WHY SIZE MATTERS

A MERCANTILIST PERSPECTIVE ON THE RISE OF CHINA

By: Student Number: Course:

Tim Harris HRRTIM002 International Political Economy

CONTENTS:

1. Preface 2. Introduction 3. The Rise of China 4. Explaining the Rise - Liberalism - Structuralism - Mercantilism 5. The Importance of Size 6. The Impact of Chinas Size 7. A Mercantilist Player on a Global Stage - Mercantilism: Malevolent or Benign - The Role of Military Power - Foreign Policy, Globalisation and Human Rights - Future Scenarios for China 8. Conclusion 9. References

WHY SIZE MATTERS:

A MERCANTILIST PERSPECTIVE ON THE RISE OF CHINA

1. Preface In April 2005 I had the rare pleasure of debating free trade with a Communist. Being part of the delegation of a liberal political party on an official visit to Beijing, my position, in a debate with Lu Guozneg - the Director General of the Ministry of Foreign Affairs of the Peoples Republic of China should have been clear. But as I listened to this hardened veteran of the Communist Party controvert our delegations concerns about the damaging effect of overly rapid trade liberalisation on local production, I realised that our traditional ideological positions on free trade his as a Marxist, and mine as a liberal had been reversed.

This example says as much about the way a political party has to adapt its ideological position to suite electoral realities as it does about the pragmatism of the Chinese government in their pursuit of economic growth. It also, however, highlights how the Chinese state has promoted international interdependence to take advantage of the cost of production benefits their enormous labour market gives them.

2. Introduction

In 1979 Chinese Leader Deng Xiaoping proclaimed to get rich is glorious and launched China on a path of economic reform and opening-up to break the Communist partys totalitarian control of the economy. This directive would come to influence Chinas

foreign policy objectives as much as it transformed the economic lives of millions of ordinary Chinese.

It must have been clear to Deng at the time that such reforms could improve the lives of his people at an individual level, and drive economic growth at a national level; thereby building the wealth of the Chinese nation, uniting the people behind a common cause, and filling the state coffers. But, this paper argues, Deng must also have been aware that a nation-wide pursuit of wealth would likewise because of the sheer size of the Chinese population turn China into a powerful player on the global stage.

In other words, the reform agenda of the Chinese government was, and is, part of a mercantilist strategy to build the wealth and productiveness of China to the benefit of the states political power and influence. The key driver of this relationship is the fact that China has the worlds largest population at 1,3 billion citizens it has 300 million more people than the nation with the second largest, India.

Any aggregate increase in the buying power of the Chinese people increases the buying power of a market that represents more than 20% of the worlds population. Similarly, any advance in aggregate productivity in China improves the productivity of the worlds largest single national workforce.

For these reasons China has followed a mercantilist approach to development, recognising the power that sheer size bestows upon a state and using the scale benefits of nationwide economic wealth creation to the advantage of the state in international affairs.

3. The Rise of China

While such mercantilist tendencies are relatively new in modern China, Imperial China in the fifteenth century was one of the worlds first large-scale, trade-based mercantilist societies. Despite numerous invasions, the central administration-based bureaucracy

founded in those years was retained for four hundred years. This was the golden age of Chinese mercantilism, when global trade routes served to expand Chinese exports and helped to cement its pre-eminent position in the global economy.

Chinas economic dominance also re-enforced the position of the ruling class. As Swartz puts it: Chinas highly commercialised economy more advanced than Europes in the 1400s and 1500s made it easy for central authority to gather the resources needed to crush challenges from would-be nobles - (2000: 22)

This period, which lasted up until the 1800s, was followed by what The Economist calls an extraordinary decline over hundreds of years (Sep 9, 1999) when a growing aversion to openness by the ruling bureaucrats meant China was unable to develop a significant merchant class and was overtaken as the worlds largest economy by the United States (US) in the 1890s.

Indeed, while the US had followed Europe into an industrial revolution by this stage, Chinas bureaucracy had killed off capitalism (Max Weber in Strange, 1994: 70) while a cumbersome and inefficient tax system (loc cit) and geographical isolation had suppressed forces of economic reform.

This decline was accelerated by increasing isolationism, constant invasions by Japanese forces and, eventually, civil war. Emerging victorious from the tumultuous first half of the 20th century in China, Mao Tse-Tung and the communists promoted a nationalistic agenda and presided over, amongst other happenings: a bloody purge of landlords, a famine that killed 30 million Chinese, and the Cultural Revolution where one million people were killed in a shake-up of the party institutions. All-in-all, China remained inward looking and grew slowly, if at all, throughout most of the 20th century.

The process of economic reform and opening began in China in 1979 when Deng Xiaoping adapted the pure socialism of Mao Tse-Tung into what he called Socialism with Chinese characteristics. Dengs reforms included the lifting of local ownership and

local procurement requirements for investment, the tolerance of private capital, the introduction of market prices for farmers, and the re-establishment of some property rights.

The results were impressive and sustained - although it must be remembered that China was growing off a low base, and had a lot of catching up to do with the developed world. In 1950, China contributed a mere 4,5% of global GDP despite having over 20% of the worlds population within its borders. By 1998 the Chinese share of global GDP had grown to 11,5% (Maddison, A 2001 in Desai 2003).

