China: Threat and Opportunity 
- JIM STODDER, The Hartford Courant, September 23, 2007 


Everyone is trying to figure out what China means for the West. New business opportunities in the East? More poverty in the West? A rival superpower? 

Jack London asked all of these questions a century ago. Already famous for tales of the Alaskan gold rush, the 28-year-old author was hired by the Hearst newspapers in 1904 to cover the war between Russia and Japan. London, who loved boxing, was now ringside for a major defeat of a European country by non-Europeans - the first since the fall of Constantinople in 1453. 

This Asian triumph came at the same time immigration was leading to anti-Chinese riots in California. In this climate, London sent home a 1904 essay titled "The Yellow Peril" - predicting that the Chinese might one day inherit the earth. 

Three years later, in 1907, he wrote a science fiction story called "The Unparalleled Invasion," in which he made two accurate predictions about China's future. 

First, he predicted that Japan would invade China, but eventually be expelled. The Japanese invasion came in 1931, 15 years after London's death, and their expulsion came at the end of WWII. 

More important was his second prediction. He saw that China would industrialize in the 20th century, and that its vast supply of cheap and disciplined labor would again make it what it had been for millennia before - the world's greatest economic power by far. London wrote that: 

"China ... entertained no dreams of conquest. The Chinese [were] not an imperial race. .. [they were] industrious, thrifty, and peace-loving. War was looked upon as an unpleasant but necessary task that at times must be performed. And so, while the Western races had squabbled and fought ... China had calmly gone on working at her machines and growing." 

Until, in his story, it becomes the largest economy on earth. And at current rates of growth, China's GDP will in fact surpass the United States by mid-century. 

The finale to London's prediction is horrific: The Western powers, terrified by China's new power, wipe out its population with biological warfare. London may not have approved of such genocide, but there is no question that he saw the "yellow peril" as a threat to the West. 

Despite this ugly racism, Jack London's story captures two faces of globalization: the promise of amazing growth in the East, and the West's shock of relative decline. 

First the bright side: Most of humanity is escaping from poverty. World Bank figures show that from 1981 to 2004, people living in extreme poverty (less than $1 a day) fell from 33 to 15 percent of world population. Those in moderate poverty (less than $2 a day) fell from 54 to 40 percent. 

Nowhere was this faster than in China, where extreme poverty declined from 64 percent to 10 percent, and moderate poverty dropped from 84 percent to 35 percent over the same period. Never before has there been such rapid improvement in human well-being. 

Quite a few foreigners are getting rich in China as well. While in China on business last month, I visited luxury hotels and conference centers swarming with business people from all over the world. This is a gold rush - China's industrialization has produced the greatest increase in absolute world wealth ever. 

Meanwhile, however, there has been a decline in U.S. relative wealth - and its correlates, our political and military power. This is the downside of globalization, for us. 

In the long run, we need to keep our military strong, and have much better incentives for environmental protection. But our most immediate need is for a more generous safety net - for the victims of trade. 

If free trade really is good for the country as a whole - as we economists argue - then it ought to be possible to make it good for the whole country. But don't do it with tariffs - they cut off the benefits of trade for everyone. Do it with subsidies targeted to those hurt by trade. 

In Scandinavian countries, where such subsidies are much more generous, surveys by Harvard's Dani Rodrik and others show that more people are in favor of globalization. Recognizing what is good for their people as a whole, Scandinavians are willing to protect the inevitable losers. 

We need to do the same - not out of kindheartedness, but to protect our overall gains from trade. We cannot expect millions of workers to willingly sacrifice their jobs upon the altar of globalism just so the rest of us can enjoy higher living standards. 

The United States economy has grown faster than the rest of the world for most of two centuries. But not anymore. The poor world is now growing much faster than the rich world. The combined GDP of the developing world, led by China and India, grew 7 percent in 2006 - more than twice as fast as the GDP of the rich countries, according to the World Bank. 

If world poverty is to be conquered anytime this century, this very rapid growth for the poor must continue. We in the U.S. can get richer by investing, helping the world's poor - the vast majority of our planet - to work smarter and better. China is showing us how great our world's potential is. 

We must not let our fear of a resurgent Asia cut us off from this immense engine of wealth creation. Let's be constructive - and go get a bigger piece of that wealth. 

Jim Stodder, an economist at Rensselaer Polytechnic Institute at Hartford, recently returned from Beijing and Tianjin, China, where he taught a course on risk management. 

Copyright 2007, The Hartford Courant