Andrey Denisov has spent much of his career studying China. The economist and diplomat discusses the keys to China’s social and economic success.
The last three decades have brought visible changes in every aspect of Chinese life. Andrey Denisov, Russia’s first deputy foreign minister, former minister-counselor of the Embassy of the Russian Federation in the People’s Republic of China, and Russian ambassador to the United Nations, has spent years inside and outside China studying the country’s astonishing ascent. “I entered the economics department of university and began to learn Chinese in 1969. It was the worst year in the whole history of relations between the two countries,” Denisov recalled in a recent interview. “Thus, if anyone told me at that moment what China would become 40 years later, and that I would experience it with my own eyes, I would have refused to believe them.”
In this excerpt from an interview conducted by McKinsey’s Yermolai Solzhenitsyn, Denisov discusses China’s socioeconomic reforms and potential lessons for Russia. The complete interview was published this year in the 22nd edition of Vestnik McKinsey.
McKinsey: What is the secret of China’s successful economic reforms?
Andrey Denisov: In China, they have carefully studied various models of economic growth, various economic theories and doctrines, and examples of successful industrialization and modernization. But most important is that they have adapted the approaches they select to their own realities. It is safe to say that China’s reforms owe their success to the combination of the best international practices and the national Chinese specificity, with due consideration of local conditions.
McKinsey: Can you give us an example of something that China borrowed from other countries and adapted for its own use?
Andrey Denisov: China began to establish special economic zones along its coastal belt, making good use of a big, hardworking, disciplined, and unpretentious population—in terms of wages and salaries—and a convenient location at the crossroads of global trade routes. Special economic zones were not invented in China; it is an international practice. But in China, they have become a driver of reforms, while in other countries, including Russia, they actually stagnate.
McKinsey: What are some other reasons why economic reform has succeeded in China, whereas others have failed?
Andrey Denisov: I have already mentioned the labor force and the beneficial geographic location with regard to the global markets. The third factor is the existence of the immense internal market. The fourth aspect is the Chinese expatriate community, which is committed, as they say, to “the rejuvenation of their motherland.” Chinese populations abroad remain Chinese. They are citizens of their country—if not in their passports, then in their souls. They possess vast financial resources, and these resources have been funneled to China. The country retains strong governmental power and efficient management, which helped to build a mighty, open economy literally from scratch.
Take another feature of China’s way. Amid revolutionary enthusiasm, the Chinese did not slacken managerial discipline and did not throw the baby out with the bathwater. We can argue about correctness or faultiness of this or that ideological course or political model, but it is absolutely obvious that in China the ideology was totally subordinated to the objectives of economic performance. And this ideology has become a framework of the management model rather than a set of dogmas never to be questioned by anyone.
Generally speaking, the Chinese mentality presumes consistent and gradual actions, the lack of haste, or, to put it simpler, no hustle and bustle when it comes to transformations. Therefore, in any aspect of China’s reform, the most important constituent is common sense. It is the ability to take a practical view of your needs and opportunities, to act not with haste but step by step, and to pursue the decision once it is already made.
McKinsey: What is unique about China’s experience?
Andrey Denisov: I would point out a rather interesting aspect, which is sometimes overlooked when studying China’s reforms. The leaders of China, Deng Xiaoping in the first place, made good use of the purely political factors related to the world alignment of forces. Those were the days of the Cold War, which was rather violent, for that matter. But China managed to position itself in such a way that it became of interest to the American leadership that Chinese–American tensions relax, and the relations between the two countries then began to normalize. The United States offered China vast opportunities, in terms of both technological resources and trade prospects. China got access to the immense American market. And I think you will agree that in the shortest possible time, China managed to oust everybody from this market, including the American manufacturers themselves. Anything you buy in a supermarket in the United States—be it clothes, household appliances, or domestic articles—bears a label “Made in China.”
Hence, the West, and the United States in the first place, helped China’s integration into the global economy. Not only did they open their markets and provide technologies, but they really helped China become a part of the world’s economy. It is quite obvious that such factors come together very seldom, if ever at all.
