This document will suggest that the methods that
have been the basis of 'economic miracles' in East Asia since the 1960s
are likely to be unsustainable under a liberal Western-style economic and
political order and that the attempt that is being made to create a new
'Confucian' international economic and political order like that which prevailed in Asia prior to
Western expansion faces severe obstacles.
Several years ago it was common to suggest that China's / East Asia's growth might be
decoupling from US
growth. The global financial crisis (GFC) initially suggested that this assumption was premature.
Though some of the region was then able to recover rapidly, because of a lack of
direct exposure to financial losses, this seemed likely to be temporary
because those economies remained dependent on the strength of others' (mainly US) financial
systems. Moreover in the
medium term East Asian societies faced severe difficulties in creating
the more macroeconomically balanced economic regimes that would be needed in
reducing that dependence.
In brief this document, after outlining the origin in the 1980s of the
present writer's efforts to understand the intellectual basis of East Asian
economic models, suggests that:
a key feature of such models appears to involve coordination of
economic production through social relationships rather than by search
for financial profitability by independent enterprises - an arrangement
that has parallels with the state corporatism that was the economic side
of the fascist ideology of of the Axis powers in WWII. While this can be effective in creating strong
production capabilities, financial institutions would tend to fail
unless large current account surpluses are maintained to provide
sufficient cash flow to obviate the need to borrow in international
markets;
the apparent incompatibility of East Asian economic models and the
prevailing global financial regime led to increasing difficulties
including Japan's stagnation after 1990, the Asian financial crisis of
1997 and subsequent efforts across East Asia to accumulate large foreign
exchange reserves to guard against financial risks;
this adversely affected prospects for sustainable global growth - a
risk that was temporarily concealed by economic globalization and
innovations in monetary policy that allowed the US, as the 'consumer of
last resort' to compensate for demand deficiencies that have been
intrinsic to the East Asian economic models;
these financial imbalances were a major factor in the GFC but have
been overlooked by G20 efforts to deal with that crisis, because
analysts lack information about the cultural features of East Asian
economic models which necessitate such imbalances.
It is concluded that, as the US's financial system won't be strong enough in the post-GFC
environment to support large financial imbalances, the export-oriented
industrialization strategies that have been the basis of rapid growth and
development in East Asia can no longer be viable.
However, attempts to develop alternative strategies (eg domestically driven growth in a China-centred
economic 'world' or even the creation of a new 'Asian style' international
political and financial system as an alternative to Western-style
democratic capitalism) are anything but assured.
There are also environmental, social and political sources of potential
weaknesses in East Asian models of socio-political-economy that are not
addressed here. For example:
there are difficulties in ensuring that people act
in accordance with socially-desirable (eg Confucian values) values seems
to conflict with the Daoist rejection of moral authority that is vital for
neo-Confucian methods of achieving economic success (see
Conflicting
Values in China?);
the social hierarchy that is implicit in a neo-Confucian system is
incompatible with
the social equality that apparently has strong grass-roots support in
(say) China.
None-the-less attempts seem to be made to create
a neo-Confucian-style international financial and political order in
competition with the liberal Western-style international order that was
established after WWII. The incompatibility of the Western and East Asian
systems of socio-political-economy are a significant factor in military tensions in the Asia
Pacific as suggested in Comments on
Australia's Strategic Edge in 2030.
The present writer was involved in detailed study of global debates about economic development strategy
for much of the 1980s on
behalf of an Australian state government. At that time Japan's industry policy methods
were seen as very significant because of the perceived 'miracle' of its rapid
growth and development to the point where it was viewed as the major economic
rival to the United States.
As a result of earlier involvement in, and study of, organisational
development using 'strategic management' methods, theories about a systems approach to economic
development were developed and these were found to help in
understanding the methods that Japan used as the basis of its economic 'miracle'.
Show: explanation
Explanation: 'Strategic management' is a technique, which
in effect involves
accelerating learning within an organisation in response to new information.
This was widely adopted in the 1990s as an alternative to the 'strategic
planning' methods which had emerged to deal with faster changes in
organisational environments in the 1970s. The latter had involved centralized attempts
by planning staffs to determine the implications of that information (see
Strategy Development in Business and Government,
1997).
'Strategic management' techniques had (unknowingly) been used with
some
success for organisational development by the Queensland Government in
the 1970s - because of a decision to build on existing capabilities /
systems in learning to respond to then 'issues of critical concern'
(ie regional development and environmental management).
A parallel approach to economic development which the present writer developed
in the 1980s involved
accelerating 'learning' within the real market economy in response to emerging
opportunities and threats - involving techniques that could be referred to as
'strategic market management'. The basic principles were
incorporated into a 1993 book,
and are explored online in
Defects
in Economic Tactics, Strategy and Outcomes (2000), and
Probable
Breakthrough in Understanding Economic Development (2004).
Practical experiments conducted using this technique in the 1980s showed that
the method could be reasonably effective, but great care was needed in
managing the relationship with the democratic political process because the
latter would tend to: (a) be out-of-date in terms of
potentially-commercially-relevant options (see
Economic solutions are beyond politics, 1995); (b) be subject
to rent-seeking interest groups; and (c) over-ride the market-responsive outcomes required for economic success in
terms of increasing productivity. Methods to manage these relationships in
democratic societies were suggested in
Developing a Regional Industry Cluster(2000), and
in
A Case for Innovative
Economic Leadership (2009). The latter described a possible method for enhancing
the ability of Australian firms to innovate out of the severe economic
downturn in 2009.
This background aided in understanding the basis of Japan's
economic model in terms of (say): the practice of 'bottom-up' decision making;
Total Quality Management (involving the development of production systems to
prevent defects from arising in the first place); industry policy techniques such as
MITI's vision
development and administrative guidance (which was a technique to accelerate
real-economy learning); and the strict control of government
by bureaucratic elites behind a democratic 'face'.
These involvements
led in turn in the late 1980s to concept development for the Queensland
Government's response to a
proposal for a centre for technological and cultural exchange put
forward by Japan's Ministry for International Trade and Industry (MITI).
As
a result of research undertaken for that
project, a substantial document ('Towards an Understanding
with Japan', unpublished) was produced. This gave an account of the intellectual basis of
Japanese society and economic methods in ways that the writer had not
seen from any other source. Japanese connections took this to a
'philosopher' in Japan who
(without contradicting it) elaborated it with hundreds of detailed notes. Similar
work was described by Chalmer's
Johnson (author of MITI and the Japanese Miracle) as dealing with
matters on the leading edge of the social sciences.
Understanding East Asia's Neo-Confucian / Bureaucratic Systems of Socio-political-economy
Understanding East Asia's Neo-Confucian
Systems of Socio-political-economy
The intellectual basis of the economic model that Japan originated, and
apparently encouraged other East Asian ethnic communities with a Confucian
cultural heritage to adopt in the 1960s and
1970s, seems radically different to that which has been the basis of Western
economic methods and has parallels with the state corporatism that was
the economic component of the fascist ideology of the Axis powers in WWII.
An account of both the different ways of using information and the
practical consequences in terms of the nature of power, governance,
strategy and economic goals was outlined in
East Asia (in Competing
Civilizations, 2001)and is also referenced inBackground Note
and in Competing Thought
Cultures.
Show: brief outline of suggestions in 'Competing Civilizations'
In brief the former refers to:
the lack of the universal values and the notion that abstract ideas
usefully model reality (ie that there is such a thing as truth) that Western
societies derived from their Judeo-Christian and classical Greek cultural
heritage - and thus:
an orientation to
intuitive consensus within ethnic hierarchies rather than rational / analytical problem solving
by independent individuals / groups;
valuing outcomes that are 'real' or 'concrete' - with little importance attached to 'abstracts' such as ideas,
ideals,
law, financial returns, statistics or intellectual property;
a lack of universalist ethics, or obligations towards those with whom one
does not have a direct relationship (ie doing evil behind a polite face is
seen as sometimes necessary);
the incorporation of Daoism (China's traditional religion which rejects
claims about the relevance of abstract ideas and about
any clear difference between good and evil) into neo-Confucianism, which allowed learning
from others (as traditional Confucian learning mainly from a study of history had led
China into centuries of backwardness after contacting expanding Western
influences);
an emphasis on order within society as a whole, rather than on the welfare
and capabilities of individuals;
concepts of power in terms of being high in a social hierarchy, rather than
having the right to
make decisions;
a preference for invisiblity by those who are truly powerful;
exercise of power through: (a) control of access to information which
influences subordinates' and outsiders' thinking / decisions; and (b) choosing
which of various alternatives that groups of subordinates may advocate to
'smile upon' / favour;
government by educated elites whose role is as teacher and guide in what
amounts to a virtual 'whole of society' bureaucracy;
coordination of economic activities through social relationships amongst
state-linked elites and Confucian obligations of subordinates to superiors with capital
made available through state-linked banks on the basis of consensus and a desire to maximize 'real'
economic production (ie market share and cash flow) with limited regard to
financial calculations by individual enterprises (see
indicators);
facilitation by social elites in learning across organisational boundaries about industry-wide economic
opportunities - because such societies are effectively 'whole of society'
bureaucracies. Community, economic, government, military and criminal
activities are all coordinated through the same process;
the financing of enterprises primarily by debt, because of the desire to
avoid equity owners affecting business decisions, and the consequent limited
buffer in the event that losses are incurred;
the unreliability of official statistics;
a strong savings ethic - noting Confucian notions that wealth should be
accumulated by limiting consumption;
communitarian / mercantilist (rather
than commercial / capitalistic)
economic goals;
strategic methods - featuring deception and the absence of distinctions
between war, business, politics, social relationships and even criminal activity (all
being orchestrated by bureaucratic elites);
traditional strategies to defeat 'barbarian' invaders by serving them, and
thus making the 'barbarians' dependent and weak.
What is periodically referred to as giving effect of 'Asian values'
apparently involves an aspiration to build social and economic systems on
a foundation of interpersonal relationships (thus creating what could be
regarded as as
'family-like states') and the use of quasi-bureaucratic methods for
decision making (ie promoting collegiality and consensus) rather than reliance on
the universal / abstract values (eg a rule of law, profit-oriented
accounting principles) that are
the organizational basis for
Western societies by facilitating independent initiative by rational /
responsible individuals as citizens, employees, employers, investors or political
leaders.
Confucianism is one of China's traditional religions which is primarily
concerned with the nature of the social order (eg see A Simple View
of Confucianism).
For many centuries that order extended to include
methods of government under which highly educated
bureaucratic elites (as agents for emperors) exerted power by:
taking a neutral stance (ie not detectably having opinions of their
own) and on that basis claiming a 'mantle of heaven' (ie that their only
concern is with the good of their ethnic community - not their personal
interests). How such methods (which parallel those used by top-level
bureaucrats in governments worldwide) can achieve practical action by
supporting the consensus reached from consulting leading / powerful
stakeholders is suggested in Acquiring Soft Power
below.;
using those methods to
act as teachers and guides to the community (rather than as
enforcers of laws under which citizens / organization take independent
actions) in inculcating 'desirable' social and economic behaviours in that
community as a whole through hierarchical social networks - this being
an extension of the East Asian notion of 'education'
as inculcating desired behaviours, rather than facilitating abstract
understanding;
determining what is 'desirable' by reference to history and by
seeking a consensus within networks of the most powerful and influential
in their community;
ruthlessly using state power to ensure that such an consensus was
actioned by the ethnic community as a whole (and any dissent was
suppressed) ; and
continually increasing their own stock of information (and thus their ability
to 'teach' / influence others) as a by product of their involvement in
'consensus-forming' processes.
In the post-WWII era Japan was heavily influenced by US occupation
forces. However it seems likely that (behind the democratic
'face' implied, for example, by the political role of the so-called
Liberal Democratic Party from 1955) Japan's government was in practice
long controlled in relation to financial and economic affairs by a modified Confucian
bureaucracy which was accountable to Japan's emperor while ultranationalist gangsters played key behind-the-scenes
roles as facilitators on behalf of Emperor Hirohito (see reasons for suggesting this in
Broader Resistance to Western
Influence, The
Dark Side of Japan and
Establishing Japan's Post-WWII Political and Economic Systems).
Show: Japan's Post-WWII Economic Model
Japan's Post-WWII Economic Model: Japan's post-WWII bureaucracy seems likely to have operated
to at least some extent under an imperial
(not Japan's nominal democratic political)
mandate, and has been
claimed to have used
methods developed by Japan's military in Manchuria in the 1930s to
orchestrate Japan's pre-1990 'economic miracles'.
Western observers accept that Japan's post-WWII economic
bureaucracy (ie the Ministry of Finance and the Ministry of
International Trade and Industry - MOF and MITI) operated with few
constraints by Japan's governing LDP (Liberal Democratic Party) -
in fact power flowed in the opposite direction. And those
bureaucracies were dominant in social hierarchies that
incorporated Japan's banking and major industrial operations (eg
consider the 'descent from 'heaven' process of selecting senior
banking and industrial managers). This corresponded to the
traditional status of Confucian bureaucracies in governing on
behalf of emperors - and the 'vision development and
administrative guidance' methods used for MITI's industry policy
development replicated the (inculcating desired behaviours)
methods that were traditionally used to do so.
The role apparently played by
ultranationalist Yakuza gangs in putting these arrangements in place is outlined
in
Establishing Japan's Post-WWII Political and Economic Systems.
And, as the latter noted, a notorious
ultranationalist and Yakuza boss (Ryochi Sasakawa), who may (some
observers believe) have worked with Yakuza organisations in
developing infrastructure in Manchuria to facilitate Japan's invasion, was apparently
one of three behind-the-scenes 'kuromaku' / 'fixers' managing the relationship between
politics, business and the bureaucracy (and, in Sasakawa's case, approving
gambling-sourced funding for
'special' MITI projects).
The fact that some Japan-watchers have
suggested that
Japan's post-WWII economic model was developed by its military in
Manchuria in the 1930s can also be noted.
Show: Extract from and Comments on 'The Transition from Technocracy to Aristocracy in Japan 1955-2003'
Summary of Extract from and Comments on 'The
Transition from Technocracy to Aristocracy in Japan 1955-2003' (North C.,
2007)
Show: Introductory CPDS Note
Introductory CPDS Note: This book was
extremely useful in summarizing debates about the relationship
between the bureaucracy and politicians as the key to
understanding Japan's political economy. It sought in
particular to identify: (a) who was making policy; (b) how much
authority was delegated to the bureaucracy; (c) whether the
influence of the bureaucracy has declined (which was suggested
to have occurred due to lesser bureaucratic recruitment into the
LDP) .
However the book presumed that 'governing' involves
determining 'policy' which is then implemented. It also refers
to claims that Japan's bureaucracy 'picked winners' as a factor
in Japan's economic 'miracles'. However under a neo-Confucian
system, government traditionally involves directly inculcating
behaviours within hierarchical social / economic systems through
bottom-up consensus forming by the subordinates of a
bureaucratic elite. Power in East Asia does not involve making
decisions, but rather having subordinates who make them (see
East Asia: The Realm
of the Autocratic and Intuitive Ethnic Hierarchy).
This involves a 'socio-political-economy' - not a 'political
economy'. The role of the political system (in relation to
economic affairs) would not be to determine policy but to seek
and distribute a share of the 'goodies' to the interests they
represent. The extent to which the bureaucracy
'influenced' the LDP would not be not critical, because
(economically) the LDP would have been 'a decoration' (with
largely ceremonial functions) not the core of government.
If 'political' groups have increased their power relative
to the 'bureaucracy' (which some observers dispute) this could
imply that some in the LDP are taking on the 'bureaucracy's role
(ie as the 'aristocratic' head of social / business hierarchies) not that
Western-style political processes are becoming significant,
though the fact that the LDP lost power in the early 1990s would
have made this less likely.
Chalmers Johnson's development state theory suggests that politicians
delegated industrial and financial policy making to the elite Ministry
of International Trade and Industry (MITI) and Ministry of Finance (MOF)
- though politicians frequently intervened in other ('pork barrel')
ministries. Johnson argued that 'bureaucrats rule, politicians reign'.
Others have suggested that politicians had acquired enough technical
knowledge to reduce bureaucratic dependence - though bureaucratic
influence may have declined because bureaucrats took fewer key political
posts. Bureaucrats had been recruited to political life because
after WWII many politicians were purged. But recruitment slowed when LDP
was formed. Over the years MOF's ability to control fiscal policy
declined. When LDP was first formed, there was a distinction between
'bureaucrats' and 'party' people. In the 1980s the distinction was
between bureaucrats and 'tribes' of politicians with specialized
interests. The main debate about Japan's political economy has
been between those (eg Chalmers Johnson) who see Japan being ruled by
bureaucracy and pluralists who see LDP's policy tribes holding their
own. In the 1950s and 1960s the main debate about Japan's political
economy was between Marxists and neo-liberals. Now the debate is between
'revisionist' (who argue for bureaucratic government); 'pluralists' (who
emphasize politicians role in policy making); and liberals (who also
argue for bureaucratic government and blame this for Japan's long
economic slump).
Chalmers Johnson started writing about Japan in 1970s when interest
arose in relation to its economic 'miracles'. Explanations beyond
neo-classical market-based theories were sought. Johnson focused on
bureaucracy's role. He suggested that the bureaucracy made most major
decisions, drafts legislation, controls the national budget and is the
source of all major policy innovations - and that this continued in
1995. His explanation of the bureaucracies ability was based on: elite
recruitment; ability to avoid 'pork barrel' influences; control of
foreign exchange; ability to direct national savings to policy rather
than market goals; politicians' inability to deal with economic issues
on their own; bureaucracies focus on 'market-conforming' policies.
