China’s Leadership Struggle

LewisCurveSlide.jpgBy John Richardson

IT is still an article of faith among some people in the chemicals industry that all you have to do is concentrate on cost-efficient supply and the demand in developing countries such as China will inevitably continue on an even, upward course.

But this week’s extraordinary political events in China further demonstrates that any effective analysis has to take into account the “what ifs” of either further political and economic reform, or a return to the old way of doing things.

Premier Wen Jiabao, one of China’s liberal leaders, said in a speech this week: “Without successful political structural reform, it is impossible for us to fully institute economic structural reform and the gains we have made in this area may be lost.”

And he warned that unless the “new problems” that had emerged in Chinese society were fully resolved “such a historical tragedy as the Cultural Revolution could happen again”.

The 12th Five-Year-Plan (2011-2015), launched last year, highlighted the flaws in this old model. These include inefficient investments, an increase in income inequality and lack of innovation.

The plan laid out a clear path to solve these problems.

But as China undergoes a once-in-a-decade leadership transition, what if the reformists fail and the 12th Five-Year-Plan isn’t effectively enforced?

The work of West Indian economist Sir Arthur Lewis (see the above slide), who we discussed in chapter 6 of our e-book, Boom, Gloom & The New Normal, is an indication of what might happen in China if the reformists lose their apparent struggle for power.

China might be caught in a “middle income trap”, where it fails to innovate sufficiently to justify higher labour costs.

This is a theme we shall return to in more detail in chapter 10 of our book, which will be published later this month.

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