I am just back from a week in China (Beijing, Shanghai and Hong Kong). I have grown accustomed over the years to see the incredible pace of construction and westernization taking place in Shanghai. Hong Kong is, of course, a familiar and well established First World city. However, what really impressed me this trip is how fast Beijing is transforming from the dull, militarist capital into a thriving commercial as well as capital city. From the new financial district to the bold Olympic sites, Beijing is modernizing in every sense of the word.
This lead me to ponder on the long plane ride home what must be the central question being debated in the inner sanctum of the Communist Central Party: To what extent should China embrace a market economy so as to make the pie bigger for everyone and thereby help raise the standard of living of the large rural population and to what extent should it centrally constrain that liberalizing impulse to avoid large inequalities which could foster revolt?
To me this question is immediately linked to a core socio-economic debate: Are individuals rational economic animals who respond to direct improvements in their standard of living, or are we actually wired to only appreciate relative improvements in our economic status?. That is, if my income goes up from $500 to $700 per month, will I be satisfied with the governing system that has delivered this 40% improvement? Or will I only be happy if at the same time the gap between my income and the richest segment has not increased?
I believe the Chinese government is acutely aware of this debate, made all the more immediate by the spread of television and other media across all of China, showing to rural laborers for the first time the luxury consumption of the ascendant urban professionals. Is it any wonder then that Government of President Hu is so focused on stability and "social harmony" and that his government continues to go to such lengths to wall off the internet and control the media?
This is not just a philosophical debate. China has a long history of civil rebellions starting in the countryside. The government knows it is playing with fire in attempting to mould a "socialist" market economy. Without the "market" part there is no engine for economic growth and, therefore, no larger pie to divide. However, taken to the laissez-faire extreme, the resulting inequalities, now beamed to every corner of China, could cause great unrest.
I'll stick to running companies.