A public warning issued by Premier Wen Jiabao of “huge downward pressure” weighing on China’s economy has multiplied doubts about the direction in which the world’s second-most powerful country is heading. Latest statistics show that China’s unstoppable juggernaut has slowed down to an annualised GDP growth rate of 7.6 per cent, the lowest since 1999.

Even in the immediate aftermath of the global financial crisis of 2008, China had managed to churn out stellar growth averaging nine per cent or more. If the world is truly moving towards a “post-crisis economy”, as the Economist suggested in late 2011, China should be growing even faster, not cooling. But the converse is happening.
The dragon has lost some of its firepower and the government is not denying that this slide from a miraculous growth path is a lasting one. According to the Chinese National Bureau of Statistics, China’s economy has begun conforming to a “universal rule” and is in “a period of transition after 30 years of vigorous growth”. As was the case with Japan and the Asian “Tiger” economies, which all peaked for a while and then declined, China’s sensational run of double-digit GDP growth appears to have finally halted. The government in Beijing is applying sheen on this lost glory by insisting that China is entering a more “mature” stage in its economic history.
This is a far cry from past celebrations of emerging economies as engines of growth, contrasted with sluggish “mature markets” of advanced economies. If the emerging economies are “maturing” or, in fact, slumping, then where is the dynamic source of recovery for the global economy? This economic crisis was understood to be different from the Great Depression because it’s occurring in a world where high growth has survived in one segment, i.e. the emerging economies, while the other segment of the West and Japan were down in the dumps.
But with the Brics now undergoing sharp dips of their own, it is time to accept that the world is in an extended, systemic economic crisis that is nowhere close to ending. The alarming estimation of Mervy King, the governor of the Bank of England, that we are “not yet halfway through” the current crisis is ringing truer as disappointing quarterly growth calculations and intractably dismal unemployment charts portend more suffering on a global scale.
Apart from the material consequences of a bleak global economic future, the relative fall of the Brics from a supersonic growth trajectory into a still-healthy but worrisome downward spiral is also bringing into question the idea that “state capitalism” is superior to Western-style liberal capitalism. All the Brics countries are notable for higher state involvement and stewardship over their respective economies — a sort of “mixed economy” model that has indeed done better than absolute free market capitalism in absorbing macroeconomic shocks.
Ian Bremmer and David Gordon of the Eurasia Group contend in the New York Times that present-day emerging powers represent a “carefully managed market capitalism”, or state capitalism, which is radically different from the liberal capitalism adopted by previous emerging economies of the post-World War II era like West Germany and Japan. The hegemony of the West was assured as long as rising powers accepted the free market model where states did not interfere much in the economy. But Brics countries are qualitatively different because of their statist political economy. The traditional Western-centric division of capitalism into only two variants, viz. liberal (Anglo-Saxon) capitalism and social democratic (continental European) capitalism, has thus been jolted by the arrival of the third strain of “state capitalism” of the emerging powers.
Yet, is state capitalism not a hyped nostrum for the ills of excessive deregulation of markets that occurred in the West and plunged the world into the global economic crisis in 2008? The deceleration of GDP growth in China and the rest of the Brics raises concerns about the long-term viability of state-directed and state-steered industrial policies. The obscene phenomenon of a “red aristocracy” (princelings of Communist Party leaders who dominate the business sector) in China under the banner of cadre capitalism is to blame for distributional iniquities as well as inefficient allocation of capital — two factors that are dragging the Chinese economy down. Official corruption by agents of the state, in cahoots with crony capitalists and organised vested interests, is a huge lag on economic growth in India and other emerging economies, which are now entering a struggling zone. US President Barack Obama’s critique of India for “limiting and prohibiting” foreign investment “in too many sectors” illustrates this protectionist nexus between the state structure and local capitalists that does not benefit the poor in India.
Defenders of state capitalism, like the Chinese scholar Zhang Weiwei (whose book The China Wave: Rise of a Civilisational State is said to be on the reading list of the President-in-waiting of the country, Xi Jinping), insist that a “benevolent, enlightened and strong developmental state” is an alternative model that is “winning out” over the decadent laissez faire model of the West. But Mr Weiwei predicates this verdict on the low levels of unemployment and high growth rates that the so-called “China model” has been delivering to its impoverished denizens for decades. Can an economy which is galumphing and “maturing” still perform this social uplift function at a pace that does not incite mass rebellion? If it fails, should state capitalism be hailed as the answer to the casino capitalism that the big banks are running in the West?
Bloomberg Businessweek recently showcased “innovative state capitalism” in emerging economies and debunked the neo-liberal myth that state interference and guidance of the market hampers scientific innovation and technological research. China’s scores in the Global Competitiveness Index and in rankings of innovation compiled by the Economist Intelligence Unit have indeed been steadily rising, but it remains to be seen whether the “maturing” dragon will be able to sustain this ascent.
Politically, the Chinese Communist Party’s magic figure for stability has been fixed at eight per cent annual GDP growth. Through monetary and fiscal stimuli, Beijing may still be able to obtain this overall annual figure in the coming quarters of 2012, but the trend of slowdowns across the emerging economies merits attention to more basic problems of the concept and practical implementation of the notion of state capitalism. An adverse external environment (low demand for exports or drying up of incoming foreign investment) can only explain part of the reason why Brics are feeling feverish these days. Self-criticism and acceptance that state capitalism has its own structural flaws is the first intellectual step before embarking on the oft-mooted “reforms” to overcome the growth paralysis.

The writer is a professor and dean at the Jindal School of International Affairs