Reverse Black Swan?

Romain/ avril 26, 2020/ Finance, General/ 8 comments

« Kids are playing on an escalator, walking up in the wrong direction. If they stop to walk, they go downstairs. If they keep on walking, they remain in a stationary position. If they climb faster, they go upstairs. »

According to former French diplomat and politician Alain Peyrefitte, this tricky game is actually the fundamental dynamic of all human societies. In the long run, immobile countries will gradually decline, leaving space for those making significant progress.

Peyrefitte published The Immobile Empire in 1989. The book is the astonishing history of the British Embassy of Sir Macartney trying to establish trade relations with China at the end of the 18th century.

Macartney spent one year facing a rigid and intrusive administration, and never managed to negotiate a single deal. At the end of his journey, both sides felt misunderstood and humiliated.

Sir Macartney’s expedition was the not first attempt to push China on trade. And further attempts would only lead to bigger frustration.

But this particular encounter occurred at a key moment for both countries. Indeed, Britain was enjoying a great economic momentum and was like the kid climbing faster the escalator. Meanwhile, after more than 2000 years of existence and dominance over Asia, the Chinese Empire had quietly stopped to walk and was about to enter a dark age.

China was so reluctant to embrace change that they did not see the risk of being outdated by Europe’s technological advance. And the powerful Qing dynasty did not resist to the following decades of decline, characterized by war defeats and internal chaos.

Peyrefitte’s book is all about black swans. In China, Qianlong was at the top of the celestial pyramid and the only thing a foreign monarch was expected to do was to owe allegiance to the Emperor. While in Britain, every human being was said to be rational and the Court firmly believed that China would not refuse a trade deal that would benefit both countries.

But there is more to it than that. At this time, no one had realized that the Chinese system was suffocating on inertia and that this country would go nowhere. Conversely, no one really understood how far the British Empire could go thanks to the industrial revolution.

China’s digital transformation

Why is this book so meaningful today? Because it looks like we find ourselves in the reverse situation. In Europe, many countries have made insufficient progress during the past decades and could be easily described as ‘immobile’. While politics has become a mess, the economic situation has not improved that much.

In the same time, China has engaged in a spectacular transformation from a poor rural economy to the world biggest exporter, and then from a low-end manufacturer to a competitive first-class industrial player. On the diplomatic scene, PRC has evolved from an isolated third world State to a global leader of the 21st century.

While Europe has obviously missed the train of the dot-com revolution, China has developed a huge internet ecosystem that will challenge American Big Tech. And this country might soon become a leader in fields like fintech or artificial intelligence.

Of course, China also faces its own structural problems, such as an overheating real-estate market in big cities and a mounting debt problem, and no one can know for sure what will come next. But when you look at the long-term trajectory of each region, the similarity with Peyrefitte’s book is striking. Except that Europe is on the wrong side this time.

This article was originally published on LinkedIn September 28, 2018.

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