Lu Zongyuan, the Director-General of the Macro-economic Research Department of the Peoples Republic of China, regards the market reform of the Chinese economy as the greatest success of modern China. He claims that it harnessed the effectiveness of workers, peasants and entrepreneurs, and enhanced efficiency (Interview 21 April 2005i).

The reforms spurred investment and growth with annual real GDP growing by 9% a year, on average, since 1978. And this growth performance is set to continue: it is forecast that the Chinese economy will be the second biggest in the world by 2016 and the largest by 2041 (Goldman Sachs, 2005).

4. Explaining the Rise

If, in thirty-five years time, the Chinese economy will be the biggest in the world then how do we best explain the rise of China in the past 25 years and, perhaps more importantly, how do we predict the international political and economic implications of the rise to come?

It seems clear that best perspective from which to analyse the rise of China is a mercantilist one. A state-centric approach, which focuses on the role of the autocratic state in the economic and political rise of China, allows the analyst to best analyse the

unique growth performance of this state, and how economic forces have been harnessed to promote Chinese interests internationally. It also sheds lights on Chinas status as a one-party, socialist state in a world where almost every other country commits to liberaltype democracy in one form or another.

Liberalism

To approach the question of China from a liberal perspective, therefore, would be challenging. The basic liberal assumption, that the state represents an aggregation of private interests (Gilpin in Art and Jervis 1999: 242) clearly does not apply to the Chinese situation where democracy is actively suppressed. Although the Chinese state has allowed significant market reform of the economy and liberals would argue, correctly, that Chinas impressive recent growth performance largely a result of this injection of liberalism the state still retains fundamental control over basic economic activity and investment.

Liberalism, from a normative perspective, may have been the source of Chinas recent economic success, and may feature significantly in its future - should the Chinese state follow a path of democratisation. There is no doubt, however, that Chinas unique status as the last remaining globally-significant communist country leads the analyst away from the liberal perspective.

Robert Gilpin also argues against the liberal perspective, and for a state-centric interpretation of international political economy, when he claims that the latter:

rejects a popular belief that economic and technological forces have eclipsed the nation-state and are creating a global world economy in which political boundaries and national governments are no longer important. It is certainly true that economic and technological forces are profoundly reshaping international affairs and influencing the behaviours of states. However, in a highly integrated global economy, states continue to use their power and to

implement policies to channel economic forces in ways favourable to their own national interests. (Gilpin, 2001:21)

China is, in fact, an excellent case study in support of this view. While the state has opened up to investment by multinational corporations, it has also used its position as an autocratic state with the worlds largest domestic market to retain more control over these corporations than most other states.1

The recent rumpus over Chinese censorship of internet firms like Microsoft and Yahoo has re-enforced international awareness of the states control over foreign firms. Even Google - whose prospectus claimed Google is not a conventional company - and the Rolling Stones, often referred to as the worlds greatest rock band, agreed this year to submit to extensive censorship by the Chinese state.

The degree to which Chinas size boosts the states ability to impose such onerous restrictions on foreign organisations is testament to the cultural leverage their economic power has granted them. The International Herald Tribune recently put it another way: The Stones may be aging rockers, but they're also businessmen. If the Wal-Marts of the world can get rich exploiting China's workers and environment in ways they can't at home, why should the Stones be held to a higher standard(Pesek Jr, 2006).

Structuralism

If Karl Marx originated the ideas that lead to the communist policies implemented by the Chinese Communist Party, in one form or another, since 1949 then surely a sturcturalist perspective, which focuses on class and economic structure, would be the best lens through which to analyse the rise of China?

A recent Sunday Times supplement on China tells the story of how, in 2003, the French retail company Carrefour was ordered to close its outlets in China after they assumed they could open outlets without obtaining official approval. (12 March 2006).

As it turns out, Chinas position as a communist power, and its recent growth experience, raises questions about many of the sturcturalist notions inherent in dependency - as expanded on by dos Santos (Balaam & Veseth, 1995:79)- and modern world system theories - as originated by Wallerstein (loc cit).

While some may attribute Chinas rise solely to the Chinese states embracing of the capitalist system in its trade relations and domestic economic organisation, it is obvious that the Chinese states political management remains, at its heart, a socialist - or even communist - exercise. This reality means that a communist country has, in twenty five years, dragged itself up from the periphery of Wallersteins Capitalist World Economy right to its centre. This has occurred despite what many structuralists would have

predicted in a global economy so dominated by capitalism.

Alternatively, one could take the view that Mao Tse-Tung modelled his communist state on Marx and Engels blueprint for overturning the capitalist system; and therefore, their theories were so normatively successful that they have resulted in a fundamental restructuring of the world economic order.

While there may be some truth in this notion, the analytical usefulness of the Marxist perspective is limited by the nature of Chinese communism itself, and the complex interactions between a communist state - with an economy in various stages of market reform - and the capitalist global economy.

That is not to suggest that the liberal and Marxist perspectives do not provide valuable insights into Chinas economic and political rise, only that the mercantilist analysis best sums up the drivers that initiated Chinas recent accumulation of economic and political power.

