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China's Silicon Ceiling The Beijing/Google skirmish is a reminder that free markets require free minds.

By Daniel GrossPosted Saturday, Jan. 16, 2010, at 7:12 AM ET

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

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But now one of the world's most rapidly growing companies has threatened to quit 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 last few centuries, the developed world has been led economically by democratizing commercial empires—Great Britain in the 18^th and 19^th centuries, and the United States in the 20^th. 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.

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For the last 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 21^st century. The hardware is certainly impressive—the maglev trains, shiny new airports, and modern skyscrapers. China has displaced the United States 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 have overlooked or come to terms with the lack of political freedom. After all, General Motors and 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 with 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.

Google's software engineers became billionaires by devising a democratic algorithm. China, too, is led by engineers, but civil engineers. 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."

The crisis that plunged the world into recession has only given the Chinese more confidence in their model. In November, I met with Qian Xiaoqian, 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.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.

Illustration by Rob Donnelly.

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