The right eloquence needs no bell to call the people together and no constable to keep them. ~ Emerson

Friday, October 22, 2010

A Dragon Market

The Chinese Learned Free Market Capitalism From the West; Now What Can We Learn From Them?

Whether you believe globalization has been ultimately good or bad for the United States, everyone can surely agree that China benefited greatly from it. China reaped these benefits because the Chinese government began promoting economic liberty for its people, following the dismal failure of Mao Tse Tung’s communistic Cultural Revolution. The explosive growth that resulted and continues today leaves China poised to become the world’s largest economy by 2020.
China is poised to
become the world's largest
economy by 2020

China’s economic success story demonstrates the obvious and comprehensive superiority of free market capitalism for many Americans. It leaves conservative thinkers speculating why President Obama and the Democratic Party seem determined to take this country in the seeming opposite direction. If, as conservatives imply, Chinese leaders are so much smarter than are the people currently running this country, it might be instructive to see how they are handling their triumph.

China’s basic strategy up to this point relied on an abundance of cheap, unskilled labor, permitting them to undercut Western goods with higher production costs while simultaneously improving the income/quality of life of its own workers. It resulted in a mass migration of people from rural areas to urban centers, paralleling the Twentieth Century American experience. This approach has not been without costs, however.

Explosive double-digit growth has created a burgeoning wealth gap, environmental concerns, widespread government corruption, rising inflation/sluggish domestic consumption, and foreign pressure to properly value the yuan. Many here at home say such is the price of success. One might think China is resolved to re-double its efforts.

The Chinese see things a little differently. They are thrilled with growth but fear they are growing too fast and out of control. Back in March, Premier Wen Jiabao described his country’s expansion as “unbalanced, uncoordinated and unsustainable.” The Chinese are opting for long-term stability over short-term profitability.

What is more, they are putting their money where their mouth is. This Wednesday, the People's Bank of China, the government central bank, raised its key lending rate by 0.25 points. It was the first hike since the recent global economic crisis and explicitly aimed at slowing growth, inflation, and domestic credit. China has prospered by selling its goods cheaply oversea and it wants that to continue. However, it also wants to promote domestic consumption.

While the Chinese model has brought wealth and upward mobility into the middle class for people moving from rural areas to cities, those remaining in the countryside continue living on subsistence wages. Rural workers also face more obstacles to healthcare and other benefits as well as endure the worst of environmental damage by industry. Meanwhile, urban laborers are pushing for higher wages, more benefits, and cleaner/safer working environments.

Many in this country commonly decry such social concerns are job killers. Chinese leaders realize they need to create tens of millions of new higher-value, higher-skilled jobs. This means stressing innovation and improved higher education, even at the risk of introducing more freedom of thought and pro-democracy ideas among the educated. The risk appears to be paying off. China's global patent applications are growing five times more quickly than those of the U.S. In addition, the number of papers appearing in international journals authored by Chinese researchers has increased.

New York Times columnist Thomas Friedman reports a recent conversation with Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore. Mahbubani was incredulous the U.S. Congress balked at an initiative proposed by President Obama to create separate research centers to solve the eight biggest energy problems in the world because the $200 million price tag was deemed too high during a time of high deficits.

Singapore recently invested more than a billion dollars to promote itself as a biomedical research center. Likewise, the Chinese government responded to the global recession with a four trillion yuan (i.e. $586 billion) stimulus package to promote research and development.

Sometimes more notable than what the Chinese government does is what it chooses not to do. Traditionally, the Communist Party has come down hard and fast on any type of labor unrest. However, the Economist noted in July that the government treated a recent strike with far greater leniency. The Chinese surmise a (slightly) stronger labor movement would give workers more money to spend and boost domestic consumption.

When the Chinese government talks about growth that is “unbalanced,” it refers to growth not experienced by all segments of its society. It wishes to spread the wealth to all its citizens, preferring moderate gains by everyone to meteoric gains by a relative few. Unsurprisingly, a Communist regime sees government as one of the best tools to do this. To be sure, so much money funneling through government has led to corruption among officials, including bribes, graft, and embezzlement. The government has introduced a series of economic reforms to deal with such problems.

Some Western observers insist economic reform will drive political reform in China, forcing it to become more democratic. Gordon Redding and Michael Witt, two senior fellows at the Institut Européen d'Administration des Affaires, disagree. In their book The Future of Chinese Capitalism (Oxford University Press, 2008), the two explain that different parts of China are trying different things to find the best formula.

They believe the South Korean chaebol model is the type of capitalism most likely to emerge in China. Chaebols are powerful conglomerates owning numerous international enterprises. Ownership is not limited to the founding group or “family” but it retains tight control over the enterprise. Samsung, Hyundai, and LG are all examples of chaebols that have become well-known international brand names with aggressive governmental support and finance.

Many Westerners dismiss such possibilities. They point to the historical superiority of free market capitalism over the dismal failures of past and current communist states. Charles Krauthammer of the Washington Post characterizes European experiments with socialism as “unraveling,” a common conservative charge of late, in his column today. However, the data does not bear out all this indulgent smugness.

The website Econompic Data analyzed data on average wealth per citizen for various countries, as gathered by financial giant Credit Suisse. The study defined “wealth” as all assets, including real estate, minus debt. A decade ago, the U.S. ranked number two in the world for this category, second only to Switzerland. Despite a twenty-three percent increase over the past ten years, numerous other countries, including Norway, Australia, Singapore, France and Sweden, have since outpaced us.

There is little question the Communist Party in China is a totalitarian and frequently repressive regime. We express self-satisfied assurance there is a big difference between the Chinese and us. Nowhere does this seem truer than recent economic performance and our respective ideas for dealing with the future.

The Chinese favor long-term, stable wealth creation; we worship short-term profits. The Chinese understand wealth creation among its citizens is the best way to stimulate domestic consumption; we prefer maximizing wealth for our largest corporations and richest citizens, with the hope it will trickle down, as ordinary Americans purchase more and more through debt. The Chinese are investing in innovation; we obsess over deficit reduction.

The Chinese are turning to appreciate the value of stronger labor; we talk about busting more unions. The Chinese understand the value of a superior education; we stigmatize intellectuals and universities as elitist. The Chinese use regulation to police the worst aspects of business and are starting to use it to self-police government; we deny the problems exist or insist lower taxes and smaller government are the panacea for all our problems. The Chinese middle class is growing despite a wealth gap; our middle class is in decay as our wealth gap mushrooms ever larger.

There really is a big difference between the Chinese and us. The Chinese seem to know how to manage a vibrant, growing capitalist economy, while us . . . not so much. We live or die on market fortunes. Soon, we will no longer have to worry about bull or bear markets. The future is on course toward a dragon market unless we smarten up. With the yuan in its talons, this beast has the world wrapped around its tail and it is starting to squeeze.

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