Others argued in the 1980s that Japan's bureaucrats actively intervened
to 'pick winners'. Prestowitz argued that Japan's capitalism differed
from neo-classical model. Its policies were producer (not consumer)
oriented. Profits were not important - as emphasis was given to market
share. Exporting was emphasized, while access to domestic market was
constrained. In 1996 Vogel argued that the MOF was not just a
powerful bureaucracy but a political institution in its own right.
Reforms of the bureaucracy and MOF were not seen to involve
de-regulation but rather re-regulation to ensure the bureaucracy
maintained its power.
Eisuke Sakakibara also sees the
Japanese economic system as so different from that of the United States
that it need not even be called capitalist, and chooses the term
‘non-capitalist market economy’ to describe it. One reason for Sakakibara’s insistence that Japan is not capitalist is that cross
shareholding works as a built-in mechanism against hostile takeovers of
firms. Another reason is that firms are governed by their employees
rather than owners. Furthermore he cites the considerable public sector
of the economy in the form of government-owned financial institutions and
corporations and also heavy government participation in the management of
agriculture and construction. The revisionists are not uniform but share
a core belief that Japanese capitalism differs from western (and
particularly Anglo-American) varieties. They see Japanese government
taking a much greater role in the economy, not through ownership but
through direction. Moreover they agree that this government direction of
the economy, in the form of industrial policy, mobilizes resources for
production at the expense of consumption. There is also a consensus that
that the bureaucracy generally has primacy in policy making. …
Revisionists offer an explanation for bureaucratic domination of policy
making – namely bureaucratic eliteness, which leads to control of the LDP
by former bureaucrats.
The traditional methods
by which Confucian bureaucracies governed on behalf of emperors were
apparently varied to create what can be called
neo-Confucianism (see
Beyond Confucianism). Traditional Confucian methods for exerting
bureaucratic influence involved providing wisdom from a study of history
to influence their subordinates' consensual responses (see also
Look at the 'Forest' rather than the
'Trees'). Those traditional Confucian foundations were modified (by
including Daoism and thus become neo-Confucianism).
Daoism (China's traditional religion which makes no clear distinction
between good and evil) went even further than Confucianism in disputing
the relevance of 'knowledge' and 'understanding'. What was learned by Confucian scholars from
a study of history to guide their social / business subordinates was then expanded to include what was learned
from a study of the economic successes of Western societies.
Show: Orchestrating System-wide Change
Orchestrating System-wide Change: Such methods:
are likely to be familiar to those at the top of any bureaucracy (a
situation that the present writer had the
opportunity to observe
and practice for
many years - both in a process of stimulating strategic change within
Queensland's Government in the 1970s and in the
application of similar
techniques in a market economic context in the 1980s). Facilitating the development of a consensus amongst
government agencies with
diverse interests is necessary because no central authority could ever
acquire all the relevant information. In doing so access to strategic
(ie new and significant) intelligence will be gained which increases the
coordinator's power. And later introducing that strategic
information to a process whereby other groups with diverse interests are
being required to reach a consensus will affect the conclusions reached.
In Western societies, hierarchical consensus-forming methods are usually
confined to use within governments. However in East Asia, however such
methods have traditionally been used by Confucian bureaucracies to
influence the society as a whole - ie by developing consensus
amongst / stimulating action by amongst the most powerful groups in the society
because such societies are, in many ways, 'whole
of society bureaucracies';
have parallels with the
traditional approach to education in East Asia, which involves inculcating
behaviours rather than enabling individuals to 'understand'. The core precept of China’s traditional religion
(ie ‘The Dao that can
be named is not the true Dao’) epitomizes the perceived futility of
understanding. This makes sense because rationality (whose failure is
recognised in complex situations by Western social science) fails even
more in societies that lack the simplified social spaces that Western societies
have been able to create (because of their Christian-sourced emphasis on individuals
as potential children of God rather than as instruments of an ethnic state).
Establishing a rule of law, for example, eliminates individuals' need to
second-guess the reactions of the powerful and thus improves the
reliability of 'rational' decisions based on the abstract ways of
thinking that western societies inherited from classical Greece. However
when there is no real rule of law (because hierarchical social relationships
guide behaviour), attempts by individuals to make 'rational' decisions will be
much less reliable (because those low in the hierarchy would never be
able to second-guess the pressures from other parts of the hierarchy
that the powerful will bring to bear), and it will reasonably be concluded that there is little value in
understanding;
can be very effective because of the positive whole-of-society-wide feedbacks that can be
generated;
have
(for reasons suggested below) been the basis of its non-capitalistic pre-1980s economic 'miracles';
are very difficult for many Western observers to understand (see
Why Understanding is Difficult). Under Western traditions power is equated
with 'rational' decision making (which is
not an East Asian characteristic) rather than with using hierarchical status
and strategic
information to influence / manipulate the thinking / behaviours of others and
to seek gains primarily from the synergistic relationships amongst diverse
activities (rather than, say, the profitable use of capital for specific
activities);.
Broadly-based learning about economic opportunities can be facilitated
by neo-Confucian social elites (through what amount to strategic management
techniques, which in the case of Japan's Ministry of International
Trade and Industry were referred to as
'vision development and administrative guidance').
Show: Economic Application of Those Methods
Economic Application of Those Methods: The
application of neo-Confucian practices were the foundation of accelerating economic
development, when instead of inculcating what Confucian elites' study of history
suggested were moral behaviours, emphasis was placed on inculcating
behaviours based on study of world-best economic practices.
This process did not involve setting commercial priorities in terms
of the profit expectations of independent enterprises (see
Evidence), and assessing
abstract concepts such as 'profitability' is largely incompatible with
East Asian thought traditions (see
Understanding the Cultural
Revolution and Competing Thought
Cultures).
In relation to China in particular little attention was said to be paid to
the profitable use of capital in relation to particular investments - as most
gains are expected to flow from the synergistic relationships that can be
established between diverse activities. Production is motivated not by the
financial rewards available to enterprises or individuals but by a desire that
is inculcated through relationships in a social hierarchy to boost the positions
of participants' family or ethnic nation as a whole.
The present writer's experience in systems approach to coordination
in a central government agency in the 1970s and the
moderately-successful application of somewhat different methods to
accelerate the development of market-led economic
opportunities in the 1980s strongly suggested the feasibility of orchestrating
economic 'miracles' - even in a democratic capitalistic environment (see
Background).
Variations on traditional Confucian systems appeared to be adopted in
south and east Asian counties with a Confucian cultural heritage as the
basis for 'real economy' miracles like those achieved in Japan. And
interestingly North
Korea apparently adopted a neo-Confucian style as a means for giving effect to a non-market variant of Maoist
Communism.
A market-oriented model was introduced into China in the late
1979s in the guise of 'socialism with Chinese characteristics'
(presumably because under Mao the Confucian bureaucracy had been seen as
oppressing the masses). In China the catalytic role of the neo-Confucian
bureaucracy was taken by the so-called
'Communist' Party and the 'mantle of heaven' (which traditionally provided
the unchallengeable authority base for emperors) was
given to China's
Presidents. In 2015 it was noted that there were many similarities
between Japan's and China's economic systems - and that (despite the official
cooling of relationships between Japan and China from 2012) there had been a
great deal of informal collaboration because China faced a risk of a financial
crisis like that which Japan suffered in the early 1990s and there was a
determination that China should learn from Japan's mistakes [1];
Of particular significance is that the resulting East Asian market economic models tend
to be
nationalistic, 'communitarian', crony-ist, bureaucratically-orchestrated and mercantilist (rather than 'capitalistic'
in the sense that this involves independent profit-focused decisions about
investment). Emphasis is given to 'production' rather than to productivity /
economic value-adding / profitability of individual activities presumably
because:
the use of abstract concepts (such as profitability / law /
universal values) is not traditionally regarded as a reliable basis
for decision making (see
Epistemology: The
Core Issue). Thus social, economic and political institutions
exist involving complex networks which make the expectation about the
inadequacy of abstracts self-fulfilling;
China's Economic Weakness in the Past: It has been suggested that China failed to sustain
the relative (eg economic) advantages that it enjoyed over Western nations in the centuries
before Columbus because it did not keep proper account of expenses and income.
There was a capacity to produce great treasures - but this was done, not to
benefit China's people, but rather to make impressive gifts to others. However
impressing barbarians did feed the workers who produced those gifts. Thus
putting prestige above profit put China into such massive financial difficulties that
it had to abandon its expansionist ambitions (see Mangalwadi V. 'The Book that
made your world', 2011 which was written by an Indian observer who has studied
the practical consequences of the Bible's historical impacts in both India
and Western societies.
China Has A Corporate State Not
Large 'Private' Companies: Coordination of economic activities depends more on
neo-Confucian social relationships amongst elites (called 'guanxi' in China) and the
obligations of subordinates to superiors, and the focus tends to be on increasing market
share / cash flows (ie 'real' production) while paying limited attention to
'symbolic' outcomes (ie financial measures such as the 'profitability'
that Western economies emphasize for reasons suggested
below) - see
Evidence; Why
Japan can't Deregulate its Financial System;
Comments by a
Former World Bank China Expert; and also
Structural
Incompatibility Puts Global Growth at Risk (2003). Savings
by the national 'family' tend to be mobilized through state-linked banking systems and
provided to state-linked (ie state-owned or state-crony-owned) enterprises that are presumed to
have communitarian / nationalist motivations.
Decisions are not traditionally made by independent
entities based on their profit opportunities and legal
obligations, but rather on relationships, consensus and
obligations within social hierarchies. And:
an insider to China's system has suggested
that it would be impossible for anyone in China to succeed if they
tried to operate outside it [1];
observers have suggested that major Chinese companies that seem to operate
commercially can nonetheless be subject to direction by the 'Communist' Party
[1,
2];
the catalytic role of senior officials has been very important to
industrial development in China [1];
the view that China is freewheeling / unregulated is misleading. The
Communist Party is never visible yet its tentacles are everywhere. Party
Committees control key functions (eg appointment of personnel) in all
major companies [1];
in Japan (whose methods for achieving 'real economy' miracles and
financial crises) China adopted in the late 1970s, major companies
were traditionally controlled by senior bureaucrats who 'descended
from heaven';
there is traditionally no separation in
(East) 'Asia' between military / security activities and everything else (eg
economic strategy, social relationships and even the activities of
organized crime);
China's economy and everything else is
seen to be
subordinate to politics under President (Xi Jinping). It is wrong
to see China as still a communist state. Reference to boosting the
role of the market did not mean market liberalization but rather
creating a structure in which private companies, NGOs and other
organisations carry out the functions of government while being
controlled by party committees;
organised criminal gangs
reportedly play significant roles in activities that have official /
governmental endorsement in East Asia (eg consider methods used to
suppress the Umbrella movement in Hong Kong) Organized crime (ie Triads / Yakuza )
have been seen to play
significant roles as the 'private armies' of offshore commercial groups while
offshore Chinese play significant political roles in China and elsewhere.
These arrangements have parallels with the state corporatism (ie the
view that the 'private' sector was an extension of the state) that was
the economic model favoured by the Axis powers in WWII.
The rate of saving tends to be very high, because the state (the head
of the national 'family') diverts income from households (the 'family') to subsidise investment (by paying low wages and low interest rates on
savings, by providing minimal social benefits and by keeping exchange rates low) [1].
Moreover the outcome of these methods is primarily
mercantilist (ie they increase the economic and political power of ethnic
communities, and of their social elites in particular, more than they increase the welfare of members of those communities whether as consumers,
investors
or citizens) - see also In East Asia deals
always involve politics.
Individuals, in such societies, traditionally
tend to place more emphasis on the success of their community as a whole,
than on personal benefits (see also: (a)
Is China more legitimate than
the West? which suggests that the Chinese state is viewed as being
like the head of a family which involves all Chinese civilization, rather
than any nation state; (b)
Debating the Chinese
State; and (c) Creating a New International
'Confucian' Financial and Political Order which notes the pre-Western
expectation that China's people would work hard for limited reward to
ensure that China had a dominant regional political influence).
A strong sense of ethnic nationalism seems to be required to motivate
economic efforts and progress - as benefits to individuals as investors or
consumers are apparently of limited significance. As noted
above Japan's post-war economic miracles
seem to have been orchestrated by its nationalistic bureaucracy - at
least until the 1980s. This can reasonably be viewed as a
continuation of Japan's
efforts to build economic strength to resist Western influence that
had started at the time of the Meiji restoration.
And China's (so-called)
'Communist' Party seems to have sought community support on the grounds that
it was taking the lead
in gaining vengeance for China's historical woes (see also
The US's Most Significant Intelligence
Failure? in relation to the reported 'Hundred Year Marathon' of
China's nationalist to gain geo-political dominance). And a basis for
nationalistically-motivated endeavour (eg potential conflict) seems likely
to be required indefinitely.
Thus when outsiders now engage insiders in business dealings (or
employee them as staff) it is necessary recognize that they may (unless
Westernized) be discretely playing a 'Game
of Thrones' rather than being simply engaged in profit-seeking commerce.
Likewise it is necessary to recognize that academics whose
approach to
'education' reflects East Asian traditions are likely to be seeking to
influence others behaviour to benefit an ethnic group rather than to
enable others to actually 'understand'.
Soft Fascism:The East Asian neo-Confucian systems can
perhaps be likened to a 'soft' form of the 'fascism' which challenged
liberal Western systems militarily as a result of the economic disruption
of the 1930s.
Show: A 'Soft Fascism' Hypothesis
A 'Soft Fascism' Hypothesis: Fascism (see quote
below) involves a radical authoritarian nationalism. It promotes:
unifying a nation through an authoritarian state to achieve mass
mobilization of the national community; a strong emphasis on the state;
nationalism which can approach ultra-nationalism; an emphasis on national
rejuvenation and conflicts between nations and races; and a principle
economic goal of achieving national self sufficiency and independence through
interventionist policies.
A Conventional View of Fascism: "Fascism is a form of radical authoritarian
nationalism .... Fascists sought to unify their nation through an
authoritarian state that promoted the mass mobilization of the national
community and were characterized by having leadership that initiated a
revolutionary political movement aiming to reorganize the nation along
principles according to fascist ideology. Fascist movements shared certain
common features, including the veneration of the state, a devotion to a
strong leader, and an emphasis on ultranationalism and militarism. Fascism
views political violence, war, and imperialism as a means to achieve
national rejuvenation, and it asserts that stronger nations have the right
to expand their territory by displacing weaker nations. Fascist ideology
consistently invokes the primacy of the state. Leaders such as Benito
Mussolini in Italy and Adolf Hitler in Germany embodied the state and
claimed indisputable power. Fascism borrowed theories and terminology from
socialism but replaced socialism's focus on class conflict with a focus on
conflict between nations and races. Fascists advocate a mixed economy,
with the principal goal of achieving autarky to secure national
self-sufficiency and independence through protectionist and
interventionist economic policies." [Fascism:
Wikipedia]
Various observers have
suggested that the post-WWII systems that Japan implemented to
achieve economic 'miracles' had fascist parallels and had originated in
the 1930s in Manchuria which the Japanese army had controlled on fascist
principles.
The East Asian neo-Confucian systems (eg those of Japan and China) seem
to be seeking related but by no means identical goals by the use of 'soft power' rather than 'hard
power' methods (ie the primacy of the state; autocratic rule by social
elites; a degree of ultranationalism (belief in the superiority of
particular race); and national unity to boost the strength of an ethnic
nation). And, as suggested below, those methods are apparently
being
extended to the international arena with limited recognition from Western
observers because of their lack of familiarity with the way power is
exerted in East Asia.
There is
also a parallel with the 'order' that the Islamic State seeks to
offer in the Middle East and elsewhere. Islamic State's likely strategy was
presented in
The
Management of Savagery - ie the presumption that people will
accept control by anyone who can prevent chaos when they are
sufficiently afraid. The possibility of a link
between what is happening in East Asia and the Middle East should not be
ignored (see Military
Tactics are Not Enough).
The reforms introduced by China's president Xi Jinping in 2013 arguably
constituted (not the economic and political liberalization that Western
observers had anticipated) but rather a renewal of ancient Chinese systems
of governance by autocratic elites (see
The Resurgence of Ancient
Authoritarianism in China and
comments on
President Xi's 2015 endorsement of Confucian virtues)
While non-capitalistic neo-Confucian bureaucratic methods can be very effective in creating production
capabilities (and in fact arguably constitutes
a novel form of protectionism as
well as mobilizing finance in a way that is similar governments paying for wars by
selling 'war bonds'), savings tend to be used wastefully, enterprises have limited
capacity to absorb losses without technical insolvency (because of the
lack of any significant equity buffer) and financial institutions tend to have poor balance sheets.
