China’s premier warns on Cultural Revolution risk

Lewis curve Asia.pngOn 29 June 1987, the blog was in S Korea on a business trip. With its ICI Korea colleagues, it arrived at the company we were due to visit, to find the gate open. The offices were also deserted.

Surprised, we walked into the factory to find 500 people watching a small black and white television. It was a momentous day in the political life of S Korea. President Chun was announcing that, for the first time, the next president would be directly elected under a new constitution.

Since then, Korea’s economy has blossomed. Even the 1997 Asian Crisis proved helpful in hindsight. It further weakened the ‘crony capitalism’ that still existed between the powerful industrial chaebols and the government.

China, of course, still has to go through this process. But the starting gun was fired on Thursday, when it was announced that one of the Communist Party’s top officials, Bo Xilai, was being fired. Premier Wen then went on live television in his annual press conference to warn:

“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. New problems that have cropped up in Chinese society will not be fundamentally resolved and such a historical tragedy as the Cultural Revolution may happen again. The mistake of the Cultural Revolution and impact of feudalism are yet to be fully eliminated.”

The background to this intense debate, as in Korea in the 1980s, is the need for political reform to accompany and support economic growth.

The chart above, from chapter 6 of ‘Boom, Gloom and the New Normal‘, highlights the insight of West Indian, Sir Arthur Lewis. He won the Nobel Prize for his work showing how early growth (y-axis), based on the supply of cheap labour, comes to an end after ~20 years (x-axis):

• This ‘free labour’, which kick-starts industrial development, has to be replaced by more labour intensive manufacturing
• In turn, this means people have to be allowed to think for themselves

Since 1987, Korea (red dot) has successfully followed Japan (blue dot), in moving up what has become known as the ‘Lewis Curve’. Now China (green dot) has to try and follow the same path. It will not be easy, and as Wen warned, success is not guaranteed.

Bo’s dismissal shows that China’s leadership is starting to move in the right direction. But it is just a first step. The new Politburo leadership, due to emerge in October, has a major task ahead of it.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

, , ,

Leave a Reply