and consolidates democracy. Democracy also supports capitalism by protecting property rights through checks and balances. It is no coincidence that nearly all developed countries adopted capitalism. The two systems promoted economic prosperity and political freedom by reinforcing one another.

In an alarming development, however, democracy and capitalism have started to show signs of cracks due to deepening economic polarization. The share of household incomes of the top one percent in the U.S. soared to 20 percent in the 2010s from 10 percent in the 1970s thanks to globalization.

Such division is structural as the two driving forces of capitalism hurt democracy. The two factors enhance economic efficiency, but deepen income inequality at the same time. As a result, wealth polarization progressed in the U.S. to the levels shortly before the Great Depression or before World War II. Some scholars warn about a stark wealth gap in America on par with the days of the Roman Empire. Could capitalism with wealth inequity embedded in it be compatible with democracy based on political equality? What do the systemic schisms mean to the Sino-U.S. conflict?

Such a systemic mismatch has reached serious levels in China after President Xi Jinping stopped “softening dictatorship” — a crucial factor in a smooth transition to capitalism — since Deng Xiaoping embarked on opening and reforming the economy four decades ago. As a result, political power is hardened. In the beginning, the “dual-track system” initiated by Xi aimed to gradually move toward capitalism starting with the coexistence of the command economy and the market economy. But Xi suspended the scheduled privatization of state-run enterprises and banks probably because of the fear that the single-party system could not be maintained in China if they are privatized. However, a vertical dictatorship clashes with horizontal systems. Moreover, the political elite in China have enjoyed a cornucopia of profits from colluding with state-owned companies under the current system.

China’s labor productivity is only 30 percent of the U.S.’s, even lower than the Soviet Union’s 60 percent in the mid-1970s. A World Bank report shows that China’s total factor productivity increased 0.7 percent annually from 2009 to 2018. In other words, China’s annual growth rate would have been fixed at 0.7 percent if capital and labor had not increased. But such a growth formula cannot be sustained. Despite superior technology and quality manpower in some cutting-edge industries — and in a dramatic transition to digital economy around the globe — China’s sclerotic systems are wasting them.

Worse, China’s growth can plunge if Beijing reinforces ideological control and economic intervention internally and launches economic retaliations externally in reaction to Washington’s campaign to separate China from global supply chains. What choice will Beijing make? Will Xi attempt to unify Taiwan by force or transfer his power to a moderate leader?

As the U.S-China standoff continues, their hegemonic battle will have a bigger impact than any other battle of the past. America and China have huge populations and territories. As seen in the Thucydides Trap, a war over hegemony lasted long if two big powers compete, thanks to their abundant resources. A government that lacks democratic systems tends to respond to external threats by force. Due to its innate contradictions, China could be tempted to counter U.S. pressure through a more aggressive foreign policy. A new leader in Korea must be aware of the plethora of uncertainties ahead.

(Translation by the Korea JoongAng Daily staff.)