The latter can only be
protected from financial failure by:
regulatory regimes and state-owned banking that tolerate poor balance
sheets in financial institutions;
avoiding the need to borrow in capitalistic (ie profit seeking) international
financial markets by
suppressing domestic demand to such an extent that savings exceed investment
and current account surpluses are achieved (op cit);
reliance on trading partners' ability to tolerate current account deficits
and increasing debt levels indefinitely; and
rigging domestic markets through cartels to apparent 'profits' for state-connected
enterprises and financial institutions at the expense of the rest of the
economy;
Following decades of 'miracles' by accelerating development of its
production systems, Japan ran into severe difficulties in the 1980s because of its
structural focus on production capabilities and lack of concern for
financial outcomes. Huge quantities of credit had been created on the basis of
inflated land values, and invested in excess industrial capacity, real
estate and
acquiring assets world-wide with little regard to price. Moreover Japan lacked
the capacity to effectively manage the acquired assets because of the lack
of a 'communitarian' tradition amongst employees in the related organisations.
In the early 1990s, a senior official in Japan’s Ministry of Finance (Eisuke
Sakakibara) published a book (Beyond Capitalism) which described
Japan’s economy as a ‘non-capitalistic market economy’. However no Western
observers apparently bothered to ask what was meant by ‘non-capitalistic’,
or what would be the consequences of applying ‘non-capitalistic’ economic
practices to a substantial segment of the world’s economy. In 2000 it was
argued that the character of Japan's financial system made it impossible
for it to be deregulated (ie to operate on Western principles) - see
Why Japan cannot
deregulate it's financial system. Again Western observers seemed to
generally put the issues this raised in the 'too hard basket', and Japan
maintained its ('Art of War') traditions by: (a) seeking to ensure that
outsiders did not understand its true 'shape'; and (b) 'holding up a
mirror' so that when opponents looked all they saw was a reflection of
themselves.
What has been going on has been anything but obvious to average Western
observers who have not considered the cultural context, and thus mis-understood
what was happening (see also Babes in the Asian Woods).
Seeking understanding in terms of Western-style models and concepts
(such as communism or democratic-capitalism) was useless.
Show: explanation
Western societies rely on
rational decision making by individuals and have
created artificially simplified social environments in which the limits to
rationality in dealing with complex problems are significantly reduced (see
Cultural Foundations of Western Strength).
Simplification results from: trusting individuals to generally make
moral choices (based on their responsibility to God under
Judeo-Christian traditions); a rule of law
(which frees individuals from the need to second-guess the reactions
of the powerful); democratic government based on policy debate; and
(capitalistic) reliance on the profitable use of savings to coordinate
economic activities.
However East Asian societies operating on traditions derived from
ancient China (who can best be conceived as
whole-of-society bureaucracies)
rely on bureaucratically-orchestrated social consensus for decision making
which is then implemented by those involved in developing the consensus
and, if necessary, enforced autocratically. Individual rationality is not
part of this process. [In China the role that the
bureaucratic elite traditionally play (and actually play in Japan) seems to have been taken since the late
1970s by the so-called
Communist Party (see
China's Bigger Secret) presumably to
disguise what was going on because under Mao the bureaucracy had been portrayed
as oppressing the masses].
Those societies do
not rely on (and in China's case have not even created) the arrangements that Western societies have
in place to
enable 'rational' individuals to make decisions that a fairly effective in
allocating resources and managing change (see
The Advantages and Limitations of Financial
Criteria). However in East Asia,
economic decisions
do not tend to be based on calculations of financial outcomes (eg
profitability) but rather on seeking to maximize 'real' production (eg market share). Thus neither financial outcomes nor Western-style
economic statistics are central to decision making, though they are
produced (at times impossibly-quickly and apparently arbitrarily) to comply with the expectations of Western
and international institutions.
Thus East Asian economies can't be
understood in terms of Western economics. Economic activities are
primarily motivated and coordinated by people's obligations to one another
(and ultimately by their obligations to the social elites who represent
their ethnic community as a whole) rather than by calculations of income /
profit by independent individuals.
China's conversion from Communism to a variation of the Japanese
neo-Confucian system of socio-political-economy after 1979
- a very few years after Mao's policies were seen to fail and his cultural
revolution had sought to purge Confucian influences from China;
attempts by the US to engineer a rebalancing of its trade deficit with
Japan in 1985 (under the Plaza Accord) which failed because changes were
sought by adjusting exchange rates and the way in which
Japan's financial system directed funds to production and suppressed
consumption was ignored;
the bursting of Japan's financial 'bubble' in about 1990, which was
followed by: (a) no serious reforms of financial institutions - presumably
because this would
have required disrupting Japan's whole system of socio-political-economy; and
(b) a decade of stagnation;
the 1997 Asian Financial Crisis - brought on by the withdrawal of a great
deal of foreign
capital, when the lack of serious attention to profitability was recognised in
many countries (ie those practising 'crony capitalism' without the protection
of current account surpluses);
the traditional unwillingness to discuss such weaknesses with outsiders;
the more widespread adoption of strategies to suppress demand and so accumulate
large foreign exchange reserves (mainly $US) as the best method to reduce the risk of
financial crises;
efforts by Japan to sponsor the establishment of an Asian Monetary Fund to
operate in ways that would be compatible with its economic model - and the
creation of large quantities of virtually zero-interest credit that was
exported through 'carry-trades' to boost import demand for Japan's exports
(mainly from US);
increasing concern (eg by Bank of International Settlements and World
Bank) about the risks to the global financial
system of East Asia's continued dependence on US demand and escalating US
debts;
the hope that Western-style financial systems might be made redundant
under a new global financial order, and a possible relationship between this
and the West's clash with Islamist extremists after 2001 (who also would
presumably be happy with an international order that was not based on
democratic capitalism).
Following the Asia financial crisis of 1997, East Asian societies were
urged (especially by the IMF) to reform their financial systems to make
them more transparent.
What was not apparently recognised was why this was culturally impossible (see
Understanding the Cultural Revolution, 1998). The latter referred (for
example) to: fundamental differences in way information is used; the need
to change economic
goals from economic 'power' to financial returns; the inseparability
of economic
issues from questions of social / political power; and the lack of appropriate
legal systems.
In practice, all that happened was that (with IMF encouragement) strategies were
even more widely adopted to suppress demand and so accumulate
large foreign exchange reserves (mainly $US) as the best method to reduce the risk of
financial crises. After all Japan and China had done this with apparent success.
Some Western analysts have sought to understand China's rapid
economic progress.
Show: examples
In late 2009, the 'mystery' of why Chinese companies maintained high
savings rates was examined by the IMF [1].
Some observers: (a) noted that this made their growth dependent on
debt-fuelled consumption elsewhere (mainly in the US) - which would no
longer be sustainable) and (b) suggested that the explanation of their
high savings rate was that those companies were state owned and had no no
one to pay dividends to [1].
In late 2010, economists' attempted to explain China's economy by
simply suggesting that its super-fast growth has been driven by investment
(funded by transfers from China's consumers), and that this tactic is both
limited and difficult to change [1].
And there has been almost no effort at all to
understand the intellectual basis of East Asian systems of government.
Show: An Aside on the Chinese State
An Aside on the Chinese State: The Chinese state has been said to be
based on 'socialism with Chinese characteristics'. However, the reality is
arguably more complex because:
the Chinese classics seem to be becoming the foundation for educating
future generations. This would inculcate desired behaviours and a
responsiveness to the information provided by community leaders, rather than
any reliance on abstract understanding or independent initiative (see
Competing Thought Cultures);
there are Confucian elements in the
way the state operates (ie in the role that social elites (eg bureaucracies)
play as
teacher and guide to the community (rather than as enforcers of laws that were
enacted to facilitate independent initiative by setting boundaries);
though Confucianism is now being promoted, the Communist Party was
originally radically opposed to this - and Mao's Cultural revolution had
sought to eliminate this influence from China (see
Communism Versus Confucianism:
The Continuing Contest in China) - and the role of Confucianism seems
to be increasingly contentious (see
Debating the Chinese State);
Japanese influences were arguably more significant in the development of
China's 'socialism with Chinese characteristics' /
neo-Confucianism - yet this also can't be mentioned
because China's people remain resentful of Japan's actions in WWII (see
CPDS Comments in Competing
Thought Culture).
The necessity to boost
production
and suppress consumption in East Asian societies that adopted variations
on the Japanese bureaucratic / non-capitalistic economic model led to structural demand deficits (and
so-called 'savings gluts') within
those economies. This was compounded by one of
Japan's solutions to the challenges it faced in the 1990s
because of its economic model
(ie creating credit at virtually zero interest rates which was exported
through 'carry trades' to boost demand elsewhere, mainly in the US).
Large domestic demand deficits were macroeconomically
unsustainable within affected economies. In the 1930s Keynes identified the
risk that demand deficits (ie unspent savings) posed to economic growth, and
advocated counter-cyclical public spending as the remedy. Moreover these large
demand deficits made global economic
growth unsustainable (see
Structural Incompatibility Puts
Global Growth at Risk, 2003), though the problem took many years to
manifest itself.
In recent decades innovations in macroeconomic management and economic
globalization provided a temporary means for compensating for demand deficits,
by allowing them to be countered by excess demand elsewhere (mainly in the
US).
Show: how this was possible
East Asia's demand deficits could
be accommodated for a time because:
changes to the global financial system in the early 1970s (ie the
move from a gold standard to the $US's role as a global reserve
currency), permitted the US to sustain persistent trade deficits, as
these could be financed by boosting money supply (rather than balanced
with gold reserves);
Keynesian counter-cyclical public spending, which had been economic orthodoxy in the post-WWII
years, tended to lose credibility in the 1970s as governments had
difficulty getting the timing right (ie such tactics tended to amplify, rather
than smooth, booms and busts). Monetary policy,
based on setting the interest rates that reserve banks charge financial
institutions to maintain an acceptable rate of CPI inflation, tended to
take its place in stimulating or damping economic
growth, Moreover easy monetary policy proved effective (originally in the US
stock market crash of 1987) in preventing financial crises from affecting the
'real' economy;
an apparently 'virtuous circle' in trade and investment arose as:
(a) easy money policies were needed to sustain US growth, given the drag
of its current account deficit; (b) easy monetary policy encouraged the
rapid growth in asset values, which in turn sustained high rates of
consumer, business and government spending [1,
2] and ensured a large trade
deficit; (c) cheap imports from Asia inhibited the CPI inflation that
would normally make very easy monetary policy seem unwise; and (d) the
US current account deficit was balanced by capital inflows mainly from
East Asia;
industrial structure in advanced economies changed as capital intensive
manufacturing lost productivity and shifted to lower wage economies. Knowledge-intensive functions
expanded in their place of which one of the most important was financial services
- and the latter tended to attract savings from elsewhere;
high and perhaps unsustainable levels of public spending
were needed to maintain demand in many other major economies (as well as the US).
It may be that US authorities (presumably as a by-product of Cold War
strategies to promote world development on a democratic-capitalist basis
and with Japan's encouragement as a US 'ally')
sought to exploit those innovations to maintain global growth in the face
of East Asia's demand deficits, in the expectation that market forces
would eventually force real financial reforms in Asia (see
An Unrecognised
Clash
of Financial Systems?).
However the US's ability to take on the role of 'consumer of last resort', which had made
export-driven growth a feasible economic tactic, could not be a permanent solution as the resulting financial imbalances led to
problems (eg a large and persistent US current account deficit and accumulated debts).
The financial instabilities that emerged in the US in 2007 (related
initially to losses on very complex structured financial assets - ie
sub-prime mortgages) and were transformed in 2008 into an unprecedented global
financial crisis had many causes (eg see Financial Market Instability: A
Many Sided Story (2007) and
Global Financial Crisis: The Second Test of Globalization?).
However global financial
imbalances (which, as noted above, also had many causes) were key
components of the problem (and later problems) because counteracting the
effect of structural demand deficits elsewhere required: (a) easy money
policies in the US that generated asset bubbles; and (b) high levels of
public spending in countries that favoured fiscal rather than monetary
policy measures to stimulate growth (see
Comment on the European
Sovereign Debt Crisis).
Despite their importance most GFC analysts (because of the lack of
information about the East Asian systems of socio-political-economy that necessitated such
imbalances) have focused simply on arrangements within Western financial systems and
economies. Moreover the G20 Summit in
April 2009 essentially ignored the imbalance issue, and was thus unable to
create any solid basis for sustainable economic growth (see
Announcing 'Peace for our Time'?).
Though there was another
ineffectual G20 meeting in September 2009 analysts in the the US and Europe had
started to recognise the
necessity for systematic efforts to reduce imbalances (and this was
mentioned in the context of a forthcoming G20 meeting) - a focus to which China objected [1].
By March 2010, there were signs that the US was unilaterally moving away from its post
WWII commitment allow easy access to its markets in order to boost global
economic development (see A US Response to the GFC : Backing Away from Bretton Woods?).
Moreover in June 2010 the G20 again failed to confront the problem
of financial imbalances and created the risk of an even more severe round
of global financial instabilities (see
Too Hard for the G20?). And, though the imbalances issue was
recognised by the G20 in November 2010, no solutions were found (see
Unreal Optimism?), and
another meeting in April 2011 showed that progress was not being made in
resolving the issue (see
'Waiting for Hell to Freeze over' won't solve the problem).
In August the US government finally accepted the need to constrain the
growth of its debt - and this seemed likely to have consequences for the
global economy because financial systems in major East Asian economies,
and in emerging economies elsewhere, had been protected from financial
crises by limiting domestic demand and reliance on current account
surpluses largely at the expense of the US, the world's 'consumer of last
resort'. In November 2011, the US President announced an intention to
shift the US's national security focus to the Pacific, in both an economic
and a military sense - and expressed an expectation that China would 'play
by the rules' (see Limiting the
'Consumer of Last Resort').
East Asian systems of socio-political-economy (eg those of Japan and China in
particular) seem likely to prove financially unsustainable.
They have been dependent on suppressing demand to generate current account
surpluses - to protect state-linked financial institutions from the crisis
that would result from having to borrow in international financial markets
because profitability / economic value added has not been sought in making
investments (see above). The
resulting international financial imbalances are
unsustainable - because trading partners can't continue to sustain
current account deficits and escalating debt levels indefinitely. New
economic strategies that have been put in place have not overcome the
critical need to avoid exposing (eg Japanese / Chinese) financial
institutions to national current account deficits. Moreover the escalation of
state borrowings (and contingent liabilities for the bad debts of
state-linked institutions) to sustain economic growth seemed by 2013 to have
placed both Japan and China on a
path to serious financial crises. There are no obvious solutions to these
problems within the framework of the neo-Confucian systems of
socio-political-economy that have been the basis of the 'economic miracles'
in East Asia, any more than there is an obvious way of
balancing supply and demand domestically where there is no (capitalistic)
emphasis on the use of profit to guide market-oriented resource allocation.
Large international financial imbalances (especially those involving the US
as the world's 'consumer of last resort' in seeking to promote the global
spread of democratic capitalism) can not continue, because of:
the inability of the US's
financial system in the post-GFC environment to compensate for large demand deficits in East Asia (or
elsewhere).
Show: the need to reduce financial imbalances involving US
The Need to
Reduce International Financial Imbalances affecting
the US
The ability of the US to provide the excess demand that allowed
export-oriented industrialization to be a viable strategy for economic
development (particularly in East Asia) depended on the strength of the US
financial system and ongoing asset inflation (see
Financial Imbalances). It
was clear in 2008-2009
that there could be no unilateral solution the the obstacle that imbalances
posed to global growth.
Even if modest growth resumes in the US and elsewhere in (say) 2010, it will
necessarily be based on much lower levels of consumer in the short term and
constrained government demand
in the medium term
(and much lower levels of financial imbalances) because of:
an ongoing requirement to reduce household debts;
the absence of rapid asset inflation to (a) generate tax revenues;
and (b) borrow against to fund household spending;
Though this issue was ignored by the
G20 Summit and it may thus be impossible to engineer global economic
recovery, the need for such adjustments has been increasingly recognised (see
Structural Indicators of Ongoing
Recession / Depression, and
1,
2).
The latter suggested that the solution could lie in both increased welfare
services and higher quality investment opportunities in China, which would
slowly reduce its high savings rate.
Professor Martin Wolf argued (realistically) that "Creditor countries
[mainly China, Germany and Japan] are worrying about the safety of their
money. .... (However this will be safe) ... only if the creditor countries
facilitate adjustment in the global balance of payments. Debtor countries
will either export their way out of this crisis or be driven towards some
sort of default. Creditors have to choose which". [1]
the growing pressure for wage rises in China that emerged in 2010 -
which would accelerate the growth of domestic consumption and thus speed the
shift from current account surpluses to deficits. In June 2010 China's
success seemed to have resulted in a loss of willingness by China's workers
to receive limited rewards for their efforts, and the adoption of vigorous
campaigns (based on the use of modern communication technologies) to pursue
higher wages [1]
By 2013 the limits to the US's ability to act as the world's 'consumer of
last resort' were even more apparent - as debt and income constraints on
households were being compounded by growing recognition of the limits to
increasing government debt (see
Limiting the Consumer of Last Resort) .
However even in 2009 it had been clear that without radical change East Asia's growth would continue to depend on
now-unreliable US
demand [1].
In early 2014 it was reported that economic recovery in the US was
unexpectedly not contributing to exports from economies that had been
dependent on export-driven growth - because: Asia has become less dependent on
US (given domestic demand and inter-regional trade); consumer spending in US
remains weak; and Asia has been losing competitiveness because of higher
labour / production costs [1]
Thus there seemed to be recognition that a shift in the basis of East Asia's economic growth and development
would be needed away from the export-oriented industrialization strategies
that
Japan (primarily) had spread through the region (with World-Bank and US endorsement) [1,
2].
