The Series:
Does lack of challenge lead to poor performance, or in worst case,
failure? I contend that when you look across the field of champions
both past and present, they do, in fact, fall when their power is at
its height. From ancient Rome to Enron, defeat is often born in the
jaws of victory. Previous examples covered here include Apple, Google, Starbucks, Republican Party, and The Bill and Melinda Gates Foundation.
Today's Entry: The Chinese Economy.
The Chinese economy has been an incredible success story in the past decade. The country is now the third-largest trading nation and its GDP growth has averaged at or above 8% for several years. The country is the global center of manufacturing, and it will be the center of the sports world in 2008 for the Summer Olympics. But as this series shows, great success often leads to inevitable arrogance and failure.
There are many ways that China, too, could decline. Political crackdowns and rising labor costs that result from its success, for example, could turn the world against it. A recent BusinessWeek story shows that the flood of dollars from its hot export market can itself lead to problems:
"First-quarter growth hit a torrid 10.3% and industrial production in May surged by nearly 18%, the fastest rate in two years. China's global trade surplus, meanwhile, hit $13 billion for the month, up from $9 billion a year earlier, and exports climbed 25%. When those export earnings are converted into yuan, they produce a tidal wave of excess cash that feeds ultraloose bank lending. That in turn leads to real estate bubbles and too many new factories, office buildings, and highways."
What the article misses is that this is exactly what happened to Japan in the late 80s. At the time, Japan was on an incredible hot streak, and the U.S. was in relative decline. But a real estate bubble soon began, and surplus cash from exports were funneled into many unwise loans. The result was a stagnant economy with a trillion dollars in bad debt. Japan has been relatively stagnant for the past 16 years.
There may not be a good solution in China. In fact, some say that China simply must go through periods of rapid growth and retrenchment as its economy catches up to the rest of the world. It may need to go through the same steps and learn the same lessons as Japan, Germany and the U.S. On the other hand, perhaps the tighter government control of the country and economy will lead to rules that put a brake on excess spending.
Overall, China has an opportunity to read about the failures and lessons of other nations that industrialized rapidly and joined the "first world." Lessons abound in the history of these nations, from the Great Depression to environmental protection to Social Security reform. By studying history and avoiding our errors, China can become even more competitive and improve further.
UPDATE: Last Friday the Bank of Japan increased interest rates from 0.0% to 0.25%. For years, the country kept interest rates at zero in hopes of encouraging its stagnant economy to move. Not only did this not work, but it encouraged more bad loans. Without a cost (a "challenge") to borrow, there was less pressure to reward good businesses or punish bad ones. This move was done as a response to Japan's improving economy, but it might pay extra (challenge) dividends by encouraging better lending decisions in the end.
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