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Business Journal

China's Successes and Looming Challenges

A Q&A with Sang Lee, Eminent University Scholar at the University of Nebraska-Lincoln

An expert in Asian economics peers into China's future

There's no shortage of nationalists in the United States who are just pining for the day when China slips. According to these "America First!" boosters, on that bright day, all the lost U.S. manufacturing jobs will return to the states; the U.S. economy will grow 10% a year like China's does now; and America will once again be the land of milk, honey, and fully funded pensions.

QUOTE: Once the Chinese government decides...

That outlook ignores a couple problematic facts. The first is that China is America's banker. As of July 2007, the Chinese government owns $407.8 billion in U.S. Treasury securities -- second only to Japan, China's next-door neighbor, which holds $610.9 billion in U.S. debt. Those calling for China's demise may be overlooking the reality that when a bank starts going under, it calls in the loans, something the United States can ill afford.

Furthermore, though the U.S. trade deficit with China was more than $230 billion in 2006, China is still a country of 1.3 billion potential customers. The Chinese are manufacturing a lot of America's stuff -- but Chinese consumers are buying a lot of it too. On the day China's economy has a hard landing, it will drag a good number of U.S. businesses down with it.

Sang M. Lee, Ph.D., thinks that looming challenges are coming sooner rather than later. Dr. Lee is an expert in Asian economics and the University Eminent Scholar and FirsTier Bank Distinguished University Professor at the University of Nebraska-Lincoln. A Gallup senior scientist, he is also an internationally known expert in several management fields; he is the author or coauthor of hundreds of books, articles, and papers; and he sits on myriad editorial boards and has received many awards.

Though Dr. Lee is always courteous, he does have some cautious things to say about China. In fact, he's predicting that the hopes of U.S. economic nationalists may be fulfilled. In this interview, he forecasts China's economic and political challenges, discusses how immigration is shaping the U.S. and Japanese economies, and tells readers what every business student should know.

GMJ: In your classes on international management, global business, and strategic innovation, what's the most important thing you want your students to learn?

Dr. Lee: Well, because most organizations are now involved in global business, I talk a lot about how to develop a global mindset, global strategies, and so on.

GMJ: How does one develop a global mindset?

Lee: A global mindset means that you have to go through certain steps. First, people should be open to the diversity of cultures and markets. That means not just giving people training, but letting them have the opportunities to travel and see how things work in other cultures and in other countries.

I think that traveling is important, especially for managers. Once they have an open mind about diversity in cultures and markets, then they have to become knowledgeable; they have to study. How is the Japanese market different from the European market? How is the Chinese market growing? And then they must learn to integrate that knowledge into their strategies.

GMJ: Speaking of China, do you think that the rapid growth of the Chinese economy is sustainable?

Lee: What's happening in China is just incredible. China is a one-party state, so the central government is very strong. And once the government decides to put a certain policy in place, they're going to do it -- and do it very fast. So in China, they can decide, "We're going to have a hydroelectric power plant here, and we're going to construct a dam here, so we're going to move two million people." That kind of thing never happens in the United States. So [the Chinese government] can implement its policies very quickly.

In the past twenty to twenty-five years, China's economy has grown by about 10% per year. This is unprecedented. The economic base of China has grown so much, they now have more than $1 trillion in foreign exchange reserve. Essentially, the United States is borrowing money from China to run its government. And China has become the world's factory for most of the clothes we wear, as well as the things that we don't think about, like buttons -- they're all made in China.

So is China going to continue growing at this pace? It's impossible. No country can grow at 10% per year forever -- it's not sustainable.

GMJ: How long do you think the growth rate can continue at 10%?

Lee: Maybe five to ten years. The healthy trend would be to slow it down to 8%, 6%, or let's say 5%. Just like Japan. You know, Japan used to grow at 10% per year too. But now, if the Japanese economy grows 2.5% or 3%, that's a good year. When the economic base becomes so broad and so big, there's no way that that economy can keep growing at 10%. Some of the Chinese government policies have been very effective. For example, when the ex-leader Deng Xiao Ping extolled getting rich, this was the catalyst for China's economic miracle. However, some policies may need more broad support of the people.

GMJ: Such as what?

Lee: Like the one-child policy to control population. The Chinese government has done a good job of controlling the population, but this has had a dark side. For example, if you go to China and meet the younger generation of college students and high school kids, they think that they're it because they grew up with four grandparents taking care of just one child.

In The End of History and the Last Man, Francis Fukuyama said that when the per capita income of a society reaches around $6,000 per year, then its people will not put up with restrictive government policies because people want more freedom to make their own decisions, such as family size.

GMJ: At $6,000 a year, they can afford it.

Lee: That's exactly right. Now per capita income in China is roughly $2,000. Of course, in places like Shanghai, the per capita income is much higher. So I think that in about ten years, people will reach the point when they'll say, "We're not going to put up with this strong, restrictive government and all its rules interfering with everybody's freedom, such as how many children we'll have." I think that the real challenge in China will come during the next five to ten years.