Mercantilism

Perhaps ironically, even the market reform of the Chinese economy which began in 1979, and necessitated extensive rolling back of the state, was mercantilist. Robert Gilpin has defined mercantilism as the attempt of governments to manipulate economic arrangements in order to maximise their own interests (2001) and it is clear that, although Dengs steps to open up the Chinese economy necessitated a rolling-back of state control, they have resulted in enhanced domestic and international power for the Chinese state.

In 1958, Jacob Viner wrote: I believe that practically all mercantilists, whatever the period, country, or status of the particular individual, would have subscribed to all of the following propositions: (1) wealth is an absolutely essential means to power, whether for security or for aggression; (2) power is essential or valuable as a means to the acquisition or retention of wealth; (3) wealth and power are each proper ultimate ends of national policy; (4) there is long-run harmony between these ends, although in particular circumstances it may be necessary for a time to make economic sacrifices in the interest of military security and therefore also of longrun prosperity. ii This analysis sums up the decision by Deng, and the political masters of China, to relinquish control of the economy and replace Maos re-education of the urban elite by rural peasants, with the slogan to get rich is glorious. The Chinese seized upon this instruction with gusto realising a six-fold increase in GDP per capita between 1985 and 2005 (World Bank, 2006). The state reaped the power-benefits of this increase in wealth because the growth occurred across a population of over a billion people all of whom were subject to the sole political authority of the Communist Party.

This occurred because, while the impressive growth performance was driven by marketbased reform of the Chinese economy, the Communist Party retained autocratic political

control of the state. Dengs pragmatic decision to reform the Chinese economy was driven by uniquely mercantilist sentiments. It is clear that the change was motivated by desire to create wealth and power in order to preserve and protect national security and power (Balaam & Veseth: 26). One could also argue that the unique political structure of China gave the leaders of China more control over the process than the leaders of a more democratic nation would have had.

Balaam & Veseth draw a distinction between the classical mercantilist perspective which focused on gaining wealth and power through unequal foreign trade and the nationalist perspective which focused on the internal development of the national economy (1995:29) It is argued in this analysis that the former perspective trumps the latter as an explanatory tool in the analysis of the rise of China

Although China was following several distinctly nationalist policies - like import substitution and broad protectionism - before Dengs reform of the economy, the focus became much wider during the opening up of the Chinese economy.

Starting in 1979 Chinese development strategy shifted from import substitution, the privileging of accumulation over consumption, and viewing foreign trade as irrelevant to economic growth, to an active interaction with the world economy in which foreign trace and latterly, investment, were seen as major engines of growth (Saich in Nye & Donahue, 2000:210)

This may have occurred because there was a realisation that the realities of Chinas labour market meant that the Chinese economy was always going to be a globally competitive production centre - without the need for protectionist measures.

There have been several distinct global nationalist cycles in the past two centuries. Two significant ones include: one which began in the mid 19th century when many nations focussed internally to develop and protect domestic industries - and ended when they clashed over imperialist efforts to secure markets for their products in the early 20th

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century; and a second which was driven by the Newly Industrialised Countries (NICs) in the 1990s when many of the so-called Asian tigers rolled out extensive protection to develop local industries.

The Chinese missed both of these cycles: the first because they were distracted by revolution and internal political infighting, and the second because their domestic industries were, by-and-large, already reaping the benefits of their labour-driven cost advantage in manufacturing.

That is not to say that a nationalist analysis of China is invalid, it is just that Chinas productive endowments, and their approach to development, have not necessitated a deliberate economy-wide effort to focus on internal development as the states number one priority.

Instead, one may even define Chinas approach to development as more neo-mercantilist than mercantilist because, especially since China joined the WTO in 2001, it has become more difficult to use traditionally mercantilist policies, like tariffs and quotas. Instead, and China has started to use Voluntary Export Restraints and other policies, like soft loans from the banking sector and regional infrastructure development programs (like the Special Economic Zones).

So, whatever its form, it is clear that Chinas mercantilist behaviour has resulted in the expansion of economic power to cement and grow the political power of the state. But what is the main driver that has allowed this state, one of only three officially communist states that remain in 2006, to increase its economic wealth, and the states relative political power, so dramatically? It is argued here that this driver is the sheer size of the Chinese population

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5. The Importance of Size

Between 1999 and 2003 the 10 countries with the largest populations grow at an average annual GDP growth rate of 4,2%. The next 10 largest countries grew at an average of 3.6% and the next 10 at a modest 2,3% (World Bank, 2006).

Rudimentary as this statistic is, it could point towards a trend of returns to scale in the economic performance of nations. One justification for this could be that, in a world where trade is not completely free, the size of a country may approximate its market size, thereby benefiting larger countries. Conversely, in a world of completely free trade, the size of a country will not matter, in trade terms, because the entire world will be that countrys market. It is clear that todays world is closer to the former reality, rather than the latter.

The two provinces of Canada which are furthest from each other, for example, trade more than any Canadian province does with any State of the USA which borders them directly (Alesina 2002). And Keohane and Nye point out that Britain and France are only slightly more open to trade (ratio of trade to output) today than in 1913, and Japan is less so (2000). Because our world is personified by partial trade freedom, size could still matter - a lot.

