China’s Covid Payback

Photo by Kayla Kozlowski on Unsplash

I published this post first on JuST THINK. To stay up to date, come to https://justthink.substack.com/ and subscribe for free!

For the past three years, China and Covid have been inextricably linked. The China-Covid nexus played a critical role in the global pandemic response, the global economic recovery and China’s economic prospects. And it continues to do so.

The pandemic model child…

The Covid pandemic started in China. Strong evidence suggests the virus might have been developed in a Wuhan laboratory; but from day one, US and global health authorities dismissed this possibility as a conspiracy theory, setting the tone for the entire Covid debate — a debate which allowed no room for honest discussion or any dissent from the official view of the day.

China implemented some of the most draconian lockdowns anywhere, shutting down entire cities and literally locking people inside their apartment complexes. This zero-tolerance approach was widely praised — and even envied — by health authorities and media in the West. China’s approach seemed successful, keeping the official count of infections and deaths much below that of most other countries. Proponents of mask mandates and lockdowns leveraged this apparent success to bolster their case for extensive restrictions to social life and economic activity.

Common sense however suggested that yes, a policy of complete social isolation could drastically limit contagion, but no, it would not cause the virus to disappear and no, it could not be maintained for ever — as China is now finding out. Official statistics place China at the very bottom of the Covid casualties rankings (#220 for deaths per million people and #227 for cases per million people, according to Worldometers); but these outcomes (even if true) will now be a lot harder to maintain.

…now stuck in a zero-Covid trap

As most other countries began to ease pandemic restrictions earlier this year, China found itself in a “zero-Covid trap”:

  1. Extensive use of strict lockdowns has successfully limited the spread of the virus, which means natural immunity is very limited;

2. China’s authorities insisted on using only China-made vaccines, much less effective than those developed in the West; even with a black market for Western-made vaccines, this implies that vaccination has provided limited protection;

3. To make matters worse, China’s elderly have proved especially reluctant to take the vaccine — so that the most vulnerable section of the population has the least degree of protection;

4. Finally, while China attracted international praise early in the pandemic for its ability to quickly erect temporary large scale emergency medical facilities, it has proved unable to bolster its health care capacity over the last three years, so that a large scale Covid outbreak could overwhelm its health care sector.

China therefore continued to lock down entire cities at the smallest flare-up of infections, even as international soccer fans crowded together maskless in Qatar’s stadiums. Exasperated, Chinese citizens have taken to the streets in the largest protests since Tiananmen Square, calling for restrictions to be lifted and, in some cases, for Xi Jinping to step down.

Oh, the hypocrisy

It’s been a bitter irony to see Western media and politicians express support with Chinese protesters, and argue that demonstrators are right to be exasperated with prolonged lockdowns; many of these same journalists and politicians were steadfast supporters of strict lockdowns in the West, and showed zero patience for domestic dissent and protest. Canadian Prime Minister Justin Trudeau is perhaps the most outrageous example, given his China-style crackdown on truck drivers’ protests last February.

China has now started to ease Covid lockdowns and restrictions, while hardening the repression of protests and dissent. This could ease the pressure in the short term. But if infections surge again and hospitals come under pressure, China’s leadership will be back at square one. This will remain a hard challenge for Xi Jinping’s regime.

Some have argued that Xi Jinping knew all along this Covid strategy was not sustainable, but wanted to keep the virus bottled up until he could be confirmed as leader at the recent Party Congress. There might be truth to it, but it begs the question of why he did not prepare better for what will now be a fraught transition — for example stepping up — and even mandating — vaccinations at a much earlier stage.

Has China’s model failed?

Many commentators now hail China’s predicament as manifest proof that China’s governance model has failed.

Before Covid, and through the first two years of the pandemic, the dominant argument was that China’s autocratic and meritocratic system of governance delivered better performance than democracies did: an extended period of strong economic growth, an impressive rise in living standards, the eradication of extreme poverty, and an effective management of the pandemic.

Now the narrative has been reversed, and we are told that an autocratic system was always bound to fail and that China’s leadership has proved incompetent: It mismanaged the pandemic by failing to protect its population with effective vaccines; it clipped the wings of its dynamic private economy in order to reassert political control; and now finds itself exposed to another health crisis and with crippled economic prospects, no longer able to challenge the US’s dominant position.

Not so fast

I think — and I hope — that this new consensus opinion will prove to be wrong.

First, while China has in fact mismanaged the pandemic, so have most other countries. The West’s response to Covid has caused massive disruption to the global and national economies; unprecedented erosion of civil liberties, an enormous damage to public health and to education outcomes that we are barely beginning to acknowledge, and a lasting lack of trust in public institutions, from health authorities to government to media. China’s failure does not make our performance look any better.

Second, China’s economic success was not all an illusion. China’s companies have become a crucial part of global supply chains and some of them have already achieved excellence in important manufacturing sectors. China has made huge progress in new technologies, notably Artificial Intelligence. And its education system continues to churn out large numbers of STEM (Science, Technology, Engineering and Mathematics) graduates, compared to the West’s predilection for lawyers and history majors. Innovation thrives best in a democratic market economy, which gives the US a major advantage. China’s recent moves to reassert political control over its economy will no doubt damage its growth potential. But most western countries have also moved towards heavier government intervention, which is similarly bad news for long-term growth potential. And the current struggle to bring inflation under control has exposed a decade and a half of unsustainable macro policies.

It was foolish to hail China as a superior and unstoppable model of economic progress; but it would be equally misguided to now assume that China is destined to languish in middle-income mediocrity. Commentators have noted that Japan once seemed set to surpass the US’s economic might, and never did; true, but Japan did become and remains a major economic power.

Beware Schadenfreude

China’s autocratic model, however, implies an additional degree of potential volatility, at two levels. Power transitions in autocracies can be a lot less smooth than in democracies. The latest protests therefore carry higher risk than the social unrest we have witnessed in western countries over the past few years. The protests currently seem unlikely to threaten Xi Jinping’s freshly reasserted leadership; but when people’s desperation or hope overwhelms their fear, authoritarian systems break — a major bout of political instability in China is unlikely, but not impossible.

The second level of volatility is geopolitical. If domestic social unrest threatens to spiral out of control, China’s leadership might be tempted to divert popular discontent towards an outside opponent — with a spike in tensions over Taiwan, for example.

That’s why I hope that China’s harshest critics will prove to be wrong.

China deserves its Covid comeuppance. But we should not use it as an excuse to forget how badly we in the West have messed up, or to underestimate the economic challenge that China still poses — and the global risks that a China upheaval would entail.

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Marco Annunziata

Economics & innovation at www.AnnunziataDesai.com; Co-host, M4Edge Tech podcast; Former Chief Economist & head of business innovation strategy at GE.