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Does history repeat itself?

On whether China could be the next Soviet Union

There was once a time when even people in the US solemnly feared – and expected – that the Soviet Union would become the leading economic superpower of the future. As we all know, history took a different path and today the Soviet Union is a relic of the past. Simultaneously, a new giant began to rise: China, the Empire of the Middle. While also communist in political nature, it showed a miraculous growth path over the last decades – which only recently began to slow down. Given their institutions, might China be the next Soviet Union or is this a situation where “it is different this time”?

After WWII even US-economists like Paul Samuelson assumed that the USSR would in a few decades take the place of the US as the reigning economic superpower, and later he still made that claim but with a delay of some decades now in mind. Fast forward to the 1990s and the USSR is no more, and according to Fukuyama we had reached the end of history. Fast forward another 30 years and the end of history has panned out in yet another unexpected way. Suddenly, China is on the rise, India is slowly growing up, Europe is becoming old and the US are also slowly losing their hegemonic status. The question that naturally comes to mind is whether we are actually set to experience a “changing world order” as Ray Dalio described in his book. 

There are two perspectives to discuss in that matter: The pure economics and long cycles as described by Dalio and the methodology of institutions as described by Acemoglu and Robinson.

Starting with the first, the cycle theory basically describes economies as going in cycles. Like very long business cycles, economies first rise, mature and at some point, become superpowers. Later they become complacent and might rest on their laurels. Having lost their competitive advantages, other countries might evolve and try claiming their place. The powerful nation tries to prevent this, leads wars but eventually succumbs to the external powers and a new world order is born. This is how it went with the Dutch, the English and might now also be relevant for the US and China. Given the US has been powerful in the past, now caught up in more and more wars, and China has been able to evolve as a center of cheap manufacturing, benefiting from their manpower and low costs mainly. Slowly but steadily their GDP reaches US level, of course by no means on per capita levels, but still. Growing influence in Africa, Asia and Australia also shows how they begin claiming a role as protectors and influencers in the world. Given that China is still growing relatively quickly it could be inevitable that they surpass the US some day, also on per capita levels. However, this story would have been consistent for the USSR after WWII as well, with them launching satellites and people in space first or seeing their advances in industry back then as well – and as we all know the US was able to fight their threat off during the Cold War.

A more nuanced view is set forth by Acemoglu and Robinson in their book “Why Nations Fail” in which they describe the influence of inclusive (or extractive) institutions, political as well as economic, on long-term growth. Throughout history, only countries with sufficiently inclusive institutions have been able to remain stable and grow consistently. All other regimes have either remained poor, constrained, or have crumbled and fallen apart sooner or later. While extractive institutions can lead to some growth through forced redistribution of resources or imposed innovation, they later lack incentives to develop further as reigning elites have an interest to care for their gain first before attending to society or risk giving up their place. This is what prevented the USSR at some point from growing further, as communist elites saw plans and extraction as beneficial while their people were fighting for freedom rights and more economic participation. Now China seems to defy all those odds. With partly extractive and partly inclusive institutions there seems to be no real stop to its growth. The question is, and is impossible to answer ex ante, will this continue forever? If economic growth leads to a craving for personal rights and democracy and Chinese society is able to transform this way; or alternatively if the communist government can drive such a nuanced policy of symbolic carrots and sticks that their people do not mind being exploited or unable to live in complete freedom, then it could go on to become the leading superpower. However, at most times extractive institutions have led to fights, internally as well as externally over who gets what, when and how – and how to get more of that of course. At the moment this level has not been reached in China as all is going (sufficiently) well but in any case, it will be interesting to monitor this development further in the future. 

History is history for a reason and can hence only be understood backwards. Life however, as the metaphor goes, must be lived forward. And while it is easy to rationalize a story ex post it is much harder to characterize and correctly identify all the relevant patterns ex ante. China could be different or fall prey to the same (or different) obstacles as the USSR did. This frees neither the US nor the rest of the world from being aware of China and a possibly growing new economic superpower that could have a major influence on all our lives in the future. China could be the future or could become a relic of the past as well, depending on how aware its leaders and people are of their surroundings and whether their economic, societal, and political development suits the people and can be reconciled with the demands of prosperity. Although insufficient as an answer, only time will be able to tell whether China follows the one or the other path and whether the relevant economic hypotheses or continuous growth and the underlying institutional patterns will have to be rewritten.