Tuesday, November 10, 2015

The rise of China: is the broken clock finally right?

Since the 1950's, there has been something of a cottage industry for many so-called experts on the global economy—economists, political scientists, and historians—who periodically warn the United States and "the West" about the "rising threat" of some country to the world economic order.

In the 1950's and early 1960's, this rising threat was the now-defunct Soviet Union. Supposedly, the Soviet economy was rolling along like a tank, with massive, record-setting yearly economic growth and it was poised to soon surpass the United States in virtually every economic indicator. Many of the experts here even traveled to the U.S.S.R. to witness the Soviet model firsthand, and they returned with stories of Soviet greatness, amazing tales of production and efficiency, and of worker contentment. Listening to these experts, one could hear the bell tolling for the United States of America and one could understand the calls to convert the U.S. to the Soviet model, to institute central economic planning and full-scale socialism, a command economy as it were.

The problem was, the Soviet model was all smoke and mirrors. It wasn't real. The numbers were all artificial, were either produced by inflating the real numbers or just manufactured out of thin air. Sure, there was some real growth, but it wasn't nearly as impressive as many seemed to believe. After the Wall fell and there was some access to real records from behind the Iron Curtain, this became readily apparent. Factories, for instance, had manufacturing quotas since the 1920's and these quotas were often met by simply producing defective or even inoperative equipment. Tractors from Soviet factories were shipped to farms throughout the land. And many of these tractors worked for a while—a week, a month, maybe a year—then broke down and were never repaired (no one was building spare parts). Many never worked from the get-go and just sat unused and rusting in barns and fields.

Of course, with this fabulous new equipment, farm workers were required to increase their production as well And they did by working themselves half to death, by shipping all of their foodstuffs to the point were local rural communities faced starvation, or by just lying about their production and hoping that they didn't get caught. This was not a new situation for the Soviets, as it had been happening since before World War II. The difference was that they had simply become better at the propaganda game and were more successful at limiting access. Yet to this day, there are still so-called scholars who trumpet the success of the Soviets in the 1950's, who argue that while there may have been some number fudging going on, the Soviet economy of the period can still rightly be called a marvel. Nonsense.

When the Soviet economy began to crumble in the 1970's because the Soviet leadership could no longer sustain the illusion, because it was steadily crippling itself with the arms race (thank goodness for President Carter, who helped the Soviets maintain the illusion a while longer), the Soviet model ceased to be the up and coming economy that would challenge the U.S. That mantle soon fell on Japan, whose massive manufacturing-based export economy (largely at the expense of the U.S. taxpayer, to be sure) was growing by leaps and bounds.

Anyone who was alive in the 1970s remembers the flood of Japanese imports, Datsuns, Toyotas, and Hondas on the road, all manner of Japanese electronics in the home, these were great times for Japanese companies and, to be fair, American consumers. Japan had the third largest economy in the world, going by GDP, in the 1970's and into the 1980's, when—despite a momentary slump—Japan's economic fortunes continued to grow because of the computer industry. And throughout this period, many of the experts were once again pushing an "end of U.S. dominance" narrative, even predicting that Japan would overtake the U.S. economy at some point in the near future.

The economic success of Japna was largely attributed to the Japanese economic model, with respect to its cultural component: the work ethic of the the people, the accountability of executives, etc. Indeed, movies like Gung Ho (Ron Howard's 1986 comedy staring Michael Keaton) were based on these assumptions and suggested that the U.S. should model itself after Japan if it wanted to save itself. But the end of the 1980's saw the bursting of the Japanese bubble, as artificially high real estate prices in Japan collapsed, robbing the markets there of investment monies, causing the Japanese yen to tumble against the dollar, and wiping away trillions in savings that the Japanese people had accumulated over decades. This led to the so-called "lost decade" of the 1990's for Japan and talk of its economic dominance dwindled.

But this gap—that of the needed economic superpower to challenge the United States—was soon filled, as the experts in the 1990's looked to the Asian Tigers and then the EU. But the Asian Tigers turned out to be paper tigers and the EU, well it is a formidable economy, but it has been and will always be something of a conglomerate, prone to infighting and subject to shocks resulting from problems within its member-states (i.e. Greece, Italy, etc.). Moreover, with respect to the EU's prospects for global dominance, it remains habitually limited by the demographics of its member-states, many of whom are aging and simply unable to grow significantly, points which again escaped the experts touting the EU.

Source: http://www.the-european.eu/
Since the 21st century began, there has been just one contender to speak of, one nation that has the hearts of the current experts all aflutter, has them projecting an end to the U.S. dominance once and for all. That nation is, of course, China. And there is no doubt, China's economy is huge. And it is still largely controlled by the state, thus returning us full circle to arguments for some amount of a command economy as a necessary component for the U.S., if it has any hope of staving off the rise of China.

Much is made of China's purchasing of U.S. debt as well, though more often than not the people worried about this don't really understand the issue, mistakenly believing China has loans to the U.S. that it could "call in" and cripple the U.S. economy at any moment. And recently, China has been selling off some of these holdings (which by the way shows the error of the above thinking: China must be able to find a buyer to divest itself of U.S. debt), causing some consternation, though the issue is really not all that significant, in my opinion. But it does point to the current interdependence between the U.S. and China, even as the latter preys on the fears of the U.S. public, plays games with its currency, and postures militarily on the international stage.

Lawrence Summers, from high up in his perch in the ivory tower, imagines that China's rise cannot be contained, that the U.S. must find a way to deal with the behemoth that is the Chinese economy, especially when that economy is going through difficult periods. And—like the experts of the 1950's—he knows this because he has visited China in person, has been shown its capabilities and desires by the Chinese leadership, begging the question: do we learn nothing from history?

China's economy is a pirate economy, a mercantilist economy, built on a single commodity: cheap labor. And it's not going to last in its current state. It's leadership is forced to use every available policy angle, from tariffs and currency manipulations, to maintain a steady growth rate, to hold back inflation, even as a small percentage of industrialists in China accumulate vast wealth on paper, wealth that will either flee China or risk being wiped away. Must the United States deal with China in the present? Absolutely. And the way to do that is to stop treating China with kid gloves, stop allowing a double standard when it comes to trade, intellectual property, and currency manipulation. Oddly enough, Donald Trump is the only presidential candidate willing to speak the plain truth here:
China’s economy is controlled by the government. Any notion that their economy is based on a free-market system is simply not true. If an American company wants access to the Chinese consumers, that company must share its intellectual property, a condition that violates international fair-trade standards, World Trade Organization rules and common sense.  
But the worst of China’s sins is not its theft of intellectual property. It is the wanton manipulation of China’s currency, robbing Americans of billions of dollars of capital and millions of jobs.
He's right. There is much to fear from China, but that is because we suffer these kinds of transgressions from China willingly, rather than demanding that China play by the same rules as everyone else. China's rise is fundamentally like that of the Soviet's in the 1950's. It's an illusion, sustained only by the gullibility of the rest of the world. True enough, there are resources in China aplenty (as there were in the Soviet Union), there is a huge potential market, and there is real growth. But there is also gamesmanship by the Chinese government that sustains the illusion of China's greatness while simultaneously limiting it's real potential and the prosperity of its people.

So no, the broken clock is still not right. We are not on the cusp of a new era under a new economic superpower. Unless, of course, we're dumb enough to go along with the games.

No comments:

Post a Comment