That is why the Chinese experience is so unique. But most important has been China’s ability to sustain national specificity: their nonadmittance of a purely mechanical application of any foreign practices; their common sense; their consistent and gradual approach to transformations; their patience; and, maybe, the fact that at all stages of the reforms, all layers of China’s society benefited from these reforms in their everyday life. Some of the Chinese—for example, residents of the maritime cities—benefited more, some less, but nobody, or almost nobody, lost. There are no socially important groups in the country that would have been driven by the reforms to the sidelines of social progress.
McKinsey: What are the weaknesses in the Chinese development model?
Andrey Denisov: The country’s political leaders clearly understand that, along with unquestionable successes and achievements, China still has weak points, and many of them. Despite all its merits, China’s development model involves taking over existing processes. China is very capable of copying, adjusting, adapting, and borrowing the experiences of others. But it has not yet delivered its own breakthrough technologies. Chinese exports, including high-tech products, are the result of utilizing imported modern technologies rather than proprietary solutions. One way or another, China will definitely face the necessity to upgrade to a new scientific and technological level.
McKinsey: Does modernization of the Chinese economy have a downside?
Andrey Denisov: Yes, certainly. Sometimes it results in increased social tensions; indeed, the urban territories differ greatly from the rural ones, and coastal regions are absolutely distinct from the inland. The country suffers from acute environmental problems, from the lack of arable land and water. Social problems also exist, such as high levels of corruption. The authorities realize it perfectly. And it is not by mere chance that they punish corruption so severely in China: even high-ranking officials have no guarantee against lengthy terms of imprisonment or even the death penalty.
McKinsey: More than a few people in eastern Russia are afraid that millions of Chinese will cross the border. How real is this notion? And how will relations with China develop in the border regions of Siberia and the Far East?
Andrey Denisov: Naturally, I am not a supporter of apocalyptic scenarios, which are based on superficial perceptions of some external indicators rather than on a thorough analysis of the situation. If China had designs on these lands, we would have known of this for centuries already. But the Chinese state has always existed within the same borders it currently holds. Siberia and the Far East are not quite fit for China’s economic and social model. Until recently, it was rather hard to develop agriculture in these regions due to harsh natural and climatic conditions. And agriculture was the foundation of the Chinese economy for ages. So it pays to look first at history.
Now let’s shift to modern times. In 2004, China and Russia displayed sufficient political wisdom to finally settle the border issue which, like a thorn, still remained in the flesh of our relations. To secure its interests, China has found it much more advantageous to have a prosperous, reliable, and useful neighbor nearby than a target for expansion. Russia’s situation is completely different, with its boundless spaces and scarce population—not growing, at best, or even reducing—of Siberia and the Far East. But these regions are attractive in terms of mineral reserves and transportation opportunities. In Russia, we must make all possible efforts to speed up the development of these areas. The summit of the Asia–Pacific Economic Cooperation countries, which is scheduled to take place in 2012 in Vladivostok, is being viewed primarily as an opportunity to discuss the development of these regions.
In this respect, China is an extremely valuable partner. China mainly purchases raw materials, lumber, and mineral products from Russia, while selling us finished goods and food. But it is up to Russia to change this equation. The Chinese partners are ready to build mutually beneficial relations, not unilateral ones. Not so long ago, the program of Russian–Chinese economic cooperation in Siberia and the Far East was adopted. Now that the framework is in place, everything depends on what we will do to fulfill this program. So, apocalyptic scenarios might be best kept for the movies, not for objective political analysis.
McKinsey: Since Russia’s population is declining, should it encourage immigration from China, to help these regions’ development?
Andrey Denisov: We already have enough Chinese labor force there. But it is just a labor force. The Chinese are indisposed to take roots and settle down in these territories. They still view the bilateral economic cooperation as seasonal work. I mean, people arrive, work, earn money, and go back to China. These are mainly construction and agricultural workers. Of course, many Chinese are doing some commerce as well. The Chinese are good at that, really.
McKinsey: But Russia also buys what they sell.
