Investors are taking note as the Chinese economic miracle is cooling off. What is happening and how should it affect investments? The Great Recession certainly hurt China as well as the rest of the world. Slowing demand for consumer goods produced in China and demand for Western produced goods in China are part of the picture. What we think has been overlooked is the competence needed of national leadership and the structure of that leadership in China. When looking for good investments and safe investments sound management/leadership is essential. That is lacking because of the China leadership and the Peter Principle!
The Peter Principle
Forbes wrote an article about what the Peter Principle means today.
You may think you’ve heard the Peter Principle before-something to the effect that, “In a hierarchy, every employee tends to rise to his level of incompetence.”
But the Peter Principle was more than an alarmingly nasty motto. It was an alarmingly nasty book-and a funny one at that, illustrating the efforts of many managers to seem productive when in fact they’re in over their heads.Published nearly a half-century ago, the book is now a refreshing tonic for all the feel-good, impossibly Pollyannaish management wisdom being passed around.
To a certain degree the inevitable outcome of anyone’s career can be the fulfillment of the Peter Principle. You do well and get promoted until you are in over your head. This applies to national leaders and leadership models as well.
Order versus Disorder and Managed Economies
It is true that primitive economies grow more rapidly if managed from the top. But there comes a time when top down management does not work. Economies that move from top down control to a consumer driven model are able to evolve to a higher level. Japan made the transition around 1970 and South Korea got there around 1990. China is at that point and it remains to be seen if China will be able to make the switch or if the Peter Principle will take effect and further stagnate Chinese economic growth. Philly.com understands this and writes about how the Chinese leadership cannot control things.
The perceptions about Chinese omniscience were created by years of upbeat economic numbers. More recently, the Chinese data indicated the economy was slowing. But now, people are unsure by how much.
Why the change in attitude toward Chinese data? The belief that the numbers were accurate and not managed has been called into question. Actually, as we all probably recognized for a long time but were unwilling to admit, the figures were always managed, at least to some extent, for political purposes. When reality and image diverged significantly, the truth emerged.
The article goes on to say that crude counter-productive interventions have hurt instead of helped and that government planners are less efficient than the market. This is the Peter Principle in full force. What worked in a more primitive economy will not work if China wishes to move on to the world stage in a bigger role. China leadership is fulfilling the Peter Principle and will take its economy down with it.
Going by What Has Worked Before
Many leaders get to the top by mimicking the success of others. They do what has always worked. Top down “managed capitalism” certainly worked to bring China to the level of being the second largest economy in the world. But, China leadership and the Peter Principle have come to bear. The people in charge in China need to loosen control of their economy and their society. That is not their mindset and it is why these people fulfill the Peter Principle. Investors beware.