Sunday, October 11, 2009

As modern China turns 60, can we foresee its future?

Thu, Oct 01 - By Andrew Marshall, Asia Political Risk Correspondent - Analysis

SINGAPORE (Reuters) - "Things develop ceaselessly," said Chairman Mao Zedong in 1956, noting how much China had changed in 45 years. "In another 45 years... the beginning of the 21st century, China will have undergone an even greater change. She will have become a powerful socialist industrial country."

As forecasts go, it was pretty prescient.

Yet while China's rise may seem inevitable in retrospect as it marks 60 years of Communist rule, the path it has taken was anything but predictable. China weathered the upheavals of the Great Leap Forward, the Cultural Revolution and the traumatic Tiananmen Square crackdown and emerged remarkably stable and pragmatically governed.

The surprises of the last six decades have not deterred an army of pundits from trying to peer into China's future, making forecasts not just a few years ahead, but decades.

In economics, the most influential attempt to chart China's prospects has been Goldman Sachs' research on the "BRICs": Brazil, Russia, India and China. Goldman predicts China will overtake the United States as the world's biggest economy by 2027.

Some say the BRICs concept actually underplays China's growing importance. "Among the BRICs, China is the 800-pound panda in the room," said Markus Jaeger of Deutsche Bank Research.

"If China maintains near double-digit growth rates, its contribution to global growth will continue to vastly outweigh that of the other BRICs," he wrote in a research note this week.

Efforts to forecast China's political, geopolitical and military future are just as feverish.

"China is poised to have more impact on the world over the next 20 years than any other country," the U.S. National Intelligence Council's "Global Trends 2025" report said.

"By 2025, China will have the world's second-largest economy and will be a leading military power. It also could be the largest importer of natural resources and the biggest polluter."

While most forecasts regard China's ascent as almost inevitable, not everybody is so sanguine. George Friedman, founder and chief executive of geopolitical analysis firm STRATFOR, believes China will fragment by 2020.

"I don't share the view that China is going to be a major world power," Friedman wrote in "The Next 100 Years," which ambitiously attempts to predict the entire upcoming century. "I don't even believe it will hold together as a unified country."

PREDICTION IS DIFFICULT, ESPECIALLY ABOUT THE FUTURE

The evidence suggests forecasts of China's long-term future should be treated with caution. Studies of political forecasting have found most pundits do no better in predicting the future than if their forecasts had been based on the toss of a coin.

"When I have staged competitions, many forecasters fail to outperform the proverbial dart-throwing chimpanzee," psychologist Philip Tetlock said in the latest issue of The National Interest.

Even short-run forecasts often prove unreliable. Forecasting what may happen decades ahead is fraught with problems.

"The BRIC story has one fundamental flaw," wrote Ian Bremmer and Preston Keat of Eurasia Group in their book on risk analysis, "The Fat Tail," pointing out how different the world was 50 years ago, and how different it is likely to be five decades from now.

"The fundamental problem with 50-year political predictions is that virtually no-one gets them right. We simply cannot know how leaders in Brazil, Russia, India and China will define their political and economic interests half a century from now."

So are efforts to peer into China's future a waste of time?

Not necessarily. Goldman Sachs notes that its BRICs research is setting out one scenario, rather than making fixed forecasts.

"Our projections are optimistic," wrote Dominic Wilson and Roopa Purushothaman in their 2003 paper "Dreaming with BRICs."

"There is a good chance that the right conditions... will not fall into place and the projections will not be realized. If the BRICs pursue sound policies, however, the world we envisage here might turn out to be a reality, not just a dream."

Goldman's research focuses on the conditions for growth -- in terms of human capital, political stability, control of corruption, and environmental and demographic factors. This allows alternative scenarios of the future to be mapped.

In geopolitical forecasting too, while the future may be fundamentally unpredictable, key trends can be analyzed.

Friedman concedes that long-range political forecasting is frequently overturned by the unexpected: "If you argued in 1970 that by 2007 China would have been the world's fourth-largest power, the laughter would have been ... intense," he said.

But while many of his detailed forecasts will turn out to be wrong, Friedman said, "the goal is to identify the major tendencies -- geopolitical, technological, demographic, cultural, military -- in their broadest sense."

We have no idea what China will look like in 60 years. It might be celebrating 120 years of Communist Party rule. It may not exist at all. But by analyzing the forces that shape its long-term future, investors can gain a better understanding of the probable paths -- and be better prepared for the unexpected.