Show: recognition of the challenge
Recognising the
Challenge
People in East Asia are starting to realize that they face the end of the
era of export-oriented industrialization (EOI) which has been applied for 40
years. Success by Taiwan and Korea convinced World Bank in 1970s that EOI
should be supported, as the alternative to import substitution. The latter
could have worked only with large redistribution of income and wealth - which
regional elites opposed. While the World Bank encouraged export processing
zones, little happened until the US sought to overcome its trade deficit with
Japan by currency revaluation under the Plaza Accord. This made much
manufacturing unaffordable in Japan - so kieretsu moved labour intensive
components to China and SE Asia. Japanese capital inflows allowed NICs to
avoid the credit squeeze of the early 1980s. Rapid growth in NICs resulted,
driven by Japanese foreign investment. Japan sought an Asia Pacific platform
for re-export to third countries. China later mastered this model. The process
depended on the US market - and there was no shortage of credit as Asian
countries loaned to US on a massive scale. China's demands created the
illusion of decoupling - after its demands eased the effects of the Asian
financial crisis. But this continued to depend on US demand. Now the whole
edifice - which depended on debt-financed middle class consumption in US - has
collapsed. While income inequality in Asia had actually increased, rising
wealth took the edge off this - but with growth collapsing radical protest and
social revolution are now possible across East Asia [1]
As noted above the US and Europe raised the need for systematic efforts to reduce
imbalances in the context of a September 2009 G20 meeting [1].
In August 2011 economics professors from a Chinese university raised the
prospect of another Asian financial crisis - linked to the widespread
dependence of Asian economies on current account surpluses (see
Asia's Next Financial Crisis and its Impact on Australia
below)
To sustain growth within a Western-style market economy would require more macroeconomically-balanced economic systems (ie
those without a large demand
deficit and savings surplus).
This requirement would bring the incompatibility between the prevailing
Western-style global financial regime and East Asia's economic models into
sharper focus, because it is likely that any shift towards sustainability
within Western-style financial traditions would require
a large (and probably culturally-unachievable) change in social, political and
economic practices.
However China's response after the start of the GFC
did not involve any shift
towards the adoption of Western-style financial systems (any more than
Japan had done in the 1990s). Various initiatives were taken to
seek to avoid conventional financial constraints - eg diversification of
foreign exchange holdings; seeking to stimulate demand in emerging economies;
encouraging the creation of new international IMF-controlled international
currency; and seeking to promote the Yuan as a trade currency (see
Doing China's Own Economic Thing).
However at the same time:
maintaining China's rapid economic growth required even faster creation of
credit and growth of both; (a) state debt; and (b) contingent liabilities for
the escalating bad debts of state-linked institutions. By late 2013 the
prospect of a crisis was becoming very real (see
Preparing for a Con?).
The only practical alternative may be seen to try to create a new international economic
(and perhaps political) system based on practices and institutions that have little
relationship with Western precedents to meet challenges arising in the
post-GFC environment in 'Asian' ways (see below).
The most obvious difficulty under Western-style international arrangements (mentioned above) is that because economic
production is coordinated through 'Confucian' social relationships (amongst elites
and the obligations of subordinates to superiors) rather than
by
serious concern for return on capital, losses have tended to accumulate in financial
institutions. In the past these could be ignored by suppressed consumption and
thus generating large amounts of savings and current account surpluses
so that sufficient cash flow was available to make it unnecessary for banks to borrow in
international markets.
In future, without support from a strong external economy (to provide excess demand and
productively invest surplus savings) or major changes to business and
financial practices, financial crises like that in 1997 would be likely.
Though financial systems in Asia seemed reasonably secure against external
financial shocks in early 2009 [1],
they would need to be radically transformed were growth to be driven by
domestic demand in the medium to long term. Growth would inevitably have to be funded by borrowing in international
markets rather than from cash flows derived from trade surpluses. While
sound balance sheets might be fabricated if there is no outside scrutiny, this
would not be feasible if external investment had to be sought.
There are precedents for radical transformations as part of East Asia's economic
strategies (eg Japan's initial challenge to Western economies in
the 1950s and 1960s came unexpectedly through moving into the highest productivity and most
demanding segment of developed economies - which at the time involved capital
intensive manufacturing). While similar tactics, ie moving into what had been the
high ground of Western economies - financial services, might be seen as an
option, in practice this seems unlikely.
Developing financial systems under which economic outcomes were
driven by a search for the profitable use of capital rather than social
relationships would probably be impossible because of cultural aversion to
abstracts (see An
Unrecognised Clash of Financial Systems?). Moreover in responding to
the impact of the GFC, China (for example) made no obvious move towards
Western-style changes to its financial system (see
China: After the Bubble)
any more than Japan did in the 1990s.
The possibility that alternative ways of making state-supported companies
and banks 'profitable' (by rigging markets through communitarian networks) is
suggested below.
The following useful account of Japan's economic history and prospects suggested
that in 2013 its position has deteriorated significantly since about 1990, and that it
faced severe future problems.
Show: The Setting Sun – Japan’s Forgotten Debt Problems
In 1979
Japan was seen a potential economic #1. Though it has declined since
then its stock market rose in 2012 - because of faith in new PM's reflation
strategy (ie increased public spending, creating inflation to reduce debt / GDP
and devaluation). These have been tried before and not worked. Japan had 9.5% pa
growth from 1955 to 1970, then 3.8% pa from 1971 to 1990. After debt bubble burst
in 1990 growth has been only 0.8% pa. Nominal GDP has been stagnant since
1992, while a 5-7% output gap has existed. Stock market is 70-80% below
1989. Real estate prices are at 1981 levels. Interest rates are negligible.
Public finance has deteriorated significantly since 1990. Gross government
debt is 240% of GDP (while net debt is 135%). Total (government, corporate
and consumer) debt is 450% of GDP compared with 280% in US. Japan's 128m
population is expected to fall to 47m by 2100. Japan's 65+ population will
rise from 12% to 23% of the total, while workface will fall from 70% to 55%. By 2050
Japan's median age will be 52 - the oldest ever. Natural disasters have
compounded Japan's problems. Japan's political system is fractious,
characterised by frequent changes and no stable policies. Japan's post-WWII
economic model was export-based (like Germany) and involved an undervalued
yen to gain competitive advantage. The yen was revalued under Plaza Accord
in 2085 - and exporters were affected - reducing growth from 4.4% pa in 1985
to 2.9% in 1986. Monetary policy was eased, driving real estate and stock
prices higher. To prevent asset inflation interest rates were raised from
1989 to 1990 - triggering a collapse in boom. As economic problems worsened,
large fiscal stimulus measures were announced and interest rates fell to
zero. But deflation, not recovery, resulted. Public finance deteriorated from
budget surplus and debts of 20% of GDP. As economy stagnated, weak tax
revenues and large fiscal stimulus led to large deficits. This led to 2 lost
decades. Japan's large savings, low interest rates and large current account
surplus allowed the build-up of government debt. Japan's large savings
reflect: frugality and thrift during rise to prosperity after WWII; young
age structure; low pensions; bonus system; lack of consumer credit and
savings incentives; and large corporate savings (8% of GDP). Most is
invested domestically - in banks, bonds and postal system. High debt levels
are sustainable because interest rates are very low (due to zero interest
rate policy and quantitative easing since 2001). Low interest rates did not
discourage bank deposits / purchase of government bonds, as there were no
good domestic alternatives and foreign investment was discouraged by high
yen. Also deflation turned low nominal yields into high real yields.
Japan has had current account surpluses for 50 years - and has net foreign
assets of 50% of GDP. This allowed Japan to avoid borrowing offshore. Since
GFC and European crisis, Japan has been seen as safe haven. This allowed
Japan to increase its government debt level - but may not do so in future.
After the bubble collapsed, Japan went from surplus to chronic deficit - but
this did not restore growth and stagnation became chronic. Japan has been
said to suffer a balance sheet recession - triggered by collapse of value of
financial assets. Insolvent firms are reducing debts. Investment has fallen
sharply, and corporations are net savers. Private consumption is weak -
reflecting weak employment, lack of income growth and population aging.
Strong exports and current account surpluses have partially offset this. In
a balance sheet recession, monetary policy is ineffective as there is little
demand for credit. GDP declines by amount of debt repayment and un-borrowed
household savings. As new PM's strategies have been tried before, they
reflect desperation. There will be a short term (but no sustainable) lift in
economic activity. Continued economic weakness, falling savings and a
reversal of current account surpluses make Japan's government debt burden
unsustainable. Household savings have fallen from 15-25% of GDP in 1980s and
1990s to 3%. Unemployment is higher, but still not critical (because of
government subsidies). Wages and worker's share of GDP have fallen. Moving
from lifetime employment, 34% of workforce are now on contracts. 16% of
Japanese are below poverty line. Population aging also reduces savings.
Money paid to retirees from savings now exceeds new savings. The rundown of
savings is compounded by poor returns on savings. Japan's current account
surplus allowed government to run large budget deficits which can be funded
domestically. But trade account surplus fell from 2007 into deficit in
2012 (because of strong yen and weak global growth). Territorial disputes
with China have exacerbated export decline. Shutting down nuclear power
required large LNG imports. Rising costs forced Japanese manufacturers to
relocate to cheaper sites. Japan is likely to shift into current
account deficit and have to borrow offshore to finance government deficits.
Government is unlikely to be able to continue to borrow - at least at
current low rates. Japan's domestic savings are about 250-300% of GDP, and
government debt is close to this level. Domestic deficit funding will be
much harder. Insurance companies sell their government bonds to pay
retirees. Japan's large portfolio of foreign assets (being the largest
net holder of foreign assets) will cushion it for a time. As drawdown of
foreign assets to finance retirement accelerates, Japan will run down
foreign assets - but eventually be required to borrow offshore. This could
require much higher interest rates. At current very low interest rates,
interests costs Japan's government 25-30% of tax revenues. At 2.5-3.5% rates (2-3 times
higher than at present) government debt would be unsustainable. Higher
interest rates would result in large write down in government bond holdings
by banks. To avoid these problems Japan must address core problems. Budget
deficits are hard to cut - as social security and interest now accounts for
too much of budget. Health and aged care costs are rising. Population aging and
shrinking workforce will slow growth and reduce tax revenues. Tax increases
are unpopular. Reduced deficits will reduce growth - and compound the
problem.
Other options include: financial repression to force investment into low
interest JGBs; BOJ could monetise debt to finance government; or inflation could
be sought to inflate away debt. But ultimately debt default or debt
restructuring may be vital. Older Japanese with large JGB holdings
would lose. Traders have often bet on a Japanese crisis (eg by short-selling
JGBs) and failed each time. Given large domestic savings and ability to
monetise debt, the status quo can continue for a while. But deteriorating
ratings will make debt funding harder - especially outside Japan. About 60%
of Japanese government debt must be refinanced in less than 5 years. A
crisis may take time to emerge, but then unfold quickly [1]
This account of Japan's debt problems (and balance sheet recession) is a cautionary tale
for others who have used variations of Japan's methods for accelerating
economic development.
However the problem is likely to be even worse than
suggested above for reasons suggested in Why Japan can't
deregulate its financial system, (Makuni ,2000) and
Evidence. The former suggested that financial
'repression' was used initially to direct national savings to creating industrial
capacity, and both suggest that there has been limited regard for profitability. Thus the balance sheets of
Japan's households, businesses, banks and government are likely to be much
worse than are indicated by official data - so the potential for a financial crisis is
much greater
Presumably Japan recognised in about 1990 (and perhaps much earlier)
the profound difficulties that the financial principles built into the
prevailing international financial regime (ie the emphasis on return on
capital and sound balance sheets) created for its economic model, and adjusted
its strategy on that basis .
Japan chose not to, and perhaps was unable to, adjust its system of
socio-political-economy to conform to the requirements of the Western-style
international financial regime.
'An Unrecognised
Clash of Financial
Systems' is the present writer's speculative view of
international events in terms of a 'clash of civilizations / cultures' that may have been
obvious to Japan though it was
invisible to rational Western mindsets who had no way to understand the predicament
of those (including ultimately China) who adopted variations of Japan's economic model.
Show: outline
In brief: The above-mentioned speculation referred to:
the collapse in
Japan's asset bubble in 1990s with serious adverse effects on the banking
system;
the subsequent failure to reform the banking system (perhaps because of
the adverse effect
this would have on Japan's social elites) - which lead to Japan's lost
decades of ongoing recession and deflation;
Japan's role as the
world's main source of credit, particularly that exported to the US through
'carry trades', which boosted demand for Japan's / Asia's exports;
international instabilities that apparently were related to Japan's
financial dealings (eg the 1987 US stock-market crash, and the 1997 Asian
financial crisis);
Japan's efforts to create an international financial regime based on
'Asian' traditions;
Japan's apparent influence on the US Federal Reserve in adopting easy
monetary policies; and
a possible linkage between Japan's predicament and the 'clash of
civilizations / cultures' that Western societies experienced with Islamist extremists
Japan's international relationships since 1990 need close attention - by both East Asian nations and especially by the US, as the latter may have been subjected to the greatest
con game in history by Japan's 'good cop' routine. A case can also be made for
extending that attention back several decades, eg because of deception about
the character of Japan's system of socio-political-economy and the apparent
involvement of the 'dark side' of Japan in orchestrating it (see
Coalitions of Interest)
In October 2009 it was indicated that 'Japan wants its culture back' - in
reference apparently to claims that it had become 'Americanised' and wanted
business to operate in a traditional communitarian style rather than
concerning themselves over-much with profitability (see
Which Identity Does Japan want Back?)
In mid 2010, it was indicated that Japan's major companies would seek to
develop export markets in emerging economies - because of the inability of
developed economies to continue to support Japan's export industries [1].
Needless to say this would create problems for emerging economies because many are also often dependent on current account surpluses (achieved through
export-based economic strategies) in order to protect under-developed
financial systems (see Leadership by
Emerging Economies?)
In early 2013, attention was drawn to the way in which rapid population aging
was compounding Japan's financial problems.
Show: the impact of population aging
Japan's rapidly aging population (because of
decades of falling fertility) poses a risk to its financial arrangements.
Japan has large debts - but the ill-effects of this are not obvious. Japan has
an external surplus and can print its own money. It has a savings surplus and
can thus sell government debt at low interest rates. Low rates mean that there
is no problem in debt service - and if there was the Bank of Japan could just
buy more government bonds. However there is a mismatch between declining
demography and appeasing an aging population with populist policies.
Conventional economic theory can't help see what will happen - as this has never
happened before. Investors now favour Japan because of new prime minister's 2%
inflation target - which requires perpetually devaluing currency to produce a
trade surplus despite 'war of words' about currency wars. Japan is THE aging
society. Median age is 45 now (the oldest in the world), and this will rise to
50 in 20 years. This requires savings for the future - but it also indicates a
structural demand deficiency / export dependency. Japan has now passed the stage
where it could rely on domestic demand to grow - while at the same time external
demand can't grow fast enough to to keep up with declining domestic demand. If
Japan's problems are thus structural, they won't be solved by any economic 'kick
start'. All that will happen is continued accumulation of debt that will be ever
harder for declining working age population to service. Japan could cope with
its problem by directing its excess savings offshore before the GFC - because it
was the only country doing so. But now all OECD countries need to do the same
thing. The imbalances in Europe can't be resolved (as some argued) by increased
German fiscal deficits to stimulate consumption - but rather there is a need for
peripheral economies to increase their savings. External demand and foreign
asset income are crucial for growth by aging societies - but all developed
countries can't grow by seeking exports. In Euro area, efforts by peripheral
countries to boost economies with exports are leading to economic stagnation and
the core countries (net savers) can't take up the demand slack. In Japan the
problem is now very visible - as positive external balance (the only source of
growth) is evaporating. Its trade balance is negative, and its current account
balance is weak. Japan's public debts are continuing to grow - mainly due to the
effect of population aging. Debt can be serviced at current low interest rates -
but would not be serviceable if rates rise. If confidence is lost, Japan could
wind up like Italy and Portugal. Investors are now buying on the short end of
Japanese debt - just as happened initially in European periphery. Japan will not
have sufficient savings to cover all government debts in 2016 - but the market
could force changes sooner. Japan has a strong net external investment position
- which differs from countries like Italy / Portugal. But the external assets
and internal savings are distributed differently - and those with external
savings may not be willing to pay the surcharges needed to compensate those who
have lost their savings by trusting governments. And will young Japanese be
happy to stay in a country with the highest tax rates on the planet [1]
And Japan's aggressive quantitative easing in early 2013 may have been a
desperate attempt to delay a financial crisis that would result from having
to borrow in international (profit-focused) financial markets with a
non-capitalistic financial system.
Show: Another 'sting' driving Japan's urgency?
Another 'sting' driving Japan's urgency? - email sent 9/5/13
Your article raised the question of Japan’s motive for
‘Abe-nomics’ – and suggested that this might relate to ‘stings’ from the 2011
tsunami or China’s assertiveness.
However I should like to suggest a third possible ‘sting’ –
namely the risk of a financial crisis because of Japan’s high government debt
levels and increasing exposure to current account deficits. The latter taken
together could lead to a requirement to borrow in international (profit-focused)
financial markets with a non-capitalistic financial system. The result would not
be pretty, because while Japan’s economic position looks bad to analysts who
take its financial statistics at face value, opening the books to potential
profit-focused creditors would probably reveal a much worse picture (see
Japan's Predicament).