Another justification could be that, as manufacturing and production is increasingly globalised, it concentrates in countries and regions where the cost base often driven by labour costs - is lowest. In the absence of perfectly free mobility of labour, it is

conceivable that those countries with larger labour supplies may, especially in the earlier stages of development, have lower labour costs, and hence attract more investment, spurring growth.

This does not mean that small countries are doomed to lacklustre economic performance. Far from it: the three countries with the highest per capita GDP in the world are

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Luxembourg, Switzerland and Norway. And, as the graph below shows, there is only a weak positive interaction between population size and economic growth.

Figure 1:
Popuation Size & Economic Growth
1400000000 1200000000 Population Size 1000000000 800000000 600000000 400000000 200000000 0 0 5 10 GDP Growth 1999-2003 15 20

World Bank 2003

Standard theory suggests that the sizes of national states are due to trade-offs between the benefits of size and the costs of heterogeneity of preferences over public goods and policies provided by government.

But what are the benefits of size? Alesina & Spolaore (2003), in their extensive volume The Size of Nations define five benefits of a large population size:

1. The per capita costs of public goods are lower in large countries, where more taxpayers are able to pay for them. A public good, by definition, is non-rival in nature, meaning that one persons use of a good does not prevent another from using it. Thus, for a pure public good, the per capita costs of providing the good will decline with the number of taxpayers.

2. A large country can better protect itself from foreign aggressions by its greater military power. Defence is a public good and a larger country will be able to afford 13

more development of technical equipment, and more human resources for use as troops.

3. The size of a country affects the size of its economy. In the absence of perfect openness, the size of the population defines a domestic market that can be more cheaply, and more easily, accessed by domestic firms than foreign markets.

4. Large countries can provide regional insurance. If a province experiences a natural disaster like flooding, other provinces can assist with fiscal transfers to aid recovery. Similarly, if a province performs particularly well economically, that

province can subsidise less successful provinces.

5. Large countries can build redistributive schemes from richer to poorer individuals and regions. These can go some way towards reducing income inequality and promoting fairer wealth distributions.

In addition to Alesina & Spolaores list there are two other possible benefits from size:

6. Larger countries can more easily establish more diverse industries that will limit economic volatility. A country with production diversified across geography and sector will ensure that economic outcomes are smoothed relative to a country with limited production.

7. A large country will allow an investing company to access more consumers via one set of governments laws and regulations than a smaller country The complexity of dealing with more than one set of laws and taxes in a region can, quite clearly, escalate rapidly with the number of countries involved.

In determining the optimum size of a country, these benefits are weighed up against the fact that the majority of a governments policies will apply universally to all citizens of that country, regardless of the diversity of preference, or choice, amongst the population.

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As Alesina (2002) points out : being part of the same country implies agreeing on a set of policies: from redistributive schemes, to public goods to foreign policy as heterogeneity increases, then more and more individuals or regions will be less satisfied by the central government policies

The optimum size of a country could, theoretically be ascertained by a majority vote of the people in that region. In reality though, as Alesina shows, borders are more often defined at a Leviathans equilibrium where rulers attempts to maximise their rents. While larger countries will allow the rulers to extract more rents, they also face a tradeoff as more heterogeneous populations are more costly to manage.

An implication of this is that countries are larger than optimal in a world of dictators. Thus, as democracy spreads, so the number of countries should grow. This theory has been proven by the recent democratisation, and subsequent successions in the former Soviet Union, Czechoslovakia and Yugoslavia.

6. The Impact of Chinas Size

Alesinas theory suggests that the Chinese state is a Leviathan which is able to extract rent from the largest national population on earth while preventing the heterogeneity of that population from stirring a level of discontent that leads to an insurrection.

In a country like China, with over 50 ethnic groups, the costs of satisfying the vast diversity of preference are huge. Flag-waving nationalism and direct repression of

dissent are tools often used by the Chinese state to prevent these costs from escalating to the detriment of the states very existence. (Chinese Communist) Party leaders hope that national pride will help the country to remain stable and united amid turbulent social and economic change. By playing to the publics patriotic sentiments, the party also hopes to strengthen its claim to legitimacy (The Economist March 25 2006)

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Any democratisation of China would act as a pressure release for the political tension built up by the heterogeneous population but the leaders of China, intent on preventing the erosion of the states autocratic power, are focussed on containing this political tension through encouraging patriotic nationalism and keeping the country on a highgrowth path.

This is a logical objective for them because Chinas impressive economic performance also stifles widespread criticism of the state. As Tony Saich points out in his discussion of Chinas movement towards WTO membership in 2001 (2000, in Nye & Donahue): the current leaderships legitimacy to rule is tied to its capacity to deliver the economic goods. In short, Chinas preferences are, right now, aligned by significant nationalist propaganda and a growing economy.

On the benefit side, China is reaping many of the benefits of large country size, as described in the previous section. The autocratic nature of the state and the sheer

immensity of the population as shown in the following chart - enhances many of these benefits.

