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    China Business
     Jan 17, 2013

China faces a neurotic future
By Reuven Brenner

Ten years ago, I wrote about the possible consequences of China's one child policy (published in Asia Times Online, Financial Times, and Singapore Times). All of it seems to have held the test of times - and recent evidence strengthens the points raised then:

What can be the point of reference to predict consequences of China's current childbearing pattern, adjusted over the last decades to one-kid or you're-out-of-your-apartment policy? To make any reliable analyses, one needs at least two points, so as to draw a straight line as a first approximation.

Fortunately for observers, though unfortunately for those who had to adjust to such social engineering, there is not much new under the sun. There has been a government in the past who passed

similar regulations. The year was 1726. The place, Austria.

The Viennese court, under anti-Semitic pressures, fearing a large increase in Jewish population - a fear that by itself suggests that the Jewish birth rate at the time was relatively high - introduced a regulation. Only the eldest son of a Jewish family could marry. The younger boys could not.

This regulation introduced into the Austrian empire, including Bohemia, Moravia, parts of what became later Germany, and Alsace, led to the instant migration of young Jewish generation to Eastern Europe, to Poland, to Rumania. Whereas within the Austrian Empire the Jewish birth rates dropped, in Eastern Europe they did not.

How did Jewish parents, who stayed, adapt to the regulation? As one would expect: they had fewer children, invested more in their education and health, and probably spoiled them much more than would have been otherwise the case.

One can speculate that this regulation was the origins of the myth of the neurotic Jewish mothers, and the by now tradition of driving Jewish kids to excellence - true, occasionally, to neurotic excellence", and in "neurotic endeavors". No surprise that since I wrote these paragraphs, the Chinese term adopted to describe the behavior of kids in the 100 million one-child families is that of "little emperors".

Will the Chinese mothers and kids react in a similar fashion? At least this point of reference suggests a positive answer. Thus one unintended consequence of the one-child regulation will be prosperity driven by kids who will grow up to be very ambitious entrepreneurs - though loners. And since loners do not create companies, the drive may likely be channeled to intellectual endeavors, rather than business ones.

Indeed, recent research by Lisa Cameron at Monash University suggests that the only kids in China are less likely to become business entrepreneurs, and tend not to trust outsiders.

What else can one say by drawing this parallel between the present and distant history?

Because of a wide range of other regulations and expecting less than equality before the courts at the time, European Jews have traded among themselves. When they wanted to settle disputes, they turned to religious authorities, rather than the courts. Traces of these arrangements survive to this day in the still very much Jewish diamond trade.

Exchange is still based on complex rules that go back 1,000 years. Contracts are still based on a code of honor that traces its roots to the Old Testament, the Talmud, and the teachings of the Maimonides. Contracts of millions of dollars are concluded by only a handshake and the Hebrew statement Mazal ubracha, ("Luck and Blessing") rather than a written contract approved by lawyers.

How does this evidence bear on China? Neither Chinese law, nor Chinese courts are today reliable institutions. There is no great commercial legal tradition in China. And such tradition can neither be imposed, nor created quickly. So how will the Chinese expand their family businesses?

Whereas in Europe, large families succeeded in pooling together their resources and expanding family businesses backed by legal institutions - and that's how Western European corporations developed before having access to developed financial markets - this arrangement cannot be done in China for the simple reason that the one-child policy kept families small. There are no brothers, sisters, and for the coming generations no first cousins.

How then will the small family businesses that reach their limits and would like to grow, expand? Since it will take long before China will have developed sophisticated financial markets (which do need solid legal backing), the expansion will have to take place through voluntary associations between "trusted" families - or, perhaps, the only institution which had some layers of accountability, and the ability to enforce "arrangements" - the Communist Party, the "big family." (And let us not forget that urban citizens, more likely linked to the Partym have been those deciding to have one kid).

Thus, a variation of what happened among Jews within the larger European community, or happened elsewhere in the world among tribes which, for one reason or another were discriminated against (such as the Chinese in Thailand), and where the countries had no reliable legal framework is now taking place in China, adapted to the political institutions the country had.

What shape and form these voluntary organizations will eventually take, I do not know. But people are ingenious in the ways they can adapt - even if the adaptation has long-term neurotic consequences, which are not anticipated, and whose origin will be long forgotten when they surface.

If there is validity in this parallel, China should prosper, though we do not know how long it would take. Recall Shakespeare's Shylock. Below its dramatic surface, that play is about trust versus contracts. Members of a society who know that they must rely on contracts (Jews, surrounded by a hostile Europe), find themselves in opposition with Christians, who think that contractual agreements must have an escape clause by just saying: "trust me".

Shakespeare captured the transition from customs, enforced by family, tribe and religion to one where lawyers and formal dispute resolution mechanism would have the last word. Only at that time, to him it seemed that customs should have the upper hand, and guide the courts too. He did not anticipate the necessary adaptation to a world of growing and more mobile population, where "trust" becomes an expensive capital to create and sustain.

Societies that do not succeed creating institutions to substitute lost "trust" with enforceable contractual agreements, will fall behind. And the slower these institutions are being created, the slower will society prosper.

I do not want to venture into making a prediction about the shape and form of the intellectual, neurotic prosperity so many single kids - the "little emperors" of anxious Chinese mothers - would bring about.

But let there be no doubt. A country filled with 1 million variations on Freud, combined with 100,000 variations on Woody Allen and Marx, and 700 million falling between the cracks during the transition from paternalist China to a variation on 18th/19th century lacking-safety-nets-type society, brings about a very neurotic prosperity.

When millions people, who have nothing to loose, bet on crazy ideas, expect much volatility. It may be interesting to watch, and - no doubt - some will make fortunes from this volatility. Just remember the Chinese curse: "You should live during interesting times."

One thing the US could do in order not to contribute to this volatility, is let the Chinese keep their currency stable, and pegged to the US dollar. Monetary mismanagement combined with hundreds of millions of people who would have nothing to loose, and a few neurotic millions can be a lethal combination.

Reuven Brenner lectures at McGill's Faculty of Management. The article draws on his Force of Finance (2002), and his early History - the Human Gamble (1983).

(Copyright 2013 Reuven Brenner)

China's addiction to birth planning (Jun 27, '12)



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