What Happens When Evergrande Collapses?

The markets are watching closely for what seems to be the inevitable collapse of Evergrande, a massive Chinese property developer that is almost certainly unable to service its debts. A default would have tremendous repercussions for the Chinese financial system–and with it, the Chinese economy and the global economy as well. All the immediate focus is on the financial implications of a massive default of a highly-connected property firm, both for China and for the rest of the world. But the political implications of Evergrande’s collapse are no less interesting.

So what happens to Chinese politics when Evergrande collapses? About five years ago, Jeremy Wallace and I asked a question like this in a paper called “Hard Landings and Political Change in Nondemocracies” (PDF). This paper was never published (and Jeremy and I tried valiantly to place it), probably because the paper is nonstandard in the way that it tries to answer the question using qualitative and quantitative evidence and the fact that China is different.* But our argument rests on the premise that we can learn from the experiences of things like the collapse of Evergrande, even those that don’t happen in China, to develop some insights about what would happen in this specific case.

So what will follow politically from the collapse of Evergrande? One place to look is East and Southeast Asia, and to the political upheavals that followed from the serial collapse of the exchange rates of Thailand, Indonesia, Malaysia, and South Korea during the Asian Financial Crisis. These financial crises became political crises for the simple reason that politics shapes financial markets, and the financial turmoil affected economic actors with political power.

What we learned during 1997 was just how financially interconnected these economies were, just how many politically powerful individuals and groups were using preferential access to credit as a cash machine, and just how liquidity-constrained these actors were when their cash machines quit spitting out bahts, won, rupiah, and ringgit. What might have been just a property crisis in Bangkok or an exchange rate crisis in Jakarta turned out to be a financial meltdown that affected everyone. And the very same political actors who had happily supported the incumbent governments at the time started demanding that these governments do something–anything!–to get the cash machines back up and running.

And when it turned out that governments could not help them, even as they tried, these powerful actors began to look for new governments who could.

Now, the specifics of the Asian Financial Crisis differ from whatever crisis Evergrande’s default may create. Thailand, Indonesia, Malaysia, and South Korea suffered from having open capital accounts and fixed exchange rates, coupled with enormous amounts of unhedged foreign currency debt. The details differ across the four cases, but at the end of the day the problem was how to stabilize currencies and keep interest rates low at the same time.

China does not face this problem; and in fact, one reason why it doesn’t face this problem right now is because it looked to the south and east in 1997 and said “no thanks” to an open capital account. So the financial crisis management problem that China faces will be different; if Evergrande defaults, it will need to unjam the credit markets that will seize up in response. And it will need money to do that. And there will be some powerful economic actors who do not want to spend that money, as well as some who will be desperate to spend that money.

The Xi regime will, in turn, need to find a way to placate both set of actors, or crush one. From an outsider’s perspective, it will not look politically contentious, because the regime will suppress any mention of dissent or discord. But behind the facade, there will be intense disagreement, and we will not be able to know just how precarious the situation is until it is too late. If the Xi regime cannot find a way to either placate those powerful actors who demand protection, or to crush them entirely, we will see these actors start to abandon the Xi regime altogether.**

One response might be that China’s institutions are different: they are so strong, the party so unified and hierarchical, and so pervasive within Chinese society that a political crisis like this is impossible. I couldn’t rule it out. But one lesson that studying financial crises hammers home is that time and again, people vastly overestimate how much durable political loyalty institutions create when the going gets tough. China’s political institutions created enormously powerful and wealthy people, but those people are not loyal to those institutions, they are loyal to their wealth and power.

This script was written long ago, and the actors have changed over the years. It is the story of how an authoritarian juggernaut turns into the “sick man” of its part of the world. It happens quickly, and in retrospect it seems inevitable. But it’s still a waiting game right now; we won’t know, and foreign observers like me have predicted at least twenty out of the last zero Chinese economic and political crises since Tiananmen. But it remains the case that after, say, just five more sleeps we may wake up to an entirely different kind of Chinese politics.


* Read the last three words in that sentence in a grumpy comparativist voice.

** My prediction, if it gets this far, is that in at least one public statement Xi will describe those who are demanding policy change as “rats.” You know the crisis is serious when the rat talk starts (see Indonesia and Mexico, among others).

The Microfoundations of Control

The events in Afghanistan are tragic, they are heartbreaking, they are devastating… I cannot supply words that do them justice. I am not an expert by any means in Afghan politics, society, or history, and thus I have very little to contribute to a broader understanding of what went wrong or what happens next. All I can say is that I know that the human tragedy will not end when the Taliban finally secures the airport.

I will confess, however, that the collapse of Afghan security in the face of the Taliban resonates with a long-standing intellectual interest of mine; specifically, the way that social scientists and policymakers conceptualize large social phenomena such as “control over a country.” And I have written a bit on counterinsurgency warfare and the politics of local control, so I have had cause to think about this issue before. I also regularly teach students in my Southeast Asian politics course about the micropolitics of counterinsurgency warfare, drawing on three important cases in Southeast Asia: the U.S. war in South Vietnam, the Darul Islam and Permesta/PRRI rebellions in Indonesia, and the Malayan Emergency. These aren’t just academically interesting—modern counterinsurgency training in the U.S. Armed Forces relies deeply on these cases too.*

The analytical problem, to state it again, is how to conceptualize large social phenomena. Social science is replete with concepts such as “the state” and “democracy” and “power” and “control” and “institutions” and “markets” and “class” and “ethnic group” and so on and so forth, so it is inescapably part of the job of the social scientist to work with such concepts. But these concepts are always wooly, escapably so; these are essentially contested concepts.