GMJ: You expect there will be a crisis?

Lee: I think at least a real challenge, because the Chinese people will demand more [freedom]. You know, if you go to Shanghai, you'll find beautiful condominiums and beautiful houses -- all million-dollar-plus homes -- and young entrepreneurs in their thirties and early forties live there. Are they going to put up with all the rules of the government? Many of those people were educated and trained in the United States or in Europe; they finished college in China and came to the United States for graduate studies and got jobs at world-class firms like Microsoft, GE, and IBM. But after awhile, they went back to China. We call them sea turtles.

QUOTE: The only advanced country that does not...

GMJ: Because they return to the place they were born?

Lee: Yes, they return to the place they were born to lay their own eggs. So they're educated in America, but then they return home -- not necessarily to their hometowns, but to major cities, and they're opening their own enterprises. They're becoming very successful, and then they're doing outsourcing work for U.S. and European firms. Many are millionaires.

GMJ: How does the government tolerate that?

Lee: There's a kind of fine line, you know; even those entrepreneurs have to develop certain relationships. Relationships are a very important concept of management in China. It basically involves developing social capital. So they have to know important government officials, important people in economic circles. Those relationships will help them keep their business growing, so developing and maintaining those relationships is very important.

Today there are over 350,000 private enterprises in China. In the next ten years or so, as people make more money and start demanding more quality goods, successful businesspersons won't be able to maintain effective management based primarily on relationships. Also, however, people living in rural areas have not shared the same benefits of economic development, and they are not happy. They even have started some riots. The Chinese newspapers don't report many of these incidents, but supposedly, a large number of protests occurred in the past year, and the government is just trying everything possible to pacify them. So if the economic divide comes to a breaking point, then it could lead to real challenging problems.

GMJ: What do you think such chaos will entail?

Lee: China was never one country with a homogenous ethnic group. The United States sees mainland China as one big country, but historically, China encompassed five to twenty-five different countries. Then one powerful king would rise up and unify the whole land, like Qin Shi Huang, who built the Great Wall. He was the first ruler to unify the country. But throughout its history, China was never really one country; it is made up of many different ethnic groups speaking different languages and dialects.

The current strong central government in China can hold things together. Chaos in China could be a political problem, as well as an economic and social problem, for the entire world. Obviously, the Chinese government is doing its best to achieve a balanced growth throughout the country.

Economic development and growth in China are good for most people in terms of improving their quality of life. But there may be some negative consequences; unbalanced development might bring social unrest or political unrest.

GMJ: Would you suggest that this would be a good time to relax visas for foreign students -- before unrest keeps China's brightest from coming here for graduate school or keeps the sea turtles stuck in China?

Lee: I read some interesting statistics. Right now, the United States is producing about 50,000 engineers per year; China is producing 250,000 engineers per year. And among those 50,000 engineers we produce, roughly 40% are foreign students. Without the talents of these young foreign students, we cannot maintain the U.S. economy, and that means we need to import a lot of talent from overseas. Many Asian students are also coming to the United States, and they get advanced degrees, and a great number of them stay here. They contribute a great deal to our economic growth.

In almost every advanced country, as with the U.S. baby boomer population, there is a rapid increase of the older generation and a rapid decrease of the younger generation. In Japan already, the 65-and-older generation accounts for more than 20% of the population. Now who will support the older generation? The shrinking younger generation must. Japan has very restrictive immigration laws; it does not grant Japanese citizenship to foreign workers or foreign students who enter the country. Many Japanese intellectuals are actually quite pessimistic about the future of Japan; in a matter of about ten to twenty years, the quality of life will deteriorate because there will not be enough workers.

GMJ: But immigration is a touchy issue here too.

Lee: The only advanced country that does not have a problem with its graying workforce is the United States, because it imports workers. We bring in a lot of young people, and they're working at good jobs. We need these talented foreign workers, especially in technical fields such as engineering and computer science. Right now, the United States is borrowing much of this talent from foreign students.

That's also why the U.S. does a lot of outsourcing -- it needs the workers. A lot of politicians will say outsourcing is bad because we lose jobs. But we don't have enough knowledge workers to handle all the work.

GMJ: Beyond a global mindset, what do you want your students to know?

Lee: You cannot make money in agriculture unless you're in some specialized area such as food processing. Also, now less than 14% of U.S. jobs are in manufacturing. You can't make money in manufacturing unless the job is in a specialized industry, such as in [manufacturing] airplanes, precision equipment, drugs, or things like that.

That means the rest of the jobs are in the service sector, [but the good jobs are] in the knowledge-intensive service industries such as pharmaceuticals, biotech, information technology, financial services, or entertainment. And the way people can make money is by converging industries. The iPod is a good example of this: It represents the convergence of information technology and music. The convergence of technologies or industries is where you'll find money. That's what I tell my students.

-- Interviewed by Jennifer Robison

Gallup


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