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Figure 2:
Population Size: The Dominance of China & India

China The rest of the world

India

US

World Bank 2003

The fact that China has the worlds largest domestic market is, in all likelihood, the major driver of its economic performance because, as pointed out in the previous section, global trade is not - and probably will never be - completely free. An investor looking for a market approximately as big as Chinas (1,3 billion) would have to target the whole of Europe, North America and Central Asia a total of 49 countries. Chinas ready embracing of free trade2, and its recent enthusiastic accession to the WTO, is testament to the second most important driver of economic performance derived from size: the labour cost advantage. Here, Chinas autocratic state has also been able to keep labour costs low by preventing worker representation, ruthlessly crushing dissent, and allowing the market to dictate the price of labour.

Critically, in China as opposed to any other state where workers rights are minimised any cost benefit, negotiated or enforced by the state, is multiplied out over a workforce of hundreds of millions of people creating a massive national cost advantage in global
2

As shown by the interaction which began this paper.

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manufacturing. In 2002 China became the first country in the world to attract more Foreign Direct Investment (FDI) in a year than the United States (Harvard Business Review 2004: 4).

Of course Chinas global advantages go beyond their natural size endowments, and statesuppressed labour costs. The state, in a mercantilist drive to amass economic wealth and power, has developed a large cadre of technical personnel; tax and other incentives to attract investment; and infrastructure sufficient to support efficient manufacturing operations and exports. (loc cot)

China also reaps the military benefit of size which increases its power in international relations, as the example of Sino-US relations over the sovereignty of Taiwan demonstrates. It is argued elsewhere in this paper that Chinas new economic power, and the increasing interconnectedness of the US and China, has prevented the stand-off between the two nations from escalating into military aggression. But the very fact that there is a stand off is thanks to the sheer scale of the armed forces on both sides, and the potential for lengthily and destructive conflict.

In addition the benefits of size related to the low per capita cost of public goods, regional insurance, and redistributive schemes, also add to Chinas growth potential, as does the contention that size can assist in promoting greater economic diversity.

In particular, the assertion that a foreign investor has only to deal with one set of regulations and taxes when investing in a market of 1,3bn people seems to be the major motivation for investment by many international companies.

There is no doubt that the super size status of China, and India, enhances these effects, while the authoritarian and interventionist nature of the Chinese state is one possible explanation for why their growth performance has been almost twice as impressive as Indias in the past 10 years (Desai 2003).

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7. A Mercantilist Player on a Global Stage Mercantilism: Malevolent or Benign?

Although most Chinese will go to great lengths to explain that they are a peace-loving nation that has never initiated military aggression against a foreign power, many foreigners regard the Chinese form of mercantilism as more malevolent than benign, using the distinction developed by Gilpin (in Balaam & Veseth, 1995:36).

There are several neo-mercantilist strategies implemented by China which re-enforce this view3:

The first strategy is the suppression of trade unions and organised labour, which serves to keep labour prices far below those in more market-oriented labour markets. Although western politicians have historically emphasised the human rights element of this policy like US President Bill Clinton did in his trade negotiations with China over their most favoured nation status many have recently begun protesting against the offshoring of manufacturing jobs to low wage countries like China and India.

It is clear that Indias cost advantage is linked to the enormous supply of skilled labour in that country. Were China to allow the unionisation of its labour and related industrial action China would no doubt lose a portion of its cost advantage, mainly because of the relatively low skill level of their labour force. They would retain, however, that portion linked to the sheer size of the labour supply.

The second strategy is the maintenance of a currency peg which fixes the Yuan at an undervalued level to boost exports. The US-led political pressure on China to allow its currency to adjust to a more market-related level has been intense, and has culminated in

Inspired by Davies, M. 2006. Manufacturing a trade pact with China. Business Day. 3 April 2006

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a US Senate bill which proposes a 27.5% tariffs on all Chinese goods unless the Chinese state moves aggressively to loosen a peg between its currency and the US dollar.

The degree to which China is unconcerned - and Chinese monetary policy is relatively unaffected - by US threats such as these is testament to the degree of economic interdependence between the two states; and the political power China has gained from its deliberate economic expansion.

A loosening of the peg will probably provide some relief for those US manufacturers that remain, and assist China with oil, and other commodity, imports. It will also, however, halt the purchase of US treasury bills by China to the detriment of US interest rates, and even the US economy.

The third strategy is the provision of lower cost finance to Chinese companies, and especially to state-owned exporters. There is no doubt that the lenient provision of finance to state-owned enterprises (who receive half of all bank loans), from state-owned banks, has been a deliberate strategy on the part of the state to promote the development of domestic industries. In particular, these soft loans have assisted in the expansion of production, especially in the southern coastal region.

But this approach has also imposed a significant cost on the state which has had to bankroll the state-owned banks and faced the risk of a widespread banking crisis - in the late nineties, the non-performing loan stock of the Chinese banks stood at over 60% (Economist, 25 March 2006).

The state has made some moves to reign in the banks by forcing them to introduce stricter monitoring of loans and trim their staff - by over 250 000 people (loc cit). This has brought the non-performing loan stock to around 30%, still poor by international standards.