My
interpretation of your article: Why did
Japan change its economic approach so suddenly (ie shift from acceptance of
deflation to Shinzo Abe's program to reverse 15 years of falling prices.
Everyone has been too busy making money to worry about the reasons. The currency
has devalued and the stock market is up dramatically. This is starting to affect
the real economy. Two contributing causes were 2011 tsunami (the response to
which raised questions about whether industries would leave Japan) and China.
Beijing has become increasingly assertive - and this may have given Japan a
leader with a sense of purpose. Fears about security and economic weakness have
a long history in Japan. Rich country, strong army was the rallying cry of
Japan's modernisation after Meiji Restoration. Abe sees a weak economy and
reducing Japan's ability to defend itself - and thus stresses both a strong
economy and strong national defence. Patriotism has been rising. Abe and others
shouted banzai (long live the emperor) at a ceremony to mark the end of
US occupation in 1952. The US was told that for Japan and the US to jointly
provide security for the region, Japan must be strong. Abe has also committed to
participation in Trans-Pacific Trade Pact that would expose Japanese companies
to tougher competition. This would mean tearing up the LDP's social contract
with farmers. Other long discussed imperatives might also be considered:
liberalizing energy / healthcare and getting more women into workforce
In relation to that hypothesis it is noted that major
economies in East Asia (especially Japan and China) have financial systems that
are incompatible with Western-style capitalistic economic practices – ie they
are mercantilist in the sense of pursuing economic power by maximizing
production, rather than capitalistic in the sense that this involves
profit-focused investment by independent enterprises – see
Evidence. Suggestions about the character of, and reasons for, those
systems are in
Understanding East Asia's Neo-Confucian Systems of Socio-political-economy
(2009).
The attempt by Japan and China to build economic (and thus
military) power on the basis of non-capitalistic financial systems has had
significant effects on the global economy, and now seems to create increasing
risks for those major East Asian economies (see
Fasten Seat Belts: Rough Weather Ahead). The latter suggests that the
consequences of the use of non-capitalistic financial systems include:
Contributing to the global financial crisis (because of the
favourable
international financial imbalances those non-capitalistic systems require);
An incompatibility between the financial
systems that have been the basis of neo-Confucian economic ‘miracles’ and
continued global economic growth (because a sustainable basis for global growth
can’t be created in the face of structural international financial imbalances);
and
The resulting likelihood of financial crises, political
instability and resurgent-militarism in East Asia.
Shinzo Abe’s (ultra) nationalistic outburst parallels
sentiment that being expressed by China’s leaders (see
Do Others Share the 'China Dream'?) and may reflect the fact that Japan’s
post-WWII dream that an ‘Asian’ system of socio-political-economy (that
may have been shared with China in about 1979) could finally dominate the
world is likely to turn into a nightmare. The profound significance in Japan of
tearing up the LDP’s social contract with farmers (which was foundational to
Japan’s Meiji era determination to gain power through economic success) is
suggested in
Reverting to the Soul of a Samurai?
In this context ‘Abe-nomics’ (ie an extremely aggressive
program of quantitative easing) could be intended to have the same sort of
impact as Japan’s earlier period of extremely easy money policies – namely
reduce the risk that Japan would face current account deficits because it could
be expected to devalue the Yen and boost external demand for Japan’s exports by
recreating a strong Yen-carry trade (see
Irresponsible Quantitative Easing).
I would be
interested in your response to my speculations.
John Craig
However diverse other suggestions are offered about its situation (eg that
Japan is functionally
bankrupt; that the weakening yen could set off a financial crisis across
Asia; that stimulus measures without structural reforms could be disastrous;
that BOJ has undermined the market structure that prevented crash by Japanese
government bonds).
Show: article
Abenomics has driven up the Japanese Topix Index. The case for this is that
stimulating Japanese economy will increase inflation, weaken the currency and
aid exporters. But this must ultimately fail. Japan is know as exporter, but
now imports more - a problem that has been increased by extra fuel needed as
nuclear power plants were closed after 2011 tsunami. Japan has had a 27% fall
in purchasing power, and costs are rising faster than wages. Mortgages rates
are rising when stimulus should have led them to fall, Combined public /
private / corporate debt is already 500% of GDP. Japan is functionally
bankrupt. The population is falling, so savings are declining. The real
problem is that international markets will demand higher rates because of
higher risks. The true cost of capital could double. [1]
The radical relation policies of Shinzo Abe have boosted consumer spending
- but led to concern that the weakening yen could set off a broader Asian
crisis. Japan's growth jumped in the first quarter - suggesting that Abe's
kickstart worked. Retail sales soared. The Nikkei is up 70% - mainly because
of weaker currency. Falling yen may be creating conditions across Asia like
those before Asian financial crisis (ie when external funding dried up). Trade
surpluses of many countries could evaporate and lead to new financial crisis.
China could experience a sudden loss of competitiveness after years of soaring
wage rises. The eurozone could be pushed towards deflation. The core of
Abenomics is mobilizing Bank of Japan to use tactics that drew Japan out of
Great Depression in 1930s. BOJ is injecting almost as much as US fed though
its economy is only 1/3 the size. This stirred concerns about $US1tr leaking
out into a new 'yen carry trade'. But this has not happened yet. Japan has
rather repatriated currency home. Strategy is high risk as any suspicion about
an attempt to inflate away Japan's debts could see interest rates rise
significantly. Yields on government debt have doubled - but are still below
1%. If they reach 3% a banking crisis could emerge as banks hold JGBs worth
80% of GDP. The bond rout in Japan could indicate the start of a global trend
[1]
Japan could be in trouble unless current measures (ie fiscal / monetary
stimulus) are accompanied by structural reforms. [1]
BOJ could lose control of of its bond buying blitz. Authorities want to
increse inflation and devalue yen. Thus rational investors are selling
Japanese government bonds - and overwhelming BOJ's buying program - thus
increasing bond yields [1]
Yields on Japanese bonds doubled in a month, triggering a stock market
crash. This triggered similar problems, and investor fears worldwide. BOJ may
not be able to hold down yields no matter how many bonds it buys. This could
lead to loss of faith in government and 'beginning of the end' for Japan's
economy. This happens as China is struggling with effects of 4 year ending
boom - which pushed credit to 200% of GDP and spawned a shadow banking system.
China's data is no longer reliable in assessing its economy. China is slowing
hard - and debts may be greater than reported. Global equities have boomed on
the basis of QE (in US, Europe , Japan) - but this is likely to be wound back
soon, and could create major market reversals. The promise of Abenomics has
lifted Japanese equities - but little has actually happened to justify this.
The bond market rout is raising fears of a banking crisis (as banks hold huge
amounts of government debt). The BOJ has undermined the market structure that
has kept Japan's bond market stable for 20 years. Others however believe that
this will generate recovery [1]
Abenomics generated a rapid response in terms of consumer spending and
property investment - because of Japanese expectations that inflation and
devaluation would make goods and property more expensive [1]
The 'third arrow' of Abenomics involved regulatory reforms to bring more
women into workfoce, encourage cash-hoarding corporations to invest and
promote industrial innovation [1]
In early 2014 it was reported that Japan is now experiencing increasingly
significant current account deficits. Devaluation of the Yen did not
sufficiently increase Japan's exports - and now its trade deficit exceeds to
revenues from external investments [1].
In mid 2014 Pimco suggested that Japan's extreme monetary experiments could
lead to a major crisis. Japan can't keep buying bonds without losing control of
inflation of its currency. It also can't afford higher interest rates - so it
is hard to see any scenario that leads to a smooth exit [1]
For a financial system that does not take profitability seriously, a
current account deficit (and thus a need to fund growth by borrowing in
international profit-seeking financial markets) is a precursor to a major
crisis.
In September 2014 it was reported that the Bank of Japan was moving
towards being the largest holder of stock on the Nikkei stock exchange -
as it seeks to support Japan's fragile economy through the purchase of
these riskier assets. This is in stark contrast to US Federal reserve
which has been buying government bonds and mortgage-backed securities. The
BOJ is under pressure to stabilize the country's financial system and prop
up the economy [1]
In December 2014, it was suggested that:
the Abe Government had sought
an electoral mandate for the most radical reforms in Japan's modern
history. HSBC warned that Japan is trying to drive down the Yen - and that
this was dangerous and potentially uncontrollable perhaps leading to
exchange rate crisis and worldwide currency storm. Abe may be backing away
from fiscal retrenchment and may pressure BoJ to facilitate increased
household spending. Yen would be hurt by any sign of outright
monetization. Japan's recovery faltered. Abe's Thatcherite 'Third
Arrow' of reform never happened. Japan's economy depends on BoJ's purchase
of assets of 1.4% of GDP monthly - the largest for any modern country.
Wage inflation may result - and hit the exchange rate. This could
set off beggar-my-neighbour devaluations across Asia. China is trying to
wean its economy off exports - but there are limits. And capital flight
from Japan could set off explosive rise in $US - and harm emerging markets
with $US denominated debts. This would do serious global damage. BoJ is
currently soaking up all bond issuance by Japan's government. Real
interest rates are deeply negative. Printing money may be being used to
devalue Japan's debt. There are some positive signs in Japan's
economy and the oil price slump will help. However Japan is at a critical
point. Many reforms (eg to finance / pensions / taxes / productivity /
deflation) are needed simultaneously [1]
Japan's savings rate has turned negative for the first time on
record (ie since 1955) - and this creates problems because Japan's
high debt levels have been funded domestically and cheaply whereas
foreign lenders would require a more appropriate risk premium [1]
In March 2016 it was argued that Japan could be headed for a solvency crisis
- in (say) 5 years. Public debts are 250% of GDP and spiraling up. Retirees
have been willing to hold government debt at zero rates - but these will soon
be unable to provide enough capital. When / if it becomes necessary to rely
on foreign capital, rates are likely to go much higher. Bank of Japan could
be forced to fund government debts directly - in which case Japan would face
a significant inflationary risk (rather than current deflationary risk). This
may already be starting to happen. [1]
There was ultimately an expectation that Asia's economic growth (led by
China) would decouple from the growth of the US economy (see
Decoupling: A New Urgency?).
The need for decoupling has been amplified by the GFC and the consequent
inadequacy of export-led industrialization strategies.
In June 2009 it was suggested that emerging economies might have been less
adversely affected by the GFC and be able to maintain strong growth without
dependence on demand from the US and Europe. However, without radical
changes, this
seemed likely to be only a temporary
respite.
China: After the GFC
speculates about China's position - basically suggesting that China's
response has involved both: (a) high levels of government spending and
provision of credit through banks for property, infrastructure and other
forms of investment; and (b) some
efforts to transform its society and economy which may long have been planned
to overcome the constraints implicit in the economic model it copied from
Japan (eg its dependence on the strength of the US financial system).
By mid 2010 it was common for observers to speculate
on the basis of China's rapid growth in the post GFC environment about the
21st century being the 'China era' (eg see also
Future of the World: Again?), though without any real understanding of
what such an outcome really meant or that the hazards facing extremely rapid
state-driven economic growth (like that in the USSR in the 1950s and Japan
before 1990) might disrupt China's rise also.
On the basis of a
couple of decades study of the different paths to modernisation of Western and
East Asian societies, I should like (in response to your article) to offer
some suggestions about the sorts of 'homework' that may need to be done to
cope with the China's rising economic and geo-political influence.
Show: outline of article
My
interpretation of your article:
China has become the world's second
largest economy, upsetting the status quo of the last century. In 1820
China still had 30% of world GDP - and Japan was minor appendix that owed
much of its civilization to China. But when industrializing imperialist
western powers came, Japan adjusted while China resisted. China declined
in every way from 1840s - while Japan became an imperial power. Japan lost
WWII, but won the peace. Chinese Communist victory and Cold War made Japan
into US protégé - and Japan enjoyed an economic miracle. In the 1980s
Japan was expected to become #1 economically, but it never achieved this.
From 1949 to 1976 Chinese economy remained closed under Mao, and
economically marginal. In 1979 China's new leadership reversed economic
policy - and achieved 3 decades of amazing progress since then. While
China prospered, Japan declined. This will have geo-political consequences
(eg render US-Japan security treaty less viable). Asia contains many
geo-political fault lines. Major changes in Asia are occurring while US
suffers economic woes, policy confusion and is mired in Afghanistan. Japan
was an economic rival, but was geo-politically obedient - but China may
not be. China has frailties - but it is clear that while 19th century was
Europe's, the 20th the American century, the world has now entered the
Chinese era. Doing business will require dealing with the challenge of
China's competitiveness - which needs lots of homework.
Some speculations
relevant to the issues raised in your article are:
an attempt to
identify the intellectual basis of political and economic management
in East Asia, which Western observers must find radically
unfamiliar is in a segment on
East Asia
in Competing Civilizations (2001).
Briefly this refers to using strategic information to directly accelerate
development of 'real' (say) economic activities, without paying serious
attention to 'abstracts' (such as law, contract or financial outcomes) which
are the basis of rational decision making processes under Western
traditions. These methods (which owe a great deal to Daoism, and nothing to
the West's classical Greek heritage) were:
pioneered by
Japan (whose Zen and Shino traditions have much in common with Daoism) and
combined with the Confucian traditions that were more dominant in China;
and
subsequently
spread to other East Asian societies - eg Japan
reportedly introduced
these methods to China's leaders in 1979;
built on the traditional role of highly educated
bureaucratic elites in maintaining social and political order by
manipulating what members of the community think;
the result has
been a 'clash of civilizations' (primarily
evident in terms of financial
systems) that has been largely invisible to Asia-illiterate Western
observers (see An
Unrecognised Clash of Financial Systems?)
though this 'clash' ultimately played a significant role in generating:
(a) the global financial crisis (see
Understanding East Asia's Economic Models
and
Impacting the Global Economy,
2009); and (b) the international financial imbalances that currently make
efforts by the G20 to create a sustainable path to ongoing global economic
growth virtually impossible (see
Too Hard for the G20?);
while China
appears to be the major economic power emerging in Asia, Japan's
role should not be neglected (see
Focusing on Japan and the Global Financial
Crisis, 2009 and
Which Identity Does
Japan want Back?, 2009). As your article noted,
Japan lost WWII but has tried to win the peace. Japan's goal in WWII was to create an
Asian Co-prosperity Sphere - and its major tactic in doing this was to try
to mobilize China (Japan's 'big brother') to take the lead role in creating
this. It also needs to be considered that: (a) economic growth may not be
everyone's idea of 'success'; and (b) for reasons suggested above, global
growth can't be sustainable given the international financial imbalances
that arise mainly because East Asian economic models do not involve taking
profitability seriously and thus require domestic demand deficits to provide
high levels of savings for ongoing unprofitable investment;
steps that
might be taken to strengthen the global influence of democratic
capitalist systems of political economy (which
would reinforce Western values such as individualism, liberty,
rationality, a rule of law and democracy) are
outlined in
China may not have the solution,
but it seems to have a problem,
I would be
interested in your response to the above
speculations.
John Craig
There seems to be something of a 'Ponzi' quality in China's
economy (ie its dependence on strong inflows of new cash to prevent exposure
of deficiencies in the balance sheets of its institutions - see
China's Ponzi-like Economy).
In an environment in which global growth stagnates as a consequence of
international financial imbalances (see
Too hard for the G20), China's best prospect of avoiding crisis might be
seen as creating an environment in which its institutions / economy would not be
evaluated against prevailing international financial criteria.
In August 2011, the possibility of another Asian Financial Crisis linked to
the widespread dependence of Asian economies on current account surpluses was
raised by Chinese economists - though in doing so they did not actually
identify the cause of this risk.
Show: Asia's Next Financial Crisis and its Impact on Australia
Asia's Next Financial Crisis and its Impact on Australia -
email sent 24/8/11
Your article
reported a warning by Chinese academics that another financial crisis is likely
in Asia over the next few years. I should like to suggest a perspective on this
situation and what it might mean for Australia.
My
interpretation of your article:
As investors consider a re-run of global financial crisis (GFC), warnings of a
repeat of Asian Financial Crisis (AFC) emerged from a presentation at a RBA
conference by Peking University economists. A new AFC is possible over the next
10 years, they said. The 1997-98 AFC devastated many economies as investors fled
the region. This didn't end Asia's growth because China and India emerged -
though they had not been seen as high performers in 1993. The AFC had a major
impact on the region - mainly involving the emergence of large current account
surpluses and export of capital from the region. Asian countries responded to
the rapid exodus of foreign capital by promoting current account surpluses.
Before then most Asian countries were capital importers - but they are now
capital exporters. Now Asian savings are being used to finance budget deficits
in the North Atlantic, though they are needed to promote domestic development.
Another spin off was efforts to forge trade, financial and economic cooperation
across the region – though this has made little progress. China used monetary
and fiscal stimulus measures during GFC, which also generated inflation - and
this can't be repeated. Now many Asian economies need structural reforms.
Imbalances and distortions are increasing in China. India faces problems in
providing jobs for millions of workers, SE Asia must upgrade their industrial
structures to overcome middle income trap. There need for change could lead to a
crisis - which leads to global recession. Australia survived the first AFC, but
might find the next more difficult.
The AFC was
triggered by the withdrawal of foreign capital when the wastage of capital by
‘cronyist’ (rather than ‘capitalist’) financial systems became obvious. However
similar distortions in financial systems have apparently been a general
characteristic of the systems of socio-political-economy that Japan pioneered
after WWII as the basis of its ‘economic miracle’ and then encouraged others in
East Asia to adopt (see
Understanding East Asia's Neo-Confucian Systems of Socio-political Economy).
