Every day you read something scary about Russia or China, or maybe both, flexing their muscles on the world stage. Russia interferes in the U.S. elections! Russia sends cruise missiles into Syria! Russia tests new "invincible" nuclear missile! Russia poisons ex-spy living in England! China builds militarized islands in the South China Sea! China expands its navy! China helps North Korea avoid sanctions!
Then you consider the political news coming out of both countries. The short version is that, after a few decades of flirting with nascent versions of liberalism, both countries are most if not all the way back to absolute dictatorship. But aren't they having an election in Russia this very day? Gary Kasparov, writing in the current Weekly Standard, disputes that idea. His theme is that Vladimir Putin has such an iron grip on Russian politics today that the election is a complete sham:
Putin will continue in power as if by birthright, and calling this an election soils the meaning of a word that should be treasured. Yet the media of the free world persist in referring to “elections” in dictatorships like Putin’s Russia because they have no vocabulary to call it anything else—a predicament undemocratic regimes exploit very well. Even calling Putin a “president” is at best inaccurate and abominable propaganda at worst.
Meanwhile, over in China, the Communist Party just last month abolished the term limits that had supposedly restricted a President to just two terms, and thereby cleared the way for current President Xi Jinping to remain in office for life. From the New York Times, February 25:
China’s Communist Party has cleared the way for President Xi Jinping to stay in power indefinitely, by announcing Sunday that it intends to abolish term limits on the presidency, a momentous break with decades-old rules meant to prevent the country from returning to the days when Mao was shown cultish obedience.
These situations are not so easy to reverse. So both Russia and China are now going to have near-absolute rulers in power for life. Is there any problem with that?
Yes, it's the old Roman Empire model for governance. It seemed like such a good idea when Octavian/Augustus took over in 27 B.C. and ruled gloriously for 41 years of unprecedented power and stability. But within another couple of decades you had Caligula, followed shortly by Nero, and on downhill from there. Soon enough, emperors were being assassinated every couple of years by a new guy trying to take over. Or maybe we should call it the Venezuela model for governance; or the Zimbabwe model; or the Cuba model. Each of those places had powerful leaders who swept in to great excitement and seemed to many to be by far the best guy to lead the country. But as dictators the leaders clung to power for life, ran their countries into the ground in their later years, and left no means other than a power struggle to choose a successor. And, at some point these guys can't quit, because their personal safety is in huge jeopardy as soon as they lose control of the state security mechanism.
I recently covered the situation in Russia in this post two weeks ago, titled "How's It Going In Russia?" The answer, basically, was stasis: population not growing, economy not growing (and badly hurt by the recent price declines for oil and gas), severe budget constraints. One thing not covered in that post was the lack of foreign direct investment into Russia. According to Santander Bank, foreign direct investment into Russia totaled $29.2 billion in 2014, $11.9 billion in 2015, and $37.7 billion in 2016. Russia's total "stock" of FDI was $379 billion at the end of 2016. For comparison, foreign direct investment into the U.S. was about $440 billion in 2015 and $370 billion in 2016. With a population a little over double that of Russia, the U.S. attracts ten to twenty or more times the amount of foreign investment.
Simple questions: Who is going to make a multi-billion dollar investment into Russia, when the minute you fall into disfavor with the strongman your investment could be stolen without recourse? And also, what kind of power struggle or even civil war is going to happen in that country when the strongman dies? In other words, the very existence of a dictatorship form of government almost inevitably leads to a lack of dynamism in the economy.
China gives a first impression of being far more dynamic, and maybe it is -- but don't be too sure. And if it has been up to now, don't be too sure it will continue now that Xi is strongman for life. After tremendous GDP growth in the past three decades, China's GDP is now up to over $11 trillion, nearing two-thirds the size of the U.S. economy. But don't forget that they have more than four times the population, which means that their per capita GDP is only about $7000. That's less than one-eighth the per capita GDP of the U.S., and less than places like Mexico ($9700) and Brazil ($10,800). For that matter, it's well less than one-third the per capita GDP of democratic Taiwan ($26,000).
What is the level of foreign direct investment into China? Santander's data show some $128.5 billion in 2014, $135.6 billion in 2015, and $133.7 billion in 2016. Those figures may seem like a lot at first blush, but don't forget that China's population is more than four times that of the U.S. and some 10 times that of Russia. On a per capita basis, it would appear that China is doing even worse than Russia at attracting capital.
And is that much of a surprise? Its legal system is opaque, and most of the economic plums go to the cronies of the leader and the ruling clique. I mean, if you were Xi, would you want there to spring up by the forces of unbridled capitalism some group of multi-billionaires totally not dependent on your grace, who could then be in a position at any time to support a challenge to your authority? And thus we have in China a state-controlled bank system organized to funnel capital to state-favored investments. And also an ever-expanding universal surveillance system to keep the population in line.
Now, suppose you have an investment idea that might well disrupt the comfortable existing structures. Are you going to choose China as the place for your start-up? Sure, if you are a Google or an Apple, and you have built up your business to multi-hundred-billion-dollar status somewhere else, you will try to enter the Chinese market (and deal with the strictures they put on you).
But no, I think if you were an entrepreneurial person in Russia or China, you would be looking around and thinking that whatever seeming stability there is here is not going to last for the long pull. Sooner or later there will be either a long-term decline à la Cuba or Venezuela, or a power struggle for succession, or both. If you've got extra money to invest, where would you put it? Places like the U.S., UK, Switzerland, or Singapore come to mind.