The new Confucian Ethics of Capitalism and Coriolis’ Theorem

By MH Bouchet, North Sea Global Equity Management & ZHU Fu Quan, Development Adviser, SKEMA

For three decades, since the late 1970s, the marching order in China has focused on five priorities, namely, “move, work hard, leverage your network, invest and get rich”. The result is impressive. Whereas China’s share of global GDP was roughly one third in the early XIX° century, and only 5% in the 1950s, China is now back to 14% and growing quickly. China’s economic curve might cross that of the US around 2020. Four hundred million Chinese have been lifted out of poverty, and the average income per capita stands at $8000, a two-fold increase since 2004. Despite Cassandra’s warning of the bursting of upcoming bubbles, China has navigated through the pitfalls of the global financial crisis with caution and responsiveness. And the soft landing of China’s economy, with a sustainable GDP growth rate of 8%, means that the inflation-driven overheating threat has receded.

Clearly, however, the medium-term picture is clouded by at least three structural challenges. The first is an aging population, an unexpected by-product of the successful one-child policy. By 2030, the population above 65 years old will get larger than that under 14 years, and the working population will shrink thus. The second is the large wealth gap. Those who “made it” made quickly a lot of money, while adopting an ostentatious consumption style far from Max Weber’s reference to the austere protestant ethics of capitalism. And the third challenge is related to the later, namely, the regional divide. The wages of Gansu workers are still three times less than in Shanghai. All in all, coastal capitalism surged in the prosperous cities between Guangdong, Zhejiang and Liaoning while the center of the empire is still close to an Industrial Revolution phase. The gap gets larger and larger between urban and rural areas. The Gini index, a widely used measure of income inequality, reaches 0,6 reportedly, twice as much as in the 1980s).

But there is a fourth and more formidable challenge that the new President, Xi JinPing, must meet during his ten-year term: that of inclusive development. Growth is not a problem for China, but nor is it the solution! History suggests that to transform dynamic growth into sustainable development, governments must care for the young, the old, and the poor. In developed and emerging market countries, the reduction of inequality actually boosts socio-economic progress. Given that the wealth gap is the key reason for China's high savings and low consumption, the government's social spending programs have focused on providing access to cheap loans, public health, basic education, and pension services. This is not enough. Modernization generates centrifugal forces that, unchecked, trigger social and political turmoil. The reason is simply that the lag between fast economic change and slow socio-political change creates an institutional deficit that is filled by turmoil. This “crisis of mediations” and its pressure-cooker effect have been at work in Tunisia as well as in Egypt, South Africa and the Philippines yesterday. It will rock Russia, Mexico and Brazil tomorrow. As more and more Chinese people watch TV and get access to global networks, economic frustration and social demand will lead to upheaval if they cannot be expressed through institutional channels, such as associations, NGOs, representative parties, and unions… Tiananmen Place as well as Tahrir square exemplify such “friction”.

China currently meets the challenge of the “Great Transformation” that Polanyi analyzed in the 1940s. For centuries until China’s last Emperor, namely Mao, the country’s market economy

was embedded into the sociopolitical system that tightly controlled the behavior of economic agents. Today, the combination of competitive capitalism, widely spread corruption, and the one-child policy has created a very individualist society while the values of “inclusiveness” are not embodied in the political system. The capitalist appeal of “move, work and get rich” will quickly erode its power of mobilization, all the more if growth slows down. This is where China and other fast moving countries can apply the theorem of Coriolis, from the mid-XIX° century French physics scientist who analyzed centrifugal forces in water wheels: Any country that aims at maximizing the benefits of market globalization must offset the centrifugal effects of the market economy by a socio-political system that promotes resilience and adherence. And this is all the more urgent as China is moving toward another Great Transformation, toward a Knowledge Economy phase, based on a rising level of R&D, while promoting higher education, research, innovation and services. Higher productivity will then lead to enhanced competitiveness. The problem is that Knowledge Economy-driven development is not compatible with an institutional system where power is based on vertical authority.

In China today, Confucius might be the answer. A growing number of Chinese people go back and forth between their work, shops, and the temple. The narratives of the Confucian values focus on respect for social order, authority, harmony, and saving, in rejection of conspicuous consumption. This is what will save China from a turbulent transformation toward modernization and it is good news that President Xi JinPing made clear that the west is not a reference model.