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China has come under increasing pressure from the international investment community to open up their banking sector to foreign competition, especially under the WTO provisions which stipulate openness by the end of 2006. Even here, however, China has used its economic influence to dictate its own terms resisting and restricting foreign ownership of local banks, and imposing onerous regulations on foreign banks looking to invest in China.

The fourth strategy is state-initiated overcapacity in manufacturing or, as Martyn Davies puts it a legacy of a centrally planned economy (with) political rather than marketdetermined investments (where the) manufacturing industry was quota-driven regardless of market demand (creating) overcapacity of production (2006).

Although the socialist production quota system has been phased out, there is still substantial overcapacity in steel, cement and automotive production and infrastructure like electricity and roads (Morgan Stanley, 2006). This has boosted Chinas price

advantage in international manufacturing, and driven export-led growth.

It has also, however, created another structural weakness in the Chinese economy that could lead to deflation and a slow-down in economic growth. To compensate for the over-investment, China will need to increase domestic consumption, which is low relative to international norms. If they are unable to do this they will risk a slow-down in economic growth and pay the price for their historically mercantilist policy of exportpromotion through quota-driven over-investment.

The fifth strategy is Chinas aggressive resource colonisation, whereby the states seemingly insatiable economy drives its diplomats ever farther afield in search of new relationships to bolster trade and share raw materials (Economist, 26 March 2005).

This commodity-based diplomacy has often put China at odds with the foreign policy of many other nations, especially the US, who frown upon Chinas deals with pariah states like Zimbabwe, where China provides food aid directly to the Zimbabwean government,

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and Sudan. When the UN tabled a resolution threatening sanctions against Sudan the Chinese Ambassador to the UN withdrew the Chinese veto only in response to pressure from Kofi Annan (Lynch, 2004).

More recently, China has begun lobbying against the imposition of sanctions against key leaders in Sudan (Reuters, 2006). China National Petroleum Corporation is the largest

foreign investor into the Sudan and 10% of Chinas oil reserves originate from this stateowned company (Barns, 2005).

While Chinas diplomacy in Africa, and other developing regions, has brought infrastructure, education and foreign exchange to many needy countries, it rankles Western diplomats who believe that,

with China available as a partner, authoritarian rulers from Robert Mugabe in Zimbabwe to Sudan's Omar Hassan Bashir can turn their backs when the West demands improvements in governance and human rights. With a $2-billion credit from China, Angola need not concern itself unduly with International Monetary Fund insistence on accountability in its use of oil revenues. (Copson, 2006)

The majority of Chinas economic, and political, foreign policy endeavours are personified by an over-riding respect for the sovereignty of nations, meaning that the above-mentioned deals have few strings attached. This respect derives from the

pragmatic requirements of a country - with a super-sized demand for resources - entering an international market for strategic commodities where the major players have already consumed much of the low-hanging fruit in their own development, and have politically favourable contracts in place for much of the rest.

To a lesser degree, it also derives from Chinas traditionally reclusive outlook, made worse by geographical isolation and a history of invasion and colonisation, and its insecurity about the international communitys disapproval of its political system, and their openness to the prospect of democratic regime change.

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Thus as Tony Saich puts it, what China wants is an economic order that is international in the benefits it brings but not necessarily global in the sense of diluting the decisionmaking autonomy of the nation-state (2000).

To sum up, each of these strategies is can be regarded as malevolent to one degree or another, although much depends on the perspective of the analyst. Each brings with it certain costs, some of which China may not be able to bear for much longer, but each is uniquely mercantilist seeking to expand the economic power of the state in order to reenforce the political power of the state, and define the terms of Chinese influence in the global economy.

The Role of Military Power

Balaam & Veseth define a difference between a mercantilist and realist view by the stress realists put on military instruments and similar state capabilities to render the state secure (1995:27). Without debating the merits of this distinction, it does seem that China has prioritised economic development over the accumulation of military strength in the past quarter century.

That is not to say that China has neglected military power; far from it, the county has the worlds largest standing army the Peoples Liberation Army. But despite large

investments, the countrys military-industrial complex has failed so completely to produce advanced integrated weapon systems that China has become highly reliant on Russian and Israeli imports (Xin & Pucik, 2004).

This may, of course, have resulted from a policy failure, rather than a deliberate national strategy but the fact that the army was reduced in size as Dengs economic reforms accelerated throughout the 1980s (The Economist 15 March 2004) indicates that the state took a conscious decision that security would be driven, initially, by economic strength, with military strength following after.

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The degree to which this approach was successful is seen in the Sino-US stand-off over the sovereignty of Taiwan. As Chinese economic influence has grown, so the threat of military conflict over Taiwan has declined. The main driver of this has been the

increased economic interconnection China and the US; with the US moving manufacturing to China, and China using its Current Account surplus to buy up US Treasury Bills which means that the former is, by-and-large, financing the latters trade deficit.

There is no doubt that the US response to Chinas passing of the anti-succession law in 2005 - which legislated military aggression against Taiwan should the island state make moves towards further independence would have been far less subdued had Chinas economic power not resulted in a high degree of interdependence. Thus Chinas pursuit of economic power has resulted in enhanced national security a classic mercantilist outcome.

