China or NAFTA: the world's largest market in the 21st century?

Scenario B--Military ascendancy. An alternative scenario after 2010 involves the re-ascendancy of the People's Liberation Army's (PLA), either via dominance over the CCP or by seizing control of the government. This could precipitate civil war or could produce military expansionism leading to the establishment of an even larger China. The military, although in the background in recent years, remains a major force in China. "While most nations are reducing defense expenditures in the post-Cold War era, China is one of the few doing the opposite" (Lilley and Ford, 1999). China is spending about $50 billion per year on the development of all kinds of weapons, including ballistic missiles, the neutron bomb, and stealth technology.

China's goal is to control its neighbors and diminish the American influence in Asia. The former may lead sooner or later to the invasion of Taiwan. It may also try to expand into other countries which it considers to be in its traditional political sphere of influence, such as Vietnam, Laos, and Cambodia. Such an invasion would be the beginning of the rise of "Grand China," which also might then aggressively look at Singapore and Malaysia. After military expansion, Grand China could enter the stage of strong nationalism, isolation, and belligerence (Robinson, 1994).

An alternative military scenario would be internal, rather than external, with a reversion to traditional Chinese "warlordism" and civil war. Either scenario would likely stop Chinese expansion in international trade and also trigger the negative growth of a militarized economy.

Scenario C--Bureaucratic corruption. The business environment will not yet be fully privatized by 2010. Major sectors of the economy will remain controlled by corrupt bureaucrats: A semi-private managerial class, which does not support democracy and democratic capitalism, controls the country. Undemocratic capitalism continues, but with economic power resting largely with party apparatchiks and government bureaucrats. David Zweig calls such a situation "a rent-seeking society," where he defines "rent" as "the difference between free-market prices and higher prices that exist because regulations limit competitors from entering the market" (Zweig, 1999). Those rents encourage corruption as apparatchiks and bureaucrats charge rent (fees) for providing licenses and permission to conduct business.

Under this scenario, undemocratic capitalism will retreat from reforms and development. Joint-ventures will be less popular, foreign direct investment will decline, and trade will be curtailed by the "closed-door policy" for foreign products and services. This will happen because bureaucracy likes the status quo and boycotts reforms which they fear might threaten political order. Corruption will proliferate, despite the positive economic growth of coastal areas, because inadequate investment in infrastructures will keep the rural areas from sharing in the bounty. One could also imagine under this scenario, as well, that China might fragment domestically organizing itself around warlords, the classic Chinese pattern that existed during the early twentieth century. It will lead to political instability, regional rivalry, and perhaps a civil war (Gladstone, 1995.). As a result, China would likely enter a period of negative growth, similar to that of Russia after 1991.

Scenario D--Democratic capitalism. As mentioned above, the imbalance between economic and political freedoms is not likely to be sustainable over the long run. Hence, revolutionary change may be triggered by a social revolution or a new charismatic leader such as Mikhail Gorbachev or Boris Yeltsin, who could lead a revolution. Another incentive to the conversion to democratic capitalism could be caused by the capitalists from Hong Kong, the new business teachers of the mainlanders who are accustomed to an entrepreneurial strategy as well as political freedoms in developing businesses. Such a step would mean the departure from Deng's political status quo strategy and the entry to wide-ranging, democratic, political reforms--along with the risk of instability (Dickson, 1997).

Sooner or later the mobilized elite and the middle-class bourgeoisie will try to remove the communists from power. However, due to 50 years of communistic dictatorship, the process of change from undemocratic to democratic capitalism will be arduous. It will require the transformation of institutions and behavioral patterns of workers and managers, including the shift in educational programs, which up until now have been based on communistic and nationalistic ideology. This transformation will probably go along the Russian path rather than the Polish one, since the communistic brainwashing in China was even stronger than in Poland. Poland was the freest state of the Soviet Bloc, with frequent social unrest (1945-47, 1956, 1970, 1975, 1980, 1981, and 1989) coupled with the strong influence of the Roman Catholic Church upon the citizens.

Under this scenario, although the evolution toward economic freedoms would continue along with the political revolution, change will be disruptive. The economy will likely suffer.

The four scenarios yield very diverse scenarios after 2010. Of those four, only Scenario A, (the continuation of undemocratic capitalism), is likely to support a strongly-growing economy through the years 2010-2020. Even under that scenario, we estimate this growth to be about half that of the previous years from 1998-2010, a level of perhaps 3.5 percent per year or less (FIGURE 1).

[FIGURE 1 OMITTED]

THE WORLD'S LARGEST MARKET IN 2010

China has often reported economic growth rates of 8 percent and even 10 percent and higher. However, even for China, this is unrealistic: Only the way in which the Chinese government measures GNP makes this possible. The Chinese accounting system is based upon the old Soviet method, which relies upon total-output reporting rather than upon the added value, as is done in market economies. The Soviet method is unsound and cannot provide data for comparison with the performance of the capitalistic economies.

Independent estimates, such as those of the World Bank and OECD, are much more realistic. They assume that the Chinese economy will grow annually about 7.6 percent in 1998-2010. (4) However, even this may be a very optimistic assumption since signs of disturbances in China's economy have already surfaced. The Asian financial crisis of 1997-98 was a factor. So also, has been the past 2000 world economic slowdown. But, domestic troubles are also appearing. For example, joint ventures, the engine of the economy, seem to be losing their appeal in China. The government severely restricts foreign ventures, keeping them out of some of the most attractive markets (e.g.: financial services, telecommunications) and often requiring them to export actively before they can sell to the Chinese. The late 1999 agreement between the U.S. and China to get U.S. support for China's admission to the World Trade Organization and China's entrance to the WTO should loosen some of those strictures, but severe restrictions still exist in many key areas of the economy.

Many joint ventures sustained major losses because the western partners were unfamiliar with China's weak infrastructure, corrupt business practices, government obstruction and unique form of networking. It has been estimated that three-fourths of all joint ventures in China lose money! This is especially true of foreign investments which hoped to reach China's 1.2 billion people. Some foreign investors, disillusioned, have withdrawn. When its joint venture with state-owned Guangzhou Automobile Manufacturing turned sour in early 1997, Peugeot decided to withdraw after several years of losses (Wong, Maher, Jenner, Appel, Herbert, 1999).

TABLE 2 illustrates that the projected ranking of the world's largest market will remain unchanged. NAFTA will remain the world's largest market followed by the E.U. The Chinese economy will grow more than 100 percent.

It will have sharply increased its lead over Japan as the world's largest economy (two and a half times as large) and will approaching the size of the European Union. Moreover, in respect to market share, only China will increase its world share--from 11 percent in 1988 to 17 percent in 2010.

THE WORLD'S LARGEST MARKET IN 2020?

The momentum upon which the projections for 2010 are based is well developed. Of course, disruptions may well occur. However, even a major regional disruption, such as the Asian financial crisis of 1997-99, has had only a moderate impact upon China. There is an excellent chance that the economic projections through 2010 will occur. What happens after 2010 is much more difficult to foresee. An economic forecast of the world market's dynamics in 2010-2020 is illustrated in TABLE 3.

The prediction for the world's largest market in 2020 is based upon the following assumptions:

* NAFTA will likely expand its reach to most of Latin America after 2010, if not sooner. Signs of this can be perceived even today: Mexico already has a free-trade agreement with Chile and the United States has an agreement with El Salvador. Unfortunately, there is opposition to any NAFTA expansion in the isolationist wing of the Republican Party. However, if the United States persists in excluding the rest of Latin America from the benefits of participation in regional trade blocs, the region will turn elsewhere in its own self interest.