China's economy

China is not content to serve as factory to the globe. Call it economic foresight, or cultural pride, but despite the stratospheric growth of its economy--10.7% last year--China knows that cheap labor alone can't sustain the boom. While a flurry of activity (and, yes, a government five-year plan) has stressed scientific and technological innovation, look a little closer and you'll see that creativity in art and industry--in design, fashion, media, and the like--is fast becoming a driving national mission.

Look past the behemoth Three Gorges Dam, past a highway system that will be larger than America's by 2020, and China is building a creative infrastructure, too, at breakneck speed. You can sense it in the trendy restaurants and slick boutiques popping up in major cities--and in the gritty ex-warehouse and factory districts where imagination-driven companies are joining the cafés and art galleries that first settled in. Newsstands are brimming with glossies such as Vision, Urban, and Modern Weekly that, joined by online counterparts like Coldtea, feature international trends alongside promising local talents. China's answers to YouTube (Tudou and Yoqoo) and social-networking sites (Douban)--along with an estimated 34 million (and skyrocketing) blogs--are bringing in digital reinforcements on a national scale.

Combine all of that with a counterdiaspora and reverse brain drain of talent, and the overall result is a kind of primordial soup thick with the building blocks of creative enterprise. Emerging from it is an army--small, but growing--that's working to reinvent how China thinks and works.

China has pursued a combination of autocratic politics and state capitalism--sustained by investment from American, Japanese, and European banks and corporations. The Chinese example of dictatorship cum development threatens the ideal of democracy in Asia, Africa, and Latin America. And China's beggar-they-neighbor trade strategy may eventually undo the world trading system that the United States and Europe put together after World War II.

China's prosperity has depended upon the labor policies that the Communist Party has enforced and that foreign investors have happily accepted. These policies have kept wages low and prevented the formation of private (non-government) unions. As a result, China has been able to compete for foreign investment against countries like Taiwan and South Korea where workers, enjoying some degree of political and economic freedom, have been able to drive wages up. Even where wages are comparable, as in India, foreign companies can anticipate that they will not rise as quickly in a dictatorship like China as they might in a democracy. That may have been a reason why, during the decade following the Tiananmen Square massacre, China received 85 times more foreign investment than India.

The key lies in China's two-tier labor force. Its domestic industries rely primarily on migrant labor from the countryside that is exploited and abused--even enslaved, as in the recent case of kiln workers in Shanxi province. According to China Labor Watch, more than 60 percent of the migrant workers in Guangdong Province receive between the equivalent of $63 and $125 a month and work between 10 and 16 hours a day. There is a government minimum wage, but more than 85 percent of the workers that were surveyed were paid less.

Foreign investors, on the other hand, employ urban workers with residency permits. These workers make less than their counterparts in other countries--and their wages are constantly being eroded by inflation in China's scarce housing market--but they make more and enjoy greater job security and benefits than the migrant workers. This difference in wages between the migrant workers employed by domestic industries and the urban workers employed by foreign producers allows China's domestic industries to undersell foreign producers in its own market. If foreign producers want to make money in China, they have to do so by exporting back to their home countries. The old dream of selling toothpaste to the Chinese has proven to be no more than a fantasy.

China's economic strategy aims at increasing China's exports while limiting the growth of its imports. That entails growing inequality at home--China has gone from Maoist egalitarianism to the worst excesses of capitalist maldistribution. Even the socialist safety net has vanished. Chinese workers no longer enjoy universal health insurance. Buttressed by rigid control over the value of the country's currency, China's economic strategy also leads to constant turmoil in the world trading system, as other nations attempt to protect their own trade balance and their industries from Chinese competition. If anything, these conflicts, which contributed to the collapse of the World Trade Organization's (WTO) Doha round of trade talks, promise to get worse in years to come.