National savings tend to be mobilized by state-connected banks, and made
available to state-connected enterprises that seek to maximize market share, but
pay limited regard to profitability. While this arrangement provides a novel
form of industrial subsidy, it also makes it hazardous for such countries to
borrow in ‘capitalistic’ (ie profit-oriented) financial markets.
The AFC emerged
in 1997 following the withdrawal of foreign capital from countries whose suspect
financial systems were not protected by current account surpluses and
accumulated foreign reserves. This certainly encouraged others to copy the
methods that Japan and China had previously used to gain such protection. And
interestingly the withdrawal of foreign capital was seen to have been initiated
by Japan (see Hartcher ‘Look East, Dr Mahathir, for the source of Asia’s
decline’, Australian Financial Review, 25-26/10/97).
A new financial
crisis has long seemed probable in Asia as the third stage of the GFC because
many economies have continued to depend on the willingness and ability of
trading partners (especially the US) to sustain current account deficits and
ever increasing debt levels (see
Unresolved Problems and Coming Crises, 2009). And it has been obvious that
this practice would eventually prove unsustainable (see
New Economic Strategies Must Be Found).
However the
structural reforms that were referred to in the Chinese professors’ paper are
unlikely to involve efforts to adapt to Western-style ‘capitalistic’ financial
practices. A
cultural revolution would be required for many East Asian economies to
operate profitably under Western / US financial principles, because of (for
example): fundamental differences in the way information is used; the need to
change economic goals from economic 'power' to financial returns; the
inseparability of economic issues from questions of social / political power;
and the lack of appropriate legal systems.
Rather the crisis
they referred to might be the by-product of experimenting with a ‘neo-Confucian’
international order which would operate in quite a different way to the
democratic capitalist principles that Australians are accustomed to (see
Signs of an Emerging East Asian International Order). Or alternatively the
crisis might be collateral damage associated with efforts by Western societies
to eliminate the constraints on their economic prosperity that arise from the
international financial imbalances that have been needed to protect ‘cronyist’
financial systems in East Asia – eg as suggested in
Preventing Economic Stagnation
In any event, the
next AFC will be quite unlike that in 1997-98. Australia will not be able to
rely on its exports to ‘Asia’ continuing. ‘Asia’ did not continue to demand
Australia’s commodity exports at the time of the first AFC simply because China
and India emerged as new players. Rather this demand continued because: (a) the
region’s economy was geared to exports to major developed economies
(particularly to the US), and US demand remained strong; and (b) ‘cronyist’
financial systems (in Japan and China) were protected by the willingness and
ability of the US to continue increasing its debt levels indefinitely. These
supports are unlikely to be available in the next Asian financial crisis.
John Craig
By late 2013 it seemed that China (like Japan) could be in a situation
in which the accumulation of high levels of government debt (and
contingent liabilities for the bad debts of other institutions - such as
state owned enterprises, local governments and banks, which are
effectively branches of the Communist Party) could be the basis of a
serious financial crisis which China's system was poorly positioned to
deal with (see Preparing for a
'Con'? and
Or Maybe there IS a
Real Problem)
Show: brief outline of observer's suggestions about a potential credit crisis facing China
In relation to China
observers have suggested that
risks seemed to be associated, for example,
with:
huge increases in local government debt to fund special projects to
maintain growth during GFC;
rapid increases in bank lending - which risked making
banks too big to bail out;
the emergence of a shadow banking system which marketed
risky, but higher interest, products;
banks' need for offshore capital
because of growing levels of bad debts;
China's emphasis on growth (which
required expanding credit) rather than on structural reform (to make expanding
credit safe);
government liabilities which were not limited to direct
government debt (54% of GDP - of which local government debt was 1/3 of GDP)
because of the need to cover bad debts of banking system (which was an extension of the Communist
Party) and the shadow banking system (as it had had implicit government guarantee);
China's domestic debt rising from 128% of GDP in 2008 to 216% of GDP;
lack of
reliable information about local government debt;
a perceived looming credit crunch;
20-50% of credit being provided by
shadow banking system;
perception that China was on a
$24tr debt 'tiger' that it can't control, and that all countries that have had credit
booms like China's have had credit crises;
the decline over 5 years in the GDP gain from $1 of credit
from $1 to $0.25;
expectation of defaults in China in 2014 - as many loans become
due for renewal;
50% fall in lending in February 2014 - as lending by shadow
banking system virtually ceased;
exposure of China's banking system to copper and iron ore -
whose prices declined rapidly in early 2014 - because these had been
used as collateral for loans;
significant borrowing by China's banking system in $US and its
consequent exposure to any decline in value of yuan - which in the
past could have been devalued to boost China's competitiveness;
a possibly huge and economically-significant level of
corruption by Chinese officials.
At the same time there seemed to be
serious political tensions
across north-south boundaries where past frictions have led to civil wars that
have littered China's history and to 'commercial' factions from southern China
being driven out to become the Chinese Diaspora especially across SE Asia.
Harvard researchers have argued that the history of countries that
experience rapid catch-up economic growth is that they return to the
global average rate very suddenly - especially where authoritarian
governments are involved.
Details: China's super-rapid growth has
extended 33 years - three times longer than normal. However in 1961 the
Soviet Union was predicted to overtake the US by 1980. Japan was also
expected to overtake the US. However Japan's productivity which had
doubled over 30 years to 1991 is now 6% below that in 1991. In 1980 Brazil
had experienced 5% pa growth for 20 years, but has since had zero
per-capital growth for two decades. It is invalid to use current high
growth rates to predict the future. Current rates explain only 20-30% of
future growth. Where growth exceeds 6% pa an abrupt deceleration to 2% is
normal [1]
Creating a New International 'Confucian' / Bureaucratic Financial,
Economic and Political Order?
Creating a New International 'Confucian'
/ Bureaucratic Financial, Economic
and Political Order?
There have long been, and are now increasing, indications of attempts to create international financial,
economic and
political arrangements to avoid the risk of failure that the
Confucian-style
government systems in East Asia (which involve social, economic and
political control by authoritarian state-centered social hierarchies) face in a
liberal Western-style global system (which is based on universal values, a
rule of law, democracy and independent profit-oriented investment).
Various relatively recent examples are included in Making Progress
below. However as a starting point it may be noted that:
Japan resisted
Western influence (primarily economically and militarily) from
the time of the Meiji Restoration (1868) until
at least
1945 because of the incompatibility between: (a) the
'liberal' social,
economic and political institutions that were the basis of
Western economic progress because they allowed rational / analytical
methods to be used for effective problem solving; and (b) Japan's traditional authoritarian
imperially-centered social hierarchies. In the 1930s and 1940s that
resistance involved an attempt to get others (especially China) to
support it in establishing a Greater East Asian Co-prosperity Sphere
involving traditional East Asia methods of exerting social, economic
and political power;
this took place in an environment where there had been a
centuries'-long
contest for control of 'Greater China'. The latter includes not
only mainland Chinese but also China's Diaspora - mainly
materialist / commercial groups from southern China who had been
driven out in successive waves following civil wars with north
China's more rural / spiritual factions - and had great economic
power and behind-the-scenes political influences in SE Asia;
after WWII a real-economy 'miracle' was achieved first in Japan
(and then spread to other East Asian societies with a Confucian
heritage - ultimately China in the late 1970s) by
variations of traditional Confician methods
of government by bureaucratic elites on behalf of emperors. Those
variations involved the domestic
application by bureaucratic elites of the way China ruled Asia through a
trade / tribute arrangement prior to Western expansion (ie by
facilitating trade and other dealings as the 'middle / coordinating
/ organizing
kingdom' for those who provided 'tribute' (ie accepted its
superiority) to China);
attempts to avoid the constraints implicit in the 'capitalistic' global
financial system's expectation that national savings should be invested
(largely by independent enterprises) to
maximize the return on, and ensure the return of, capital rather than to
achieve the consensual goals of ethnic elites to boost the power of an
ethnic nation (and its elites) have been
ongoing for decades and primarily led by Japan (see
A Generally
Unrecognised 'Financial War'?);
China has now firmly re-established its traditional hierarchical
social order domestically (see
The Resurgence of
Ancient Authoritarianism in China). One observer
suggested
in 2011
that China's autocratic Confucian order closely resembled that
which Communist revolutionaries overthrew in 1911. Though Mao's
Cultural Revolution had sought to purge
Confucian influences from China because he believed that they had oppressed
the people, after his death his successors apparently
reintroduced a form of
Confucian governance by a bureaucratic elite within the so-called
'Communist' Party (as 'socialism with Chinese characteristics')
- presumably because Japan had demonstrated after WWII that
bureaucratically-coordinated non-capitalistic methods could generate
'miracles' in the 'real economy';
China has re-emphasised an education system that promotes
conformity rather than independent thought and initiative (see
Competing Thought Cultures);
China has been using traditional 'soft power' tactics to weaken
other countries (eg by promoting misunderstandings and division)
while seeking to engage others in reliance on itself (either as a
state or as state-linked businesses) in developing and implementing
'visions' for their future (see What is
Soft Power?).
Various observers suggested in 2014 that China was challenging the US
dollar - but China's primary goal was not likely to involve replacing the $US with the
Yuan.
Show: Promoting the Yuan as a Reserve Currency
Promoting the Yuan as a Reserve Currency: Efforts have undoubtedly
been made to promote the use of China's currency in international trade. For
example, steps to promote the international role of the Yuan / renminbi were outlined as
follows in late 2014.
Over several decades China's high economic
growth and economic integration has increased its role in global output
and trade. It now has second largest economy; is the world's largest
importer / exporter; attracts huge FDI inflows; and is the world's largest
holder of foreign exchange reserves. However the market share of its
currency has been limited - and China has sought to change this by
gradually internationalizing the renminbi. Qualified foreign investors
have been able to access China's capital markets. The renminbi's trading
range was widened to 2%. Using the renminbi for cross border trades has
been encouraged. Renminbi deposit accounts and offshore renminbi markets
have been encouraged. This has allowed RMB to emerge in international
currency system. It has overtaken the euro in global trade finance.
Renminbi bond issuances in Hong Kong has increased rapidly. Most of this
involves issuances from China' based companies - but non-China-based
companies have increasingly become involved. The renminbi's use as a
reserve currency is small but is increasing. These developments result
from the PRC opening its capital account and deepening its financial
markets. [1]
This
clearly requires great care because China's financial system has not involved
serious concern for return on, or even return of, capital (see
Evidence). In purely
financial terms the Yuan's value would always be suspect.
Thus, presumably in
order to overcome this obstacle China has been rapidly accumulating
substantial gold reserves as a back-up for a traded Yuan - a fact that has
been disruptive of international paper-gold markets (see
Interpreting the Canary in the Gold Mine).
Rather China (and perhaps Japan)
may be primarily seeking (and have been seeking for decades) to
reduce the role that currencies / free markets play in influencing economic
affairs and democracy plays in politics. Even as far as the RMB / Yuan might play a role in international financial
markets, this would involve an 'manipulated' commodity whose actual financial
backing would be neither transparent nor certain.
The goal would be to eliminate to a significant degree the constraints
that free markets / democracy impose on the exercise of power through the
development in various parts of the global system of something like
traditional Confucian relationships
amongst social elites and their subordinates . Such systems may best be
understood from a Western perspective as virtual 'whole
of society bureaucracies' whereby the methods of consensus-forming
amongst specialist agencies (and then implementation / enforcement of that
consensus by the use of state power) includes
every aspect of society (ie not
only 'public' functions) and excludes both transparency and oversight by
citizens' representatives.
This elite-controlled international system (in which China would act as
the 'middle / coordinating / organizing kingdom' much as it did in Asia before Western
expansion) appears to be being
presented as an effort to create a 'multi-polar world' as an alternative
to the liberal international order that the US has championed since
WWII without highlighting the lack of any 'liberal' elements in the proposed 'multi-polar-world' or the parallels with the 'fascist'
emphasis on state power that was seen as an alternative to democratic
capitalism in the 1930s.
The international order that China's so-called 'Communist' Party seemed to be seeking
to create was one in which its autocratic state would be able to intervene
directly in organizing economic and other activities in other countries in
much the same way as it does in China - and thus further increase its
power and the power of those in its social networks.
In simple terms the goal could be to reduce the constraints on
rule by traditional ethnic social elites that arise where financial
considerations determine economic activities / state spending and where law and democracy are the basis of
government - because it is presumed that:
the interests of ethnic communities
(as determined by integrative-intuitive bureaucratic-style consensus amongst hierarchical and
authoritarian social elites and their
subordinates) should
dominate over the interests of rational / responsible individuals (as electors, politicians, consumers, entrepreneurs
or investors);
‘Order’ in society is all important - and ritualistic
conformity with behaviours inculcated by
educators,
governing bureaucracies (based on what a consensus of social elites
agree upon) or social superiors is seen as appropriate under East Asian
traditions. The 'rituals' involved need not be simply ceremonial,
but could include sophisticated / complex (say) technological or
commercially behaviours. The responsible individualism which Western societies gained from their
Judeo-Christian and classical Greek heritage (and
used to achieve social,
political and economic progress via rational / analytical decision
making within institutions based on a rule of law, capitalism (ie
independent profit-focused resource allocation), and democracy) is seen as the source of damaging
disruption.
In brief: Order in society as a whole (built on
the order that exists with families / communities) is emphasised rather
than the welfare and capabilities of individuals. Western societies
were described as 'barbarians' because weapons were invented and used from
the late 15th century which enabled common folk to challenge their
aristocratic superiors. Restoring rule by 'elites' may be seen as removing
the aberrations that are seen to result from liberty for the common
man.
Moreover there seems to be an expectation (eg as indicated in The Rise of the Ferro-dollar
andChina:
Sustaining Growth by Neglecting Profitability) that synergies and
externalities can produce better outcomes for an economy as a whole that
more than compensate for limited or negative returns on individual investments.
It also might be presumed that a method like that used to achieve 'real
economy' miracles might achieve similar benefits in financial markets (see
below).
The goal might not be to 'rule the world', but
merely to ensure (as Japan sought using military force in the 1930s -
initially by unsuccessfully seeking China's support in establishing a 'Greater
East Asian
Co-prosperity Sphere') that a significant part
of it is not governed in accordance with the universal values and individual
freedoms that underpin Western democratic capitalist
systems.
Show: note on parallels with Islamist's aspirations
An aside: It may be noted in passing
that such an outcome might also appeal to Islamists who believe that: (a) democratic and
capitalistic constraints on rule by social elites (ie Islamic authorities) are inappropriate - in that case because of the moral failings that
are seen to arise as a consequence of individual liberty; and (b) people
should live in ritualistic conformity with their traditions (ie Shar'ia Law in a
Muslim environment). The possibility that these similarities with the
aspirations of East Asian ultranationalists might have led to
collaboration was speculated: (a) in
Attacking the Global Financial
System (2001) in relation to the 911 attacks in America; and (b) in Is the Barbarity
of ISIS Another Attempt to Ensnare the US in the Middle East? (2014).
However it is emphasised that, while there are some
indications, the present writer is not aware of any direct evidence of
such collaboration.
Such an outcome would be quite inconsistent with the version of an 'Asian
century' (in which China in particular would play a leading global role within
a Western-style international framework) that
was advocated by, for example, business and political leaders in
Australia who seem unable to understand what a real 'Asian century' might
involve (see Australia and the Claytons Century:
The 'Asian' Century You have when you are not having an Asian century).
Such naivety is anything but unusual (see Babes in the
Asian Woods) and could have been engineered to some extent (see
What is Soft Power?).
However the possibility that a global (or non-global) neo-Confucian international order (which would make econometricians and many
political scientists redundant because they also would simply
have no idea how it would work) might
be considered and might be consistent with emerging events is considered
below.
There has arguably been a pressing need to create an international financial
/ political order in competition with liberal Western-style arrangements because radically different, and incompatible, systems of
socio-political-economy are involved in East Asia. In particular:
liberal Western style
institutions are based on universalist values and emphasise the
welfare and capabilities of rational / responsible individuals;
East Asian cultural traditions are based on ways of thinking that do
not acknowledge universal values and which emphasis the welfare and capabilities
of particular ethnic communities as a whole under the guidance of elite / autocratic
bureaucrats (see East Asia
in Competing Civilizations). From some viewpoints such systems can
be viewed as a 'soft' form of fascism (whose
primary feature seems to be an emphasis on an elitist state rather than on
the people) - and Mao's
cultural revolution in China had been directed towards promoting social
equality by purging
Confucianism from China as it was seen to have oppressed the people.
The primary constraint
on the neo-Confucian / 'bureaucratic non-capitalist' models Japan pioneered and
then promoted throughout East Asia (and ultimately in
China in the late 1970s) has been on the demand side (ie
on such ststems' dependence on favourable international financial imbalances - ie on
strong export demand - especially
from the US, and on the ability that the US has had to productively absorb
surplus savings). No amount of additional supply capacity is going to solve
that difficulty. In the absence of strong external demand, growth driven by domestic demand would merely run down foreign exchange reserves and,
if Western / global economic / financial principles continue to be applied, the neo-Confucian
economies the latter would eventually suffer crippling financial crises because of the lack of traditional capitalistic
attention to return on / return of capital that characterises those models (see
above).
Creating strong domestic demand in China would be a short term option for
overcoming this constraint.
