Will China help Russia modernise?

Dmitry Medvedev’s visit to China will doubtless help better understand the external conditions that will accompany Russia’s modernisation programme, as set forth by its President.

The radical strengthening of China’s position in the global economic and political spheres, highlighted by the continuing crisis in developed nations, is the result of China’s systematic modernisation strategy, which, combining command economy and market methods over the past 30 years has proven more effective than similar programmes in other developing and transition economies.

Over 30 years ago, Chinese reformers put China’s economy on a new track, managing a smooth transition. According to Indian economist R. Agarwala, it is the combination of China’s industrial facilities built under Mao and the new contract system stimuli that enabled the growth of China’s agricultural industry at the initial stage of reforms.

We can see the signs of a new, intensive stage in China’s economic development, including the massive replacement of production facilities, comparatively effective energy-saving methods, intensified development of the service sector and, finally, China’s emergence as a large international investor.

The gradual economic reorientation from international to domestic markets may also be seen as a sign of intensifying growth. The Chinese economy has been spurred by the global financial downturn. Indeed, the Chinese government took effective measures to fight the crisis, encouraging state banks’ lending schemes, along with many government-sponsored sector-oriented and regional programmes.

It is quite significant that, while ratcheting up modernisation, China also maintains a low level of inflation with the help of both monetary and administrative measures. Chinese banks maintain moderate interest rates and keep inflation at bay, supporting the real sector. The regulators’ effective policy balances the national economy, while also creating islands of economic stability in partners and regions close to China.

The rise of China in the 21st century has brought to light a number of structural weaknesses in developed economies, also highlighting the overall fragility of the global financial system (or “non-system”, as Paul Krugman puts it,) based on the dollar’s domination and the long-term monopoly of developed countries on lending and convertible currencies. The selective use of foreign cash proved more effective than integration with international financial flows. Thus, the idea of the multi-polar world, seen by many as the political ambition of comparatively weak nations, has taken on perceptible economic outlines.

China’s growth was also an important factor in creating the heterogeneous organisation that is BRIC. This seems logical: large countries with vast domestic markets, still-ongoing industrial evolution, strong protectionist ideas, average living standards (by world standards), and decent scientific potential are quite capable of solving their problems in an independent and creative manner. Keeping a distance from the crisis-hit developed economies does them good, encouraging them to focus on domestic markets and cooperate with more dynamically developing neighbours.

Washington is not happy about all this, switching from involvement to restraint tactics and encouraging similar sentiments in regions neighbouring China. “The Chinese threat” has become a media topic again, despite China’s growing ability to solve its acute economic and social problems and its increasingly open and predictable foreign and trade policies.

Washington’s attempts to put pressure on Beijing and offer various “carrots” to China’s neighbours in The Big Game (which can now be scrutinised by local elites) signal important changes in the alignment of global forces in favour of those countries with a focus on modernisation. Such an attitude invokes the tradition of planning the sowing and reaping, as it were, while also implying financial discipline and control. It also means that the best investment climate is economic growth; in Russia’s case, this requires investment initiatives from the government. Alas, the consequences of foreign “investments” in 2006-2007 proved too costly.

At the same time, China’s ability to maintain and even speed up the rate of its economic growth despite the downturn in developed economies provided the much needed shield against the domino effect, preventing Western problems from spilling over to the rest of the world. This ability also helped Russia’s eastern regions, which have close ties with China, to weather the difficulties of 2009 more easily.

China’s cooperation with the global economy could bring more order to international markets, something desirable indeed. The common task for BRIC nations, and not just for them, is to stabilise the global economy, with China’s help.

Theoretically, the fundamental assessment of China’s economic model is very important. Such an assessment could include an analysis of relations between economic stasis and dynamism, the balanced and investment models, between the state, monopolies and the market as the entities being modernised, between the financial economy and the real sector, etc.

In practical terms, the Chinese economy and its global expansion have an important advantage: partners from China are long-term, predictable players with more or less certain goals.

China’s economic expansion is due not just to its financial pportunities, but also to the strategic task of complementing its economy with the missing elements.

This type of expansion differs significantly from what is normal for western corporations and banks. Chinese investors favour the real sector, and the percentage of new facilities in their foreign investment is much higher. Given China’s focus on infrastructure, we can say that China not only captures foreign markets, but also develops them.

China’s overheated investment sector seeks to burst beyond the limits of the domestic economy, which is good for Russo-Chinese cooperation on investments. Apart from cooperation in the energy sphere, joint projects in such areas as transportation, agriculture and forestry look very attractive. Other promising areas include housing and infrastructure construction, the manufacture of building materials, tourism etc.

Long-term intergovernmental agreements, strategic alliances between large national corporations and cooperation in the currency sphere, which could protect both countries from the inevitable shocks in the “non-system”, will help lift “the Chinese threat”, further enhancing China’s predictability in international markets.

The successful development of large-scale agreements with China could significantly improve Russia’s economic situation. Hopefully Beijing understands that and sincerely supports Russia’s modernisation.

A. I. Salitsky, PhD, Chief Researcher
The Institute of World Economy and International Relations (IMEMO) of the Russian Academy of Sciences

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