Why Free Markets Require Free Minds, Even China's

Google vs. China represents a clash of what may be the two most powerful forces of the first decade of the 21st century. Like China, Google has changed the terms of competition in several crucial markets, thanks to its advantages in hardware, productive capacity, and engineering brainpower. The juggernaut rolls into new industries—e-mail, GPS, smart phones, operating systems for netbooks—heedless of the competition, racking up profits and disheartening competitors.

But now one of the world's most rapidly growing companies has threatened to pull up stakes from one of the world's most rapidly growing markets. It's a move that raises many questions about Google and its future—and a larger question about China. Can China get rich without becoming free?

History suggests it can't. Until recently China, which was technologically more advanced than Europe in the middle of the last millennium, had been left behind. Historians, led by the magisterial David Landes of Harvard, have made a convincing case that the slow erosion of arbitrary authority—the Reformation, the Enlightenment, the rise of rights, constitutions, democracy—helped stoke the capitalist revolution. For the past few centuries, the developed world has been led economically by democratizing commercial empires—Britain in the 18th and 19th, and the U.S. in the 20th. Without free minds, it's difficult to have free markets, and vice versa. Trying to develop economically while controlling the flow of information has generally been a losing bet. Either such regimes fail to grow and collapse (the Soviet bloc), or the forces of economic liberalism ultimately lead to political liberalism, as in Chile.

For the past 30 years China has been testing a new, inverted model: breakneck economic development while retaining strict limits on personal liberty. The Communist Party has wrenched the nation into the 21st century. The hardware is certainly impressive—the maglev trains, shiny new airports, and modern skyscrapers. China has displaced the U.S. as the world's largest car market, and is about to surpass longtime rival Japan as the second-largest economy. Such growth has attracted American companies, which inevitably make a series of trade-offs when they decide to head east. They accept local joint-venture partners and the risk of intellectual property theft, and learn to negotiate a commercial culture in which the government may arrest and jail a key executive, as happened with Australian mining giant Rio Tinto. As a group, the Fortune 500 has overlooked or come to terms with the lack of political freedom. After all, General Motors or KFC are in the business of selling stuff, not principles. And they have to be in China because that's where the action is. "If you don't come to the Chinese markets, other countries will," said Zheng Zeguang, director general of North American Affairs in China's Ministry of Foreign Affairs.

That's why Google came. Last summer, Google advertisements were ubiquitous in Shanghai. But Google is unlike other U.S. companies that have succeeded in China. It sells access to information. Its business model requires freedom of linking, surfing, and expression. And that's why it, along with other media and New Economy companies, hasn't done well in China. Google has 14.1 percent of the Chinese search market, compared to homegrown Baidu's 62.2 percent. Worse for Google (motto: don't be evil), doing business in Guangzhou means being complicit in activities that are antithetical to its mission. "How far do you go down the path to becoming a de facto adjunct to government control of information?" asks Zachary Karabell, author of Superfusion: How China and America Became One Economy.

Like Google, China is led by engineers—but the leaders were trained as civil engineers. Google's software engineers became billionaires by devising a democratic algorithm. China's civil engineers are turning the process on its head. They believe the nation is getting richer precisely because they are keeping democratic tendencies in check. In the two weeks I spent in China last November, I heard Westernized elites make all sorts of rationalizations for why the time isn't right for democratization. The main argument: in a nation of 1.3 billion people, 56 ethnic groups, and unbalanced development, encouraging free elections, civil society, and political organizing would be a recipe for chaos—and an obstacle to growth. One senior bureaucrat pointed out that the growth rates of South Korea, Taiwan, and Indonesia declined once they became more democratic. "When you emphasize development and efficiency, then you have a problem with the system of democracy," said Zhe Sun, director of the Tsinghua University Center for U.S.–China Relations in Beijing. For a regime whose legitimacy rests on economic progress, no such delays can be tolerated.

Yes, Shanghai feels a lot like New York. But don't presume that just because Americans and Chinese share a consuming culture that they also share a political one. As I stood in Tiananmen Square on a chilly November day, I turned to my guide. "That was really something, what happened here 20 years ago," I said. "Yes," he responded in his near-fluent English. "Those terrorists really killed a lot of soldiers."

Market forces prevail, but the government clearly has its hands on the steering wheel and its feet on the gas pedal and brakes—especially in information-intensive industries like Internet search. And so even as it welcomes investments by the Fortune 500, China engages in large-scale cyberattacks on the most technologically advanced company in the world. The crisis that plunged the world into recession has only given the Chinese more confidence in their model. In November, I met with Qian Xiao-qian, vice minister of the State Council for Information of China. "To say the Chinese government controls the Internet is exaggerated," he said. (After the meeting, I fired up my laptop and was blocked from getting to Twitter, Facebook, and Andrew Sullivan's blog.) Qian enumerated all the things people can't do on the Internet: no online pornography, no attempts to incite racial discrimination, and no attempts "to violate the Chinese Constitution and subvert the state." The rules, however, are arbitrary, opaque, and subject to change.

Qian ticked off the impressive numbers—China has 338 million Netizens as of June 2009, 700 million mobile subscribers, and 180 million blogs. That's certainly enough users to build businesses around, with or without Google.

Can China continue to grow without allowing Google—and the next Googles of the world—free rein in China? It's worked out well so far. But there are a few caveats to the story.

First, China still has a long way to go before it's considered rich. And some sympathetic analysts argue that it's not fair to hold China's civic development to American standards. The U.S. had China's present-day economic profile—per capita GDP of about $5,000, 40 percent of the workforce in agriculture, 30 years into the process of industrialization and urbanization—in 1900, a time when there were no direct elections for Senate, women couldn't vote, and segregation reigned in the South.

Second, much of China's extraordinary development has been based on moving peasants into manufacturing. The key to future job growth, says Stephen Green, chief economist at Standard Chartered Bank in Shanghai, will lie in the service sector. And the largest components of the services sector—financial services, entertainment, media—remain firmly in the grip of the state. Going forward, it will become more difficult for a services-based economy to prosper with restraints on communication and expression. China faces a fundamental paradox, says Damien Ma, an analyst at the Eurasia Group. "It needs to have fairly closed information flow for political stability purposes, but doing so stifles innovation."

And that's the rub. Any type of political system can produce excellent hardware; the Soviet Union, which ruled Russia when Google cofounder Sergey Brin was born there in 1973, managed to produce nuclear weapons and satellites. Likewise, China has built truly impressive hardware: some 67 bridges now span the Yangtze River, a superfast supercomputer made entirely from parts made in China, high-speed trains. But in the 21st century, a country needs great software in order to thrive. It has to have a culture that facilitates the flow of information, not just goods.

Why Free Markets Require Free Minds, Even China's | Business