Bicycle Economies

Brazil and Indonesia are classic examples of bicycle economies. In recent decades, they have gone through several boom-bust cycles, many quite severe. India may be growing more steadily as a result of economic reforms, cautiously implemented over the past two decades. It has great potential, and in some industries, such as software, it now plays an important role on its own. However, its international weight, manufacturing prowess and ability to act as a banker to the rest of the world are nowhere near China's.

Whether the BRICs or BICIs will play an important role in the global economy really depends on China.

China's Rise — and Rise

When China burst upon the global economic scene in the early 1990s and began posting growth rates averaging around 8 percent per year, many economists expected it to follow the typical pattern of regional economic development. It was pursuing an export-led economic model, using cheap labor and centralized industrial policy to build up manufacturing capacity and undercut competitors. It would go through dramatic swings, economists predicted, as well as gradual democratization, resulting in potentially severe social upheavals.

Such forecasts proved wrong. China continued to grow, through thick and thin, slowing only slightly during the Asian financial crisis in the late 1990s and the global slowdown in the early 2000s. Its currency withstood speculative attacks, and its financial bubbles burst and then inflated again without undermining the real economy. Moreover, while social dislocations did occur, and tens of millions of peasants moved to the cities and booming eastern maritime provinces, the corrupt and repressive political system remained solid. Calls for greater democracy were muted, at best.

The same happened in the current crisis. Tens of millions lost their jobs and many had to go back to their villages. Yet, social unrest has been kept under wraps.

Perhaps China reflects a fundamentally new development model. It may keep growing rapidly and relentlessly under the wise tutelage of its Communist leaders, gradually moving from labor-intensive, low-tech industries to more sophisticated technologies and from reliance on exports to potentially enormous domestic demand. It may stop polluting and shift to clean technologies. It may alleviate heavy dependence on foreign oil and raw materials by forging close ties with commodity producers. And it may do so seamlessly, without suffering a transitional crisis.

That's a tall order, of course. Two issues should be raised in this regard. First, Communist leaders in Beijing, highly praised recently, are the same people, functioning in the same political system that used to implement Mao Zedong's disastrous economic policies in the 1960s and 1970s. And, second, even the U.S. could not transition to the status of a world power without suffering a Depression along the way.

China still has much catching-up to do, and it remains to be seen whether it can transition smoothly to slower growth. Last year, the U.S., with about one-third of China's population, provided $10.1 trillion in consumer demand. China provided about one-fifth as much. Even if the yuan is undervalued, and doubles in value against the greenback, Chinese consumption will remain less than half of U.S. levels. Moreover, a more expensive domestic currency will result in reduced exports and more imports.

China is an outsized country with a long history. Its history is distinctive, but it shows that the country is subject to the same social and economic cycles that impact other nations. The only difference is that China's cycles tend to take longer and to be more dramatic — which is certain to provide small comfort for the rest of the world.