Foreign Policy, Globalisation and Human Rights

While China is eager to partake in globalisation to the degree that it enhances the economic, and thereby political, power of the state it is safe to say that China has acquiesced in the international order, and while it has been a joiner, it has not been a leader in international governance (Saich in Nye & Donahue, 2000:211).

It has also been pointed out that, since the 1980s, China has practically stopped using the veto in UN Security Council meetings claiming that it (is) an example of hegemonic behaviour (loc cit: 226). The few times it has used the veto have been related to recommendations for the secretary general, other countrys diplomatic links to Taiwan, and, notably, those cases where new states are created though secession.

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These examples shed light on Chinas objectives in global affairs, but four examples serve to explain why China does not play a more senior role in international diplomacy:4

The first, Tony Saichs view, is that there is a seeming contradiction in Chinas international behaviour (loc cit: 213). Thus, while China tries to implement a Great Power Diplomacy, as former President Jiang Zemin called it, it also bends over backwards to respect the sovereignty of each and every nation, regardless of size or status because of its own insecurity over the worlds view of its internal political affairs. This consideration severely hampers the Chinese objective of creating a multi-polar world and is one way in which Chinas insecurities hamper its mercantilist project.

The second is that Chinas economic influence is, to a degree, linked to its economic potential, rather than its sheer economic size. Martin Wolf has pointed out that at present rates of economic growth, it would take more than three decades for China to achieve the same GDP per head, relative to the US, as South Korea has today (Wolf, 2005).

The third is that Chinas human rights record - and problems such as unemployment, inequality, social unrest, destruction of the environment and corruption - incentivise the Chinese state to remain lower profile on the world stage for fear of attracting attention to their non-democratic system of governance.

It is easy for the casual visitor to China to be lulled into the sense that there is nothing untoward about the Chinese government. It is only when one tries to buy the latest edition of The Economist, or access the BBC website (both banned) that one remembers that China is effectively a police state; and that that state holds 14 million prisoners - a significant proportion political - locked up in Gulags or work camps.5
China has played a very senior role in East Asian political affairs the North Korea n nuclear negotiations, for example but globally, its role has been largely limited to resource-seeking forays. 5 That said, Chinas human rights record is becoming less of a problem as their economic influence increases. In 1989 the Dalai Lama won the Nobel Peace Prize without much acclaim from the rest of the world shortly before Bill Clinton downgraded his human rights requirements for Chinas preferential trading status.
4

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The fourth is that China is a potential super-power that arrived on the global playing field after the rules had been established. This means that China has had to accept many of the costs of adjustment to a world where globalisation is the name of the game; whereas the US, as the current hegemon, has been able to defer or evade them.6

Saich points out that China has had to deal with several challenges to domestic governance that relate to increased globalisation (2000, 215) including the adjustment of the legal system to accommodate intentional capital, the inequality resulting from increased international economic engagement, and the rise of social forces that will benefit from increased globalisation

These four broad constraints go some way toward explaining why China has chosen a mercantilist development path that recognises how political power can be derived from economic power and how economies of scale can enhance that economic power.

Future Scenarios for China

But does the mercantilist rise of China dependent on autocratic control, or does it portent political change? And what are the prospects for democracy in China?

Even The Economist, which often tends towards market-fundamentalism, has claimed that a number of countries have managed impressive catch-up growth under authoritarian systems for example, Germany, Japan and the Soviet Union. One could add Taiwan and South Korea. (March 5 2005 Survey)

It goes on to add, however, that none has stayed in the first rank without democratising. Leadership demands innovation. And, for all its failing, democracy is better at producing that (loc cit).
6

This is not to suggest that Chinas mercantilist strategies outlined earlier have not been successful, rather, that Chinas failings in influencing global international affairs are linked to their late entry into the global market.

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China has retreated from household registration and work-unit systems, and introduced political choice at the lowest level of governance, but additional political reform has been limited. Recently, Chinese Premier Wen Jiabao proclaimed that greater freedom would follow economic reform (SAPA) acknowledging the primacy of economic development, but putting no timeframe on the promotion of political freedom.

If China is to become more politically free, it will probably be in response to the evermounting pressures of globalisation. Gilpin explains the progression as follows:

In time, if unchecked, the integration of an economy into the world economy, the intensifying pressures of foreign competition, and the necessity to be efficient in order to survive economically could undermine the independence of a society and force it to adopt new values and forms of social organisation (2001).

One must remember that the degree of economic integration which China has already undertaken has been, in part, an attempt to improve the economic conditions in China to improve the lot of those Chinese dissatisfied by low wages and inflation; and to distract those dissatisfied with corruption and the lack of political freedom7.

The most likely scenario is that the risk to the domestic power of the Chinese Communist Party will come from a prolonged recession, or even a dramatic downturn in economic fortunes. While the economy booms most Chinese seem happy to tolerate censorship and the lack of political choice, but the new Chinese middle class will not take kindly to perceived, or real, mismanagement of the economy.

The Chinese government violently crushed the last mass protest calling for democracy in Tiananmen Square. But each year the state suppresses large-scale protests and, in 2004 alone, successfully survived no fewer than 74 000 official riots and demonstrations (The Economist, October 29 2005).
7

The protesters in Tiananmen Square in 1989 were made up of both groups.

