Will the Chinese people allow this to become the Chinese century?

A Chinese century: science fiction or inevitable reality? Such speculation inevitably provokes indifference among many Chinese who have heard this national scenario promoted many times over the past decade. Nevertheless, the majority of the population identifies strongly with a future in which the Chinese motherland unites the ancestors of the ancient Yellow Emperor. So the question needs to be asked: can this dream occur within this century? Or will China's pretensions to be a superpower collapse into a nightmare of social fragmentation?

There are a number of ways of engaging with such a scenario and the conditions necessary for its fulfilment. Leaving aside the question of China's military strength, which is already formidable, the great transformation that China needs in order to challenge for global supremacy is to liberate the creative energy of its people in a manner comparable to the current superpower, the USA. The USA is in many ways the converse of China - a society that is predicated on the rule of law and corporate governance, despite instances such as the Enron scandal. The USA is celebrated by media columnists such as Frank Devine among many others for a "can do" ethic.

However, China is a can do society only if one has good connections and capital. Despite a massive population, the country witnesses few such "rags to riches" stories as are regularly celebrated in liberal democracies. The combined wealth of the top 50 IT entrepreneurs in China is about US$3.5 billion, which is less than ten per cent of Microsoft founder Bill Gates' fortune, estimated at US$46 billion (South China Morning Post, 20 October 2003).

But the difficulty of attaining great personal wealth is not due to a lack of democracy as proponents of free markets often simplistically contend. In China it is more about understanding how institutionalised bottlenecks impede the development of ideas. According to Harvard-based economist John McMillan, successful economies have five elements that allow markets to operate effectively: information flows smoothly; property rights are protected; people can be trusted to live up to their promises; side effects on third parties are curtailed; and competition is fostered. None of these elements are necessarily predicated on democratic processes but all are inhibited to varying degrees in China by institutions that have yet to adapt effectively to a market economy.

Information doesn't flow smoothly and procedures are rarely transparent. Bureaucratic entrepreneurs, such as middle-ranking officials with authority to creatively interpret policy, have disproportionate power to intervene in market transactions. This situation is analogous to the role of educated Confucian scholar-officials in imperial China. Under the Confucian system those who managed to navigate the imperial exams found a role as buffer between business and government. In China today the oxygen of new ideas is stifled by such gate-keepers while social conformity is embedded within an education system that is founded on cramming to pass exams so that students can progress to the next level rather than learn to think critically.

Development in China has to also contend with a political system in which stability has developed through careful information management. Consider current practices. China's recent great adventure in space flight was carefully media managed. The day after China's "man in space" returned to terra firma I was told by friends at Beijing's China Central Television that the station management (responding to Propaganda Department directives) issued instructions to program presenters not to mention the space flight in any way during non-news programs. In other words, leave the management of this momentous event to specialists. Likewise a hospital worker informed me that in the anticipation of a return SARS outbreak they had been given explicit instructions to identify and isolate any new cases and not to leak anything to any foreign media.

A lack of quality audited information inhibits economic development. Many people in business are reluctant to fully disclose information. While the mantra "information is power" is well known, the free flow of information remains a distant apparition. Openness, transparency, and further institutional reform are necessary in China. These are elements of development that are promoted by many Western educated managers who are at the forefront of instituting corporate reform. When I spoke to this managerial class recently I heard two common responses. First, that the lack of "can do" is a problem inherent within the population, and second government is culpable.

In blaming the population the usual response is to say that people's quality (suzhi) is too low. The term "suzhi" does not directly translate into English but it can be seen to be a combination of education, upbringing, social capital and morality. I was told by the marketing editor of one of China's leading financial media that staff needs to be constantly policed in order to minimise the tendency of granting dispensations to those who might return favours. Professionalism needs to taught and aberrant behaviour duly penalised. The problem of granting dispensations unevenly has an impact upon third parties and ultimately decreases the transparency of transactions.

Blaming the government for a lack of competition is a common response, and much of this is justified. The government is unlikely to deliver on the necessary elements for markets to operate effectively despite rhetoric and occasional incremental reforms in legal processes. There are many steps that need to be taken among which are the implementation of bankruptcy, intellectual property, and press laws.

Such impediments represent different pieces of the China puzzle. Blaming the people for their lack of "quality" and the government for its reluctance to deliver on real reform seems to indicate extreme pessimism. However, there are many other issues that exist between state and society. A particular conundrum in China's development is that big is not necessarily beneficial, or beautiful. China's size is often suggested as the reason why it will be a superpower. It's about the law of large numbers. While market size matters, potential advantage is not fully realized due to an inability to transform research into discovery, or research into commercial advantage. According to recently released OECD figures (Financial Times, October 27, 2003), China ranks third in the world for spending on research and development. Likewise China has no real need for international foreign investment, given the nation's significant buffer of savings. What China needs, however, is technology transfer and ideas. Despite ranking third in R&D investment, China remains abysmally low in patenting statistics.

However, this does not necessarily mean Chinese are not innovative. Mr Yu Le, the manager of Real Networks China division, points to the quick uptake of technology-based applications such as wireless, SMS, and video games.

But this kind of innovation is ultimately the adaptation of other people's ideas. It is possible therefore to speak of a "Chinese business model" in which you wait until someone else invents something and then move quickly to copy. The emphasis is on mimicking success for short-term gain. Despite the rapid innovation that occurs in industries such as new media, a root cause of China's lack of economic development is the tendency to imitate. Imitation is also a response to structural dynamics. In other words, the innovation deficit that plagues China is a result of geographical fragmentation. Under the planned system that predated the current reforms, China's nationalised industries were not consolidated into competitive networks, but rather operated according to geographically determined logistics, creating a system that rewarded non-competitive behaviour. Under the planned economy businesses were similar in terms of structure and administration and production more often than not followed a pattern decreed by political mandate rather than consumer demand.

In effect, these trends underscore the structural dynamics underpinning Chinese economic reforms. Endowed with a massive but not necessarily affluent domestic market, China's development has been a story of many small empires rather than national champions devouring all competitors. Reform, which began in 1978 two years after the demise of Chairman Mao, has according to economist Lance Gore led to a commercial environment typified by miniaturisation and duplicate construction. Miniaturisation refers to the practice of multiple small-scale commercial enterprises unable to grow to become champions in their own right because of limited access to capital.

"Duplicate construction", on the other hand, is a term familiar to most Chinese. It describes the process by which enterprises replicate each other's activities, even including infrastructure, resulting in a fragmented marketplace typified by a great deal of parasitic localisation and little real innovation. Here the emphasis is on growing local industries rather than national or international networks. While essentially a neo-classical model of growth, this kind of duplication encourages what Gore calls "capital-less capitalists" who do not bear the whole risk of failure.

But is there a positive scenario? Most experts who criticise China's failings are quick to stress that ultimately anything is possible in China with the proper facilitation of development. Just what this facilitation might be, however, is unclear. Leaving everything to the market is likely to create anarchy. There needs to be systemic and careful regulation. A case in point is the publishing industry. According to Mr. Zhang Xiaoming of the Chinese Academy of Social Science, publishing's dependency on government for the allocation of book numbers, that is, authority to publish, means that creativity and ideas are stopped from getting out in the public domain. But can the market sustain a deregulated publishing industry, and more importantly will the government allow such a situation? Too much information may not be the government's recipe for a Chinese knowledge economy. Nevertheless, as demonstrated globally, authoritarian regimes can not sustain information control. There will be further improvements in information flow and ideas generation in time. Just what that time frame will be remains unclear. The stakes are too high for China to be left behind in the information superhighway slow lane.