THE FAILED BET ON RUSSIAN AND CHINESE REFORM / PROJECT SYNDICATE

The Failed Bet on Russian and Chinese Reform

Russia and China shattered the belief that economic liberalization leads inevitably to greater political freedom. Maybe a new generation of reformers will show that history really does culminate in democratic capitalism, but from now on Western leaders should proceed with a healthy dose of skepticism toward grand narratives.

Michael J. Boskin

STANFORD – Russian President Vladimir Putin’s invasion of Ukraine and Chinese President Xi Jinping’s increasing authoritarianism have belatedly awakened much of the world to the failure of a geopolitical wager made by the United States and its allies a generation ago. 

Their necessary response to today’s grim new realities reflects the cost of losing that bet, and it will change everything from security alliances, military budgets, and international trade to financial flows and environmental and energy policies.

The bet Western countries made in the 1990s was that integrating Russia and China into the international community through trade and commerce would hasten domestic political, as well as economic, reforms. 

Nobody expected either country to turn into a capitalist democracy overnight. 

But it was assumed that greater prosperity would gradually round off their rough ideological and authoritarian edges, allowing for cooperation to replace confrontation.

To understand the context in which this bet was placed, we need to go back to 1980, when America was still reeling from stagflation and the tragic conclusion of the Vietnam War. 

The Cold War was in full swing, pitting capitalism against communism and democracy against totalitarianism. 

Proxy wars erupted regularly, and the sobering risk of a nuclear confrontation was ever-present.

Deng Xiaoping had just announced the opening of China’s economy, but the country was not yet on many radar screens in Western capitals or boardrooms. 

Moreover, the Soviet Union and the Warsaw Pact were still intact. 

With their trade restricted to the Comecon (Council for Mutual Economic Assistance) states, they had few ties to countries in the General Agreement on Tariffs and Trade – a bloc that accounted for the bulk of global GDP. 

The next year, US President Ronald Reagan took office and initiated a military buildup to thwart perceived Soviet threats and ambitions. 

His administration’s economic reforms unleashed a long US expansion.

This was the setting in which the Nobel laureate economist Milton Friedman and Singapore’s founding father Lee Kuan Yew championed the idea that economic reform would lead to political reform. 

Friedman argued that all people – regardless of their ethnicity, religion, or nationality – would demand greater political freedom once they had gotten a taste of economic freedom. 

Though it may take longer in some contexts than in others, freedom would triumph eventually.

These ideas were extremely and broadly influential among educated elites in academia, government, and multinational businesses in the last two decades of the twentieth century. 

After Mikhail Gorbachev became general secretary of the Communist Party of the Soviet Union in 1985, he soon became convinced that the Soviets could not match America’s economic might. 

To try to keep up with the Reagan administration’s military buildup would bankrupt the Soviet economy, so he launched liberalizing political and economic reforms known, respectively, as glasnost and perestroika.

When the Berlin Wall fell in 1989, my Stanford University colleague Francis Fukuyama suggested in a famous essay that all countries would wind up as mixed capitalist democracies. 

In Hegelian-Marxist terms, history would unfold through a dialectical process culminating in capitalism, not communism.

This idea, too, was infectious. 

When I accompanied a delegation of American business leaders to Poland shortly thereafter, the Polish president (and communist party boss), General Wojciech Jaruzelski, declared that historic forces had inevitably led Poland to capitalism. 

Clearly, he could not escape Marxist teleology; the communists’ mistake was simply that they had gotten the end wrong.

Given the perceived stakes, it is easy to understand why Western leaders rushed to help Gorbachev when the Soviet economy started to falter. 

Declaring “We cannot lose Russia,” British Prime Minister John Major, French President François Mitterrand, and German Chancellor Helmut Kohl called US President George H.W. Bush every week to plead for a US-led $100 billion bailout (the equivalent of $220 billion today). 

I led those negotiations as the chair of the White House Council of Economic Advisers at the time. 

In the end, we provided some small aid and technical assistance. 

And soon thereafter, the Soviet Union dissolved into the Commonwealth of Independent States.

Despite the failure of Soviet liberalizing reforms, and despite the massacre in Tiananmen Square in June 1989, Bush and successive US presidents continued to encourage reform in China, which has since become an economic and trading powerhouse, dwarfing Russia. 

For a generation of leaders who had lived under the shadow of nuclear superpower rivalry fueled by clashing political ideologies, the 1980s and 1990s were truly a remarkable period.

But the champagne corks were popped prematurely. 

Putin has no intention of respecting global norms, and China has consistently avoided the path it was expected to follow when it was admitted to the World Trade Organization in 2001.

Still, it is worth remembering that Deng’s reforms, like Gorbachev’s, seemed farfetched only a few years before they were enacted. 

In today’s context, one can only hope that Putin and Xi will be succeeded by a new generation of reformers. 

If that happens, perhaps Friedman and Lee will be vindicated.

But it is anyone’s guess when either leader’s rule will end. 

The challenge for Western leaders is to manage the risks posed by Russia’s nuclear weapons and by China’s centrality to the global economy and its growing military might. 

It is a task best performed with open eyes and a healthy dose of skepticism for grand historical narratives.

Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.