Show: About Recent Trends in China
About Recent Trends in China: From the time of the global financial crisis,
very high levels of investment spending were arranged to maintain growth mainly
through a rapid expansion of credit.
When this seemed likely to be
unsustainable, proposals for more fundamental economic reforms were advanced at
the Third Plenum of the Communist Party in 2013.
However the liberalization
that this envisaged was quite incompatible with the maintenance of an
authoritarian state and the long term implications of such liberalization (and
or the rise of a consumer-driven economy) would have to be challenges to
autocratic government (see
Other Structural
Problems and China's
Problem is Neo-Confucianism not Hypothetical 'State Capitalism').
The latter points out that China has a major problem in reforming its
financial / economic systems because doing so (while essential to avoid its looming
financial crisis) would require changing the methods it uses to achieve change
- and this would be a formula for chaos.
The fact that changes to China's education system would
encourage the emergence of a compliant population (rather than one capable of
taking initiative in a liberal environment) also implied that China's
announced economic liberalization was unlikely to be sustained (see
Competing Thought Cultures).
The apparently incompatibility of East Asian economic models and the
prevailing international financial regime is paralleled by the
incompatibility of domestic political arrangements (eg in China) with
those required to take a transparent international leadership role (see
Eurocentric Aspirations in a World of Rising
Asian Influence) .
Other observers have suggested motives for China seeking changes in the international political
and economic order.
Show: Example
Examples:
China exhibits enormous complexity and ambiguity. While there
might be debate about its future, its strategic and foreign policy
elites have consistent views. US pre-eminence in the region has been
seen as an aberration. There is discomfort not only with open trade,
freedom of the seas and a rule of law, but with a regional order
backed by a powerful democratic community. Much writing is about how
to dilute US influence. The US seeks to promote China's role as
responsible stakeholder - while China seeks to build comprehensive
national power - and to disrupt US regional leadership through
subversion and 'winning without fighting'. The 'responsible
stakeholder view assumes that China's interests and ambitions are
flexible - though the evidence suggests that its goal is to reshape
the region in accordance with its own preferences. It also places too
much faith in liberal line of thinking - and China's economic rise has
disproportionately increased wealth / resources of state. [1]
WWI saw the emergence of social democracy in Europe as an
alternative to monarchism, while communism emerged to replace Western
imperial colonialism. Communism provided both Russia and China with an
effective vehicle for creating a new society to revive past glories.
But Western imperialism continued after feudal monarchy was overthrown
in China, by establishment of a US style republic until communists
seized power in 1949. Communism failed in Russia in 1991, but
communism with Chinese characteristics continued to prosper in China
because "socialist concepts have always been operative throughout
Chinese history and the import of Marxism from the West did not
replace a Chinese socio-political culture of communal harmony derived
from prescribed social rites and hierarchical relations". Chinese
culture has always placed community at its core, in contrast to
western post-Reformation culture centering on individualism. Confucian
philosopher Mencius warned that a nation operating on profit motives
will always endanger its own wellbeing - with renyi being a
better alternative (loosely meaning observance of proper human
relationships, support for justice, fidelity and humanity - as
embodied in socialist idea). Marxism merely adds a contemporary
dimension to indigenous Chinese socialist philosophy of renyi
that enables China to interact with expansionist Western capitalism /
repulse Western imperialism and resist neo-liberalism. [and much
more interpreting US history] [1]
A long term solution would presumably require the creation of an updated version of the
China-centered imperial tributary system that existed prior to the expansion of
Western influences. This could also be viewed as giving effect to Japan's
WWII goal of creating a 'Greater East Asian Co-prosperity Sphere'.
Show: detaills [incomplete]
Characteristics of the former 'Confucian' International Order- a China-centred tribute trade system
It was a
world within worlds (rather than a universalist global system).
In this
China-centred 'world' within the world: (a) economic activities were subsets
of political relationships between China and its tributaries: (b) major trade
and financial flows were managed by the state - though there were minor
amounts of private trade. Historical
Perspectives on States, Markets and Capitalism, East and West
[incomplete]
Features of such an international neo-Confucian 'world-within-the-world'
might involve:
a China-centered trade / tribute system in which 'tributaries' (who might
be states, ethnic groups or even individual businesses or political leaders) paid
nominal allegiance and gave largely symbolic gifts to China's elites, while
the latter:
controlled that 'world' as the 'middle / coordinating / organizing kingdom' by
facilitating the development of consensus about, and action on, economic
and other options;
Show: the price China's people pay for their elites power
US perceptions of Mao are based on current Chinese elite perceptions of
him. The latter support Mao’s revolution only so far as it provided a
basis for ejecting foreign influences and allowing China’s elite to make
China strong – so its elite can have international influence while the
majority of Chinese people eke out a marginal existence. Mao called such
people the ‘capitalist roaders’ (in that they wanted China to take a
capitalist road to national greatness) rather than a socialist road that
would distribute wealth more evenly – thus frustrating the emergence of
a stratified Chinese elite who could enjoy a concentration of resources
sufficient to wield some power on the international stage (J. P. Franks
in
Customer reviews of Mabo Gao, ‘The Battle for China’s Past: Mao and
the Cultural Revolution’, 2008)
starting by building support on the global margins - noting that
Mao's revolution in China and the Viet Kong in South Vietnam started
by building support in regional areas and using this as a base to
attack the major centres;
those who 'control the world' without democratic accountability or
a rule of law being able gain substantial political and economic
benefits from their central position, eg by:
ensuring that their (ethnic) connections gain economic benefits as the middle-men and source of key
inputs in the arrangements amongst 'tributaries' that are put in place;
requiring others to comply with whatever they want as a
condition for maintaining order. Under East Asian traditions there
is a rule of man - not a rule of law. An agreement (for
example) means whatever (the most powerful) man says that it
means. Order is not ensured by the lawful framework within which
individuals / enterprises take independent initiatives;
primary reliance on social-elite-coordinated (ie power rather than
profit-seeking) economic transactions within and amongst China and its
'tributaries' - though with independent profit-seeking enterprise allowed on the
margins;
rigging domestic markets through elite social networks similar to that used to
orchestrate production, so that favoured (large state-owned or
state-linked) enterprises appear 'profitable' -
at the expense of the rest of the economy - by setting favourable upstream
and downstream prices (see below);
seeking a net current account surplus with the outside world by
suppressing consumption, while being able to handle some current account
deficits by creating special financial institutions and institutions to which
'profit-focused' investments could be attracted by rigging associated
industrial activities through cartels;
perhaps no attempt to create a 'global' system - because of the particularist
traditions and a lack of commitment to general / universal principles and
a lack of management / government methods
that would work with those who don't accept a socially-subordinate position. This
would be a 'world' within the world, not a new global order - though efforts
would presumably be made to undermine the effectiveness of global
institutions that have operated on Western-style democratic-capitalist
rule-of-law principles;
achieving changes by behind-the-scenes activity without public
disclosure or discussion - as debate / abstract analysis is not a favoured
method for problem solving. The 'East' was not seen to be 'mysterious'
for nothing.
The development of a trade / tribute system would not initially result
in an adverse reaction from those being drawn into a 'tributary' / subordinate position
because it would involve the use of 'soft power' methods (see
What is Soft Power?).
Those who seek
to be at the centre of power would: (a) have to be well educated, informed
and in a prominent position; (b) adopt a neutral position in relation to some issue; (c) get
together influential stakeholders with complementary interests in that issue; (d)
encourage them to develop a consensus; and then (e) use state power to enforce that consensus
with the support of the stakeholders whose viewpoints it reflects (perhaps
at the expense of the elite's subordinates and those who might compete with the insider stakeholders) . This
keeps the influential stakeholders happy - as their wishes would be put into practice.
Show: The BRICs Bank Example
The BRICs Bank Example: Creation of (say) the
BRICS Bank (see below) might have involved seeking
a consensus of non-Chinese participants about development funding and
putting the participants' consensus in to place while drawing upon
resources generated within China because it is taken as given that Chinese
people will work hard to achieve nationalistic goals while receiving
limited benefits (eg because financial repression is practiced to direct
resources to production rather than consumption). This also arguably
requires a sense of nationalistic purpose - and in China in recent decades
this seems to have involved gaining revenge for what historically
happened to China, and more recently involves sabre-rattling with Japan.
What the stakeholders whose views were being drawn upon would not see is that such a process steadily increases the
‘coordinator's’ knowledge, power and status – and strong
connections with the most powerful other players. Later they would find
that nothing could be done without support gained by providing respect (and
nominal gifts) to the increasingly powerful and unrepresentative facilitator network.
Developing consensus as a basis for policy involves fairly standard bureaucratic tactics
(as the present writer's
career experience showed). It seems to have
been the method used by elite Confucian bureaucrats to govern 'Asian'
nations (as virtual
'whole-of-society' bureacracies) on behalf of emperors prior to European influence.
Show: Ideological Consequences
Ideological Consequences: Good bureaucrats have no
ideological biases - ie they don't favour 'this' or 'that' policy but merely
seek consensus.
Correspondingly the core
'ideology' of China's 'Communist' regime involves non-intervention and
the rejection of universalist values (ie the notion that anyone would have
any idea what were good or bad for another society). This makes sense if
one's intended method for building an 'tributary' international system
involves being at the centre in developing consensus amongst the most
socially, politically and economically powerful in the region that is
being 'administered'. It does not matter to those who who bring the powerful
groups together what consensus emerges. All that matters to the catalysts
is that they have the status, and thus the power, to do so.
By contrast in the post WWII era, the US often intervened in other countries to promote the
use of institutions built on individual
freedom. Such intervention frequently failed because the cultural
preconditions required for liberal institutions were not considered (eg
see
Establishing Japan's Post-WWII Economic and Political Systems and
Fatal Flaws in relation to Iraq).
However the international system that China aspires to create would not
involve intervention with liberal aspirations. Local elites would be
enabled to exert power in any way they see fit - providing they did not
criticize the way that China's 'princelings' exerted power in
China.
Unfortunately these apparently 'virtuous bureaucratic' methods would eventually
create a monster because they place huge influence in the
hands of mortals who would inevitably abuse it (eg as members of
China's so-called 'Communist' Party did in using their role as economic
catalysts to make themselves and their families wealthy, or as
ethnic nationalists have done at times in espousing the superiority of their
community over all others).
In a democratic environment the 'soft
power' that an effective bureaucracy can develop is constrained by
accountability to the electorate's representative. However abuses of such power are likely in
the absence of that grass-roots accountability.
There have been indications for decades of alternative arrangements
being sought in East Asian to give formal expression to what had been
happening in the region.
claims by leading officials that Japan is a 'non-capitalist market
economy' - which is reasonable as profit-seeking by independent
enterprises (the key feature of
capitalist economies) has not appeared to be the main driver of businesses
in Japan;
reference to the emergence of a 'Confucian union' - based on the
concept of a 'worker caste system' in which bureaucrats / technocrats would
have power which would be different to the 'merchant caste' system in which
capital is the source of power;
China's practice of 'sharing' the protection offered by a current account
surplus with countries that provide inputs to its export industries, whose
economic methods would otherwise result in financial crises;
proposals, led by Japan, for the establishment of a Asian Monetary Fund as
an alternative to the IMF (and the considerable strengthening of that proposal
under the Chiang Mai initiative) which would:
provide a framework for financial and monetary systems in which social
elites enable resources to be directed towards boosting the economic power of
their ethnic communities without serious concern for return on capital from
meeting their people's demands as consumers;
involve shared access to foreign
exchange reserves to
prevent crises associated with withdrawal of capital in any particular
country;
calls by the leader of Japan's newly elected government (of the Democratic
Party Of Japan) for Japan to 'get its identity back' - an identity that did
not traditionally involve Western-style democratic capitalism.
China's responses to the GFC from 2009 were consistent with a desire to create a
new China-centred trade / tribute empire as speculated above. Steps taken had the effect of:
boosting growth within such a potential China-centred 'world' (both in
China itself, in potential 'tributaries' and in developing countries)
presumably in order to strengthen demand for its products from other than the
US (and other 'capitalist' countries);
retaining social-elite control of economic and
financial transactions within such a 'world';
establishing special financial centre and financial institutions -
perhaps so that (hopefully) small amounts of profit-seeking investment to cope
with any net current account deficits that arise can be officially
controlled while giving the impression of financial profitability;
making it harder for anyone (especially the US which has favoured a
different approach) to create an effective global financial system.
China has made no attempt to reform its economic / financial system
on Western principles. Emphasis has continued to be placed on state-owned
enterprises and state banks neither of which are noted for taking
Western-style approaches to profitability seriously - and the environment for private enterprise is very
poor;
foreign banks have started operating profitably in China arguably because
of the same sort of market-rigging by cartels that allows state-owned
enterprises to appear profitable;
significant amounts of China's foreign exchange reserves have been
diversified away from $US. In particular, reserves have been used to: (a) make loans to key
trading partners; (b) acquire businesses; (c) stockpile commodities;
(d) acquire future key energy / commodity inputs; and (e) gain support;
proposals have been presented for the development of Shanghai as a
international financial centre with 'Chinese characteristics' -
perhaps involving regulatory reforms and creating a market for $US denominated
bonds;
proposals exist to upgrade established industrial regions on China's
coast to succeed on the basis of independent innovation - while
transferring traditional industries inland;
the use of the Yuan has been encouraged as an international trade currency
amongst key trading partners;
concern has been expressed about reliance on the $US as the global reserve
currency with SDR's issued by IMF suggested as an alternative. Concern has
also been expressed about the need to rely on US demand;
the Ministry for State Security was reportedly placed in charge of China's
economic dealings - a move which could be expected to dramatically curtail
foreign commercial involvement within China.
Social-elite-coordinated cartels
(rather than reliance on conventional market transactions) seemed to be being put into
place to promote the perceived 'profitability' of state-favoured enterprises and banks
(and thus reduce the perceived risk of financial crises in neo-Confucian economies).
Show: indicators
the massive boost in China's corporate profits / savings
from 2003 that was described by
The
Myth of Chinese Savings;
the pre-GFC balance-sheet health of
Asia's corporate and banking sectors [1],
when this faces
massive cultural obstacles under Western-style business techniques,
claims
of such
rigging by Eammon Fingleton, a close Japan-based observer of the region;
the increased concentration on larger enterprises, and
the credit constraints facing SMEs which the IMF reported [1]
China's efforts in late 2009 to subvert United Nations talks intended to
negotiate an international agreement on responding to climate change indicated an attempt to limit the effectiveness of global
institutions which operate (as the UN has sought to do) on Western-style
political principles and perhaps establish alternative 'Asian-style'
elite-consensus machinery.
Show: explanation
Explanation: In December 2009 it was noted that China's tactics at the
UN's Copenhagen climate change
summit appeared to be aimed at preventing any outcomes being achieved [1].
This reportedly involved:
a complete
refusal to engage in talks;
China-engineered procedural blocking tactics (in conjunction with developing
nations) to prevent political debate on draft resolutions by claiming that
they were a plot to 'kill' the Kyoto Protocol;
the refusal
of China's Premier to participate in talks with the US President - with a
third-rank official substituting;
avoiding
engagement by top political leaders for two weeks by insisting that everything
had to be done by consensus amongst 192 countries;
encouraging
involvement of a hardline Sudanese negotiator who described developed nation's
approaches to climate change as like Nazism; endless rhetoric about historic
responsibilities of the West and rants about the evils of capitalism - which
meant that there was no top-level discussions about practical action.
This is significant because the UN has been
based on Western-style political processes. The latter rely upon debate
amongst representatives as the means of reaching decisions. This is
incompatible with East Asian traditions in which:
entirely different assumptions are made about
the feasibility of reaching appropriate decisions through rational debate (see
East Asia);
political power is associated with NOT making
decisions, but rather with having social subordinates who make them on behalf
of the powerful
(see Pye, Asian Power and Politics).An insistence on
'consensus' (amongst social subordinates) is compatible with these traditions.
While some observers suggest that China's obstructionism merely
reflects an inward focus on its own needs [1,
2], the possibility that China might seek to develop alternative
means for developing practical responses to international issues such
as climate change through consensus amongst those countries whose
elites accept a subordinate status within a China-centered 'tribute'
system should be recognized.
The UN, it may be noted,
has been ineffectual in dealing with global issues in any event (and
for much of the previous decade the US, which originally took the lead
role in setting up the UN, had emphasised unilateral rather than
multilateral action - because of the US's apparent preference for
trying to defeat ignorance on
the battlefield rather than in the academe). China's new efforts to
subvert UN machinery are likely to simply be further justifications
for seeking serious reforms.
China appeared to some observers to be seeking to
establish a position from which it could promote a Chinese-style
international order by endorsing a G2 relationship with
the US as a 'partnership of equals'.
Show: What a China / US 'Partnership of Equals' Means
What a China / US 'Partnership of Equals' Means - email sent 5/6/13
I should like to try to add value to your useful observations about the
aspirations of China’s current leaders to create a G2 group with the US – as a
‘partnership of equals’.