To make sense of the world, we add precision to these concepts as necessary. We can delimit their scope (“a democracy is a …”) or we can define their alternatives (“the difference between a social convention and a social institution is …”). Or we can disaggregate them, breaking large social concepts into their component parts, which can seem simpler and easier to conceptualize than large ones.

To give an example, let us think of what “woodpile” means. A woodpile is a collection of pieces of wood, of course. So to make sense of what a woodpile is, we might choose to define it with reference to the things that comprise it. Woodpiles are comprised of pieces of wood. And, naturally, they vary based on what kind of wood is in there. Locust woodpiles are made out of pieces of locust wood, ash woodpiles are made out of ash wood, mixed woodpiles are made out of multiple types of wood, everything you need to know about how to classify woodpiles and how they vary, it seems, can be described with reference to the characteristics of the pieces.

But of course, that is not really true. Look at these two collections of pieces of wood:

Both of these would qualify as woodpiles under the definition given above. You could describe them with reference to the different kinds of wood, but obviously you’d be missing something else about the two piles, which is how they are arranged. To make sense of how these two woodpiles differ, you need to understand how the two collections of individual pieces relate to one another. In this case, it is their arrangement in a stack versus an irregular pile. You could describe all the parts of each of the two piles of wood, and still not see why one of them is special, because the characteristics of the pile cannot be reduced to just their components.

In the social sciences and the philosophy of science, we can speak of conceptual accounts that a reductionist, and those that are holistic. We can think of social science concepts that are microfounded, where the whole consists of nothing but the parts, so that the characteristics of the whole are epiphenomenal on the characteristics of its components. And we can also think of concepts where the characteristics of the whole supervene on the characteristics of the parts, so that you cannot describe the essence of the whole with mere reference to its components. The best modern defense of why we need to work with social concepts that embrace the possibility of supervenience is by List and Spiekermann, and if you’ve read this blog for a while, you’ve heard me make this point a lot.**

I propose that modern counterinsurgency doctrine has a very good way to conceptualize political control, but only in reductionist terms. And that is a problem for policy in situations like Afghanistan since the fall of the Taliban to coalition forces in 2001.

To explain what I mean, consider modern counterinsurgency doctrine and the emphasis on “clear hold build.” I will not debate whether this strategy is the right one (I don’t know the answer, and the debate is older than I am), but I will note that modern counterinsurgency doctrine has long been praised—including by me—for focusing on local control over territory. “Control and govern Afghanistan” is hard. Afghanistan is complex. And it’s hard to know where to start after you’ve dumped all of your bombs out of the planes and beaten the enemy into retreat.

But “control this valley” and “hold this town” and “build this bridge” are, conceptually, more manageable. Of course the implementation is hard. But these are engineering-type challenges: get the materials here, work with the local notable there, establish security in this well-defined pocket of territory. The U.S. government thought of this a long time ago through the Strategic Hamlet Program in Vietnam, as did the British/Malayan forces with New Villages. You build collective security one place at a time.

My point is that this approach lends itself to a kind of reductionist vision of what it would mean to control Vietnam Afghanistan. Let’s say you can exhaustively divide Afghanistan into 100 parts. Then you could solve the problem of controlling each one. Each one is more manageable than solving all of Afghanistan. And you might hold the view that if you could solve the local control problem 100 times, then you would have controlled 100% of Afghanistan.

That is the conceptual leap, to conflate “control each individual part” with “control over the whole that the parts exhaustively comprise.” To continue the woodpile analogy, “Afghanistan” is more than the territories that comprise it; to even conceptualize Afghanistan, one must understand the arrangement of those territories relative to one another, and the organizing principle (or lack thereof) that holds them together.

There is plenty of fodder here for criticism of the social science research on Afghanistan (and on counterinsurgency research more broadly), but that is not my goal here because I’m not the one to level such criticisms and I have no idea how to evaluate the motivations, incentives, and commitments of those who worked on these questions. My point is one step more abstract. In the context of the rise of modern methods for causal inference in the social sciences, credible causal inferences about large social concepts are basically impossible. But a lot of research, including a lot of my own, has followed the strategy of disaggregating a large social whole (say, “governance“) into smaller parts that are easier to measure and for which modern methods are better suited.

We can make progress that focuses on local concerns. True progress! And local concerns are important! But it could be that the instinct to disaggregate—fueled by analytical tools that require disaggregation—produces a system of knowledge creation and policy research that cannot tell the difference between a woodpile and a pile of wood. No amount of attention to ash versus locust can tell you if the pile is stable or not.


* This tweet, by a former teacher and coauthor of mine, captured a lot of frustration among political scientists at the moment as well, in a way that resonates with what I write here.

** Illustrative examples include “democracy is not government by democrats, and authoritarianism is not government by authoritarians” and “microfoundations for political science.”