Andrey Denisov: Exactly. I do remember those times when they were buying from us. For instance, they were buying buckets and woolen coats. They were buying, ridiculous as it may seem, felt hats in large quantities. It was not so long ago, just in the late 1980s. At that time, we were buying less from them than they from us. In the 1950s, the Soviet Union was an economic sponsor. We assisted China in restoring its economy at that period. And they remember it.
But today the situation has changed. Yet, until recently, in some areas such as equipment and technology, we were selling more to China than China was selling to us. The share of machinery and equipment in our imports from China already exceeds the same share in our exports to China. In this category of goods, we are now approximately on par, but the balance is gradually shifting to the Chinese side.
McKinsey: In the decades to come, will Russia abandon its generally Europe-oriented political and economic model and turn to Asia, and China, in particular?
Andrey Denisov: I am deeply convinced that Russia’s civilization as such is Europe-oriented. And this is a natural aspect of our development. But our turning to Asia is nonetheless natural. Why so? Because we are physically present there. I remember the time—the 1970s and the 1980s—when the sole sign of Russia’s presence in Asia was its Pacific fleet. It was very powerful and was sailing with its firepower for all to see.
Today the situation has changed. We need an economic presence in this region in the first place; we need to become necessary for this region. Russia is still not recognized as an Asian country, despite all its Asian associations. We even became an ASEM member, which gathers the leaders of European and Asian countries. For a long time, we held off from ASEM, because we ourselves do not always know who we are.
We should look at Australia, and especially New Zealand, and how these Anglo-Saxon countries searched out their Asian-Pacific identities. I believe that these conscious spiritual efforts deserve deep respect and attention, and we should follow this example. Turning our face to Asia must not be a political move, but an inherent natural act.
People who live in Siberia, in Eastern Siberia, in the Far East, perceive themselves as residents of Russia, but of this part of Russia. They are not temporary dwellers, they do not think, “OK, we will live here for some time, work here, and then we’ll leave for Saint Petersburg, and our children will study there.” We must cultivate the sentiments of permanence, of better conditions for a better life in the Far East. And much depends on ourselves here. But I do not believe that artificial models can be implemented. It must be a natural process.
For historical reasons, since the 16th century, Russians have found their way to the far-distant Pacific coast, to Kamchatka, to Chukotka. This migration grew from some inner flame, some impulse. And only afterwards, the purposeful actions followed. One of the outstanding Russian economic projects of the 19th century, of course, was the Trans-Siberian Railway, which was laid in the territory of both Russia and China. The Chinese Eastern Railway is also part of this story. We have really good examples, and we should remember them.
McKinsey: Still, Russia and the Asian countries would seem to have limited knowledge of one another. What do you think?
Andrey Denisov: I agree. In the field of economic cooperation, we are looking to achieve more but must put up with what we’ve got, since our ambitions are out of sync with our capabilities. This is also true for cultural cooperation. This is a point of mutual interest, mutual attraction.
I am very pleased that interest in China—Chinese culture, language, medicine, philosophy—is rising around the world. For example, we have discussed that the Chinese might lack creative potential when it comes to technology, but when it comes to filmmaking, for example, creativity abounds. Chinese film directors gather awards at many international film festivals as their motion pictures reflect a unique outlook on the world around them.
It is crucial that the governments of China and Russia have a good understanding of this. Hence the focused effort, the “Year of Russia” in China, followed by the “Year of China” in Russia. This is a program including more than 300 important events—exhibitions, tours, concerts, festivals, public meetings—that funds are allocated for. This is not manna falling from the sky.
I see, with great pleasure, interest in the Chinese language awakening in Russia. The very process of learning Chinese is fascinating. And it is quite distinctive, by the way, that universities in the Russian Far East and Eastern Siberia teach Chinese. Young people choose this language and go to China with pleasure. There are many people already who live in China who are like expats, like Englishmen who live in Hong Kong, because they connect their future with this country. They get married, have children, work—and very often work for Russia, thus helping it to implement various cooperation projects. And nobody in China is afraid of it. Our fellow countrymen like to live and work there, and this is good. The Chinese culture is extremely deep. And I believe that this interest will only grow.
We know that the culture and spirit of a people is transferred through their language. There are many translators of Russian literature in China, Chinese people who connected their lives with Russia. And this is also very good!