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The state seems able to keep the lid on this discontent while the economy is growing. Or, to put it in other terms, the political power of the state is derived by continued growth in the economic power of the state. If such growth were to cease, or even slow significantly, the states political power will decline substantially, and may even be disintegrate.

8. Conclusion

Chinas recent rapid economic rise has been powered by deliberately mercantilist strategies undertaken by its autocratic government. The main driver of the improved growth performance has been the reform of the Chinese economy since 1979, but this economic growth has translated into substantial benefits for the Chinese state in the political sphere.

While the liberal and sturcturalist perspectives on the rise of China can serve as normative indicators of specific aspects of the Chinese development path, the mercantilist perspective provides the most accurate analysis of Chinas rise. It is clear that China uses its economic potential, and power, to influence international politics in order to maximise its national interest.

Inherent in its economic expansion is Chinas effective utilisation of the massive size of its population, market and labour force. Size provides many benefits to nations looking to improve their economic performance, and the autocratic nature of the Chinese state has allowed it to minimise the costs associated with increased size.

Chinas form of mercantilism has many malevolent components many linked to its position as the worlds largest nation. These strategies, including: the suppression of organised labour, the maintenance of an undervalued currency, the provision of lower cost finance to state-owned companies by state-owned banks, state-initiated overcapacity and global resource colonisation, impose various costs on the Chinese state. In time,

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some of these strategies may prove to be too costly for the state, but all are uniquely mercantilist.

Chinas role in international affairs is often less high-profile than one would predict, given the political influence gleaned from its mercantilist economic expansion, and leveraging of its size. This compromising of Chinas mercantilist project relates to Chinas insecurities regarding its own sovereignty, and international criticism of its political system.

Any change in political system in China will be sparked by an economic downturn. Until such an event occurs, China will continue to promote economic growth in order to expand its international political influence, strengthen its position globally and reinforce the states political legitimacy.

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9. References Alesina, A and E Spolaore. 2003. The Size of Nations Alesina, A. 2002. The Size of Countries: does it matter Available at: http://ideas.repec.org/a/tpr/jeurec/v1y2003i2p301-316.html Art, R and R J Jervis. 1999 International Politics : Enduring Concepts and Contemporary Issues. Addison Wesley Longman; 5th edition Balaam, D and M Veseth. 1995 Introduction to International Political Economy Prentice Hall College Barns, G. 2005. China looks South Mail & Guardian. April 29 to May 5. Page 24 Copson, R,W. 2006 China branches out Los Angeles Times. 13 April 2006 Available at: http://www.latimes.com/news/opinion/commentary/la-oecopson13apr13,0,6635624.story?coll=la-news-comment-opinions Davies, M. 2006. Manufacturing a trade pact with China. Business Day. 3 April 2006 Desai, M. 2003. India and China: An Essay in Comparative Political Economy Available at: www.imf.org/external/np/ apd/seminars/2003/newdelhi/desai.pdf Goldman Sachs. 2005. Dreaming with Brics: the path to 2050 Research Report. Gilpin, R. 1975. Three Models of the Future in C. Fred Bergsten and Lawrence B. Krause, eds., World Politics and International Economics, pp. 37-60. Gilpin, R. 2001. Global Political Economy: Understanding the International Economic Order. Princeton University Press. Harris, T. 2005. Informal transcripts of interviews with CCP officials on Democratic Alliance delegation visit to China April 2005 Harvard Business Review. 2004. Doing Business in China. Harvard Business School Publishing Corporation Lynch, C 2004 U.N. Puts Sudan Sanctions Into Play Washington Post, 19 September, Morgan Stanley 2006 Global Economic Forum 3 February. Available at: http://www.morganstanley.com/GEFdata/digests/20060203-fri.html Nye, J.S and J.D. Donahue eds. 2000. Governance in a Globalising World. Brookings Institution Press, Washington D.C.

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Pesek, W, J. 2006 Commentary: Satisfaction from Beijing? Even the Stones can't get it International Herald Tribune. 11 April. Reuters 2006 Sudanese slated for UN sanctions 12 April Available at: http://today.reuters.co.uk/news/newsArticle.aspx?type=worldNews&storyID=2006-0412T212704Z Saich, T. 2000. Globalisation, Governance and the Authoritarian State: China in Governance in a Globalising World Nye, J.S and J.D. Donahue eds. SAPA. 2006. China admits to human rights shortcomings South African Press Association 6 April Strange, S. 1994. States and Markets. Pinter, London Swartz, H.M. 2000. Markets: The Emergence of a Global Economy. (2nd ed) Palgrave, New York Viner, J. 1948 "Power and Plenty as Objectives of Foreign Policy in the Seventeenth and Eighteenth Centuries," World Politics, Vol. 1, no. 1 Wolf, M. 2005. China has further to grow to catch up with the world Financial Times. 13 April 2005 World Bank. Data available at: http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,menuPK:23259 9~pagePK:64133170~piPK:64133498~theSitePK:239419,00.html Xin, K and V Pucik. 2003. Trouble in Paradise in Harvard Business Review Doing Business in China 2004

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