My interpretation of your
article:
Beijing wants a partnership of equals with the US. Xi Jinping will bring a new
Chinese world view to a coming meeting with US president Obama. Five years ago,
China rejected the Group of Two relationship between Washington and Beijing. But
the G2 has now been adopted and re-branded by China. China's administration
under President Hu was seen to be passive, reactive, isolationist and clumsy in
responding to outside world. Deng Xiaoping had advise that 'China hide its
brilliance and bide its time'. Even as Chinese companies and investment spread
worldwide and China's military power spread, China was portrayed as a poor
developing nation. China's new leadership portray a different picture. A more
coherent and assertive foreign policy may be part of a 'great rejuvenation of
the Chinese nation'. US diplomats have had better access to officials than under
last administration - and the latter seem obsessed with getting the US to
acknowledge a new type of great power relationship between equals. There is hope
that China's rise will not be accompanied by friction / war as in the past when
rising powers encounter incumbent superpowers. Focusing on this single
relationship will create friction elsewhere - because by seeking to promote a
relationship of equals with US, Beijing has downgraded its relationship with
others. Cynical Beijing-based diplomats see the 'great rejuvenation' theme as
seeking to re-establish the ancient tributary system that put China at the
centre of the world. Many feel they have been treated to a charm offensive.
China's new G2 initiative implies that China sees all other nations as not great
powers, and thus able to be ignored - and this has significant implications for
Europe
Firstly, I submit that a ‘partnership of equals’ would not simply imply a
relationship as equals between the US and China as nations.
Rather it implies that the autocratic
neo-Confucian systems of socio-political-economy that have been the basis of
rapid economic modernisation and growing power in East Asia (including China)
should be accepted as an equal alternative to the liberal democratic capitalist
international order that the US has championed globally since WWII. Some
suggestions about the profound implications of this are outlined in
China as the Future of the World; What
does an 'Asian Century' Imply? and
The Infantile US vs China Debate. The latter refers, for example, to
fundamental differences in: ways of thinking; whether most importance is
attached to individuals or to their communities as a whole; the relationship
with Japan’s ‘Asian Co-prosperity Sphere’ aspirations in the 1930s and 1940s;
and the critical importance of genuinely understanding such issues.
Secondly, the parallel with Japan’s failed efforts to gain acceptance as a
cultural ‘equal’ in the lead up to WWII should be recognised – as should: (a)
the contest with advocates of Communism associated with the Cold War: (b) the
long term ‘financial war’ that has apparently been under way – which may, or may
not, have had a relationship with the ‘war against terror’ (see
A Generally Unrecognised 'Financial War'?), and (c) the implications of
recent threats of ‘hot war’ emanating from North Korea which is another of the
East Asia’s authoritarian neo-Confucian ‘family states’ (see
'Art of War' Speculations about North Korea's Threats).
Finally, some suggestions about the character of a new China-centred ‘tributary
system’ are speculated in
Creating a New International 'Confucian' Political and Economic Order
(2009+). The latter also refers to the likelihood that countries with
neo-Confucian systems of socio-political-economy (eg Japan and China) will
experience ‘meltdowns’ if they are unable to escape from the liberal
international financial and political order.
John Craig
Efforts were made to popularize a view of
China's autocratic political system as a desirable and effective
alternative to Western democratic models - which, though unique to China
and inapplicable elsewhere, would demonstrate that Western 'universalist'
claims were invalid.
In July 2013 a video presentation by Eric Li was made available which compared what was
called China's 'modified Mandarin' political system with Western democracies.
Show: Outline of Li E., A Tale of Two Political Systems
Outline of Li
E.,
A Tale of Two Political Systems, 3/7/13:
China was
presented at one time with a linear view of history leading through various
stages to collectivist Marxism. It was also presented with a linear view that
saw individualism leading to electoral democracy and free markets. The latter
has been promoted to the developing world. But China did not buy it – and made
very rapid progress despite having a one-party state. The assumption is that
this will be associated with operational rigidity, political closure and moral
illegitimacy. But the reality has been adaptability, meritocracy and legitimacy.
This system is supposed to be incapable of self correction. However China has
had radical change. The Party self-corrected (eg in shifting from lifetime rule
under Mao to leadership changes). Political reform has been seen to lag behind
economic reform, but political reforms have been rapid. In fact the Party is the
world’s leading expert on political reform. It is a meritocratic institution.
Only 5 of 30 people in the Politbureau come from privileged backgrounds. Most
have had to work hard to get to that position. This is possible because of the
role of the little-known Party Organisation Department.- which is its human
resources engine. Recruits rotate through three components namely: (a) civil
service; (b) state owned enterprises; and (c) social organisations such as
universities. These involve separate but integrated career paths. Graduates
start at the bottom, and progress through various levels and across different
functions. Those who perform best are promoted. The top performers move up to
higher officialdom, and perhaps into the central committee. This progression
would take 3-4 decades. This is a modified form of China’s Mandarin system.
Western leaders get to the top without having this sort of experience. Winston
Churchill once suggested that while democracy had problems it was better than
the alternatives – but he had never heard of the Party Organisation Department.
The West assumes that a multi-party system with free elections is best – and
that if a party is not voted in through elections it has no legitimacy. But what
about competency as a source of legitimacy? China was in a bad situation in 1949
when the Party took power. Now people’s perceptions that the future will be
better than the past are very high – in marked contrast to the situation in many
developed countries. This is a real basis for legitimacy. Electoral
democracies (eg US / Europe) are suffering from dismal performance. And
developing countries with electoral systems are still suffering from poverty and
civil strife. Democracy, not China’s one party system, is in most danger of
losing legitimacy. China continues to face massive problems because of the
changes it is undergoing (pollution, population, food safety, corruption).
Critics see corruption as a consequence of the one-party system. In transparency
China ranks 70-80 out of 170 – and is improving. But India, the world’s largest
democracy, is 94 and dropping. 50% of the countries below china are electoral
democracies. Thus election is not the cure for corruption. Over the next 10
years China will surpass US as the world’s largest economy – and have per capita
income near the top of all developing countries. Corruption will be curbed.
Economic and political reform will continue under the one-party system.
Meta-narratives that make universal claims failed in the 20th century
and are continuing to fail. Meta-narrative is the cancer that is killing
democracy from the inside. Democracy contributed to rise of West and the
creation of the modern world. The universal claims that Western elites make
about their political system is the core of the West’s current ills. The West
should spend less time trying to force their system onto others, and more time
on domestic political reform, then democracy would have a better chance. China’s
political system won’t supplant electoral democracy, because (unlike the latter)
it does not claim to be universal (and thus can’t be exported). China’s example
does not provide an example for others, but demonstrates that alternatives
exist. Communism and democracy are laudable ideas, but the era of dogmatic
universalism is over. There is not just one way for government. Universality
needs to make way for plurality.
Observations concerning 'A Tale of Two political Systems'
Eric Li's video presentation acknowledges that
China’s system is neo-Confucian – though interestingly it was described as
‘modified Mandarin’ system (presumably because Mao-era negative attitudes to
Confucianism seem to remain strong at grass roots level in China). It
constituted a semi-official Chinese endorsement of the ‘Asian Co-Prosperity
Sphere’ idea that Japan had promulgated in the 1930s and 1940 – ie a region in
which ‘Asian values’ would prevail (ie universal values / a rule of law /
individual liberty would be rejected in favour of guidance of society as a whole
(ie what can be thought of as 'family states') by intellectual
bureaucratic elites). The present writer's version of this was
East Asia: The Realm of the
Autocratic and Intuitive Ethnic Hierarchy
(in contrast with Western societies that can be thought of as the
Realm of the Rational / Responsible Individual);
The video also illustrates the
traditional way of using information in East Asia (ie to encourage a desired
response by an audience rather than by seeking to enable others to understand –
because there is no belief in universals such as truth). For example the video suggested that
China’s Communist Party had been able to manage political and economic progress
since 1949 (including massive political transformations) on the basis of
competencies gained from a ‘modified Mandarin’ system – even though Mao’s
Cultural Revolution had been
specifically aimed at eliminating those traditions from China on the basis
of their perceived past oppression of China’s people.
The video also illustrates
the role that deception plays in traditional Art of War tactics. The system that
Eric Li describes has presumably been in place since the late 1970 – and yet has
been kept hidden from the external world. In Western societies organisational
strategy will be kept in confidence by (say) companies – but under traditional
East Asian Art of War tactics the strategy and activities of the whole of a
society are non-transparent – in the expectation that doing this will
create domestic advantages and
disadvantage other societies. The need to
respond to this by seeking deeper understanding is obvious;
Many complexities are not revealed by the video (ie it only draws
the Bamboo Curtain aside a bit). For example:
The presentation is unlikely to be an independent individual
view, but rather to be being presented on behalf of China’s so-called
‘Communist’ Party (for reasons suggested in
In East Asia Deals Always Involve Politics ). Eric Li described himself as a ‘venture
capitalist’ – which implies that his role involves arranging finance for, and
providing the commercial nous needed for, start-up enterprises involved with
innovative products. Under China’s system such a persons would presumably be
either employed by, or socially associated, with a state-owned financial
institution - and thus is presumably making a state-sponsored presentation;
It seems that the neo-Confucian methods that have been the basis
of rapid economic development
may have been transmitted to China in the late 1970s by Japan –
though China’s people are still encouraged to view Japan as an
historical enemy perhaps in order to: (a) promote national unity; and
(b) confuse Western observers about what is going on in East Asia. The
way in which the Party Organisation Department is described as
organising a bureaucratic system for staff development and advancement
within China’s so-call ‘Communist’ Party seems very similar to
descriptions of what happens in Japan’s bureaucracy – which is the
centre of neo-Confucian control of Japanese society. During its period
of rapid catch-up growth, Japan also had a one-party state - dominated
by the so-called Liberal Democratic Party (which was anything but);
thus, if any country has the right to claim that it does not seek to
provide an example for others except in the sense of showing that (say
‘modified Mandarin’ / neo-Confucian) alternatives to democracy exist, that
country is Japan, not China - though it can be noted that
North Korea's
official Juche (church'e) ideology also involves: (a) a commitment
to the uniqueness of each society; (b) a rejection of Western
'universalist' notions; and (c) a desire to create a 'family state';
The neo-Confucian methods for achieving economic ‘miracles’ that
Japan pioneered: (a) involved co-opting the community’s savings and using this
to subsidise production so as to gain market share (because an ethnic community
is viewed as a ‘family’ so it is reasonable for the ‘parents’ the use its
resources as they see fit); (b) thus required that domestic demand be suppressed
to avoid having to borrow in international financial markets; and thus (c)
also depended on the willingness and ability of trading partners to support that
macroeconomically unbalanced process of development by tolerating large current
account deficits and escalating debts. Prior to the GFC the US long did this in the expectation that countries such as Japan (and even China)
would eventually come to 'play by the global rules';
Family wealth has not been the basis on which people gained
positions within the meritocratic bureaucratic hierarchy that China’s
‘Communist’ Party became in the post-Mao era. However the positions that they
gained have often been exploited to accumulate family wealth (at least up to the
present time) – thus creating the world’s most inequitable distribution of
wealth;
Democracy and universal values are not the only Western values
that China’s ‘Communist’ Party has required that its people give up (see
The Infantile US vs China Debate). Individualism, understanding /
rationality, a rule of law and social equality also had to be sacrificed;
Potential political instability in China is illustrated by the
Bo Xilia case. The latter involved giving expression to the aspirations for
equality amongst China’s people that had characterised the Mao era, but were
eliminated by the subsequent non-transparent introduction (from Japan?) of the ‘modified
Mandarin’ / neo-Confucian system;
Western societies have experienced difficulties in recent decades
not only because of
undoubted limitations of traditional democratic institutions, but in part because of
the disruptive effects of the distorted financial systems and macro economically
unbalanced (ie domestic demand deficient) economies that have characterised East
Asian Confucian systems (eg see
Structural Incompatibility Puts Global Growth at Risk). This problem was
poorly understood because it arose behind a pretence of quite different systems
of political economy – ie democratic capitalism in Japan’s case and Communism in
China. The global financial crisis that resulted in part from international
financial imbalances has had adverse economic effects particularly in the US and
Europe – but has not yet had such effects in China because high levels of fairly
wasteful state spending and lending by state-linked banks were put in place to
sustain growth and political stability in the first phase of the GFC. However a delayed effect is likely to
hit China quite hard in the not too distant future because the world's
credit-bubble must be just about the burst (see
Debt Denial: Stage 3 of the GFC?
);
China currently seems to face difficulties as a consequence of
the ‘modified Mandarin’ / neo-Confucian methods that have been used to
accelerate early-state economic development but are now likely to generate even
worse troubles than they created for Japan after 1990 (see
China: Heading for a Crash or a Meltdown). One illustration of the
pending economic debacle is
China risks deflation trap as true GDP crumbles. While there is no
guarantee, there are many increasingly informed observers who would cast doubt
on Eric Li’s forecasts for the future;
The plurality (of political systems) that Eric Li concluded by
endorsing globally is not something that neo-Confucian systems appreciate
domestically – as the consensus reached by state-linked social elites will tend
to be enforced by the bureaucratic state, and independent / different
initiatives will be neither welcomed nor supported (and will be ruthlessly
suppressed at times).
In late 2013 China sought to promote a so-called 'Maritime Silk Road' concept to
develop a 'partnership of equals' relationship with ASEAN countries that
could potentially be like the China-centred trade-tribute regime that
existed in Asia prior to Western expansion.
Your article refereed, amongst other things, to China’s
ambition to create a Maritime Silk Road as the basis for a common destiny for
China and ASEAN.
“In
a recent speech during the UN General Assembly, Foreign Minister Wang Yi
enunciated the crux of Chinese diplomacy as being focused on multilateral
participation between developing countries based on equal footing, and forging
new international systems around the principle of non-interference and win-win
partnerships. In other words, countries like Malaysia and Indonesia have
more incentive doing business with Beijing – which invests billions in
infrastructure deals to promote transportation, health services and education
–rather than being locked into to the over-financialized,
sovereignty-eviscerating terms and conditions of the Washington consensus and
the TPP. As the geopolitical landscape develops in Southeast Asia, it will soon
be clear whether countries will play along with Obama’s China-containment
doctrine or reject it. Much of that equation depends on how Beijing can maneuver
its hairy territorial disputes in the South China Sea.
Obama’s Asia Pivot vs. Xi’s Maritime Silk
Road
Chinese President Xi Jinping became the
first foreign leader to address the Indonesian Parliament on his trip to
Jakarta, where he proposed a common destiny for the China-ASEAN community by
constructing a new Maritime Silk Road of the 21st century. In his address, Xi
made it clear that territorial disputes in the oil-and-gas rich South China Sea
should be handled through dialogue and trust-building, invoking the Indonesian
proverb, “Money can be easily earned but not friendship.” The thrust of
Xi’s message is that mutually beneficial exchange trumps military disputes, and
that comprise is possible. Xi also pledged to boost trade with ASEAN to a
mammoth US$1 trillion by 2020 and partake in mega-projects such as the
construction of the ambitious 90,000-hectare dam in West Java; he also cut US$30
billion deals in mining and port construction with the Indonesian president,
Susilo Yudhoyono, and secured contracts for Chinese companies to build the
long-overdue Jakarta monorail project.”
Some speculations about the way in which ASEAN countries
(and perhaps others) might be linked into a China-centred ‘empire’ were outlined
in
Creating a New International 'Confucian' Economic and Political Order?
(2009). This referred to the recreation of tributary relationships similar to
those that existed in Asia prior to Western expansion – which presumably
parallels Japan’s ‘Asian Co-prosperity Sphere’ ambitions of the 1930s.
While China’s Foreign Minister referred to international
relationships being on an ‘equal footing’, it is worth noting that equality is
not a feature of China’s domestic political system. That intrinsic social
inequality is the core of
political disputes surrounding Bo Xilia and the Chinese regime’s fear of
political instability / revolution because
ordinary people apparently favour a return to the social equality of the Mao era.
The ‘deal’ that China’s president is offering ASEAN countries seems similar to
that that the ‘so called’ Communist Party offers China’s people – accept our
leadership / dominance and we will make things happen behind the scenes through
our social networks and connections (which in the case of
ASEAN nations would presumably include the Chinese Diaspora that often have
economically dominant roles), but don’t expect to understand / know what
is going on.
I would be
interested in your response to my speculations.
The BRICS countries (Brazil,
Russia, India, China and South Africa) were said to be seeking the creation of of an
international order in which the United States would not be dominant [1].
Show: CPDS comment
[CPDS Comment: In the latter it was suggested that: "The principle of non-intervention
has clearly welded the otherwise heterogeneous countries together."
'Non-intervention' is a primary feature of current Chinese (and
even more of North Korean)
ideology as a reflection of the East Asian view that the West's traditional perception that there are
universal values and principles is invalid. The fact that this is seen to
be the unifying factor in the BRICS group strongly suggests that it is
China that it is drawing this group together and using traditional
Confucian / bureaucratic consensus forming methods to do so. This also
implies that the BRICS group would be an association of social / political
elites from within the countries involved - rather than one that serves
the interests that their communities generally would endorse. Claims of
'non-intervention would be spurious - because while there would be no
attempt to influence the nature of other's political and economic
systems, there would be significant direct intervention (eg by the
Chinese state) in other countries economies].
The Shanghai Cooperation Organisation was emerging as a potential
huge trade bloc. It involves China (the world's largest trading nation)
with Russia and four former Soviet state - while Afghanistan, India,
Iran, Mongolia and Pakistan gained observer status (with a view to later
membership) in 2010 [1]
China proposed the development of its own version of the World Bank
to rival institutions that are under the sway of the US and the West
(including the Asian Development Bank). The Asian Infrastructure
Investment Bank would start with $100bn capital. Capital would be
provided by China. Interested countries included oil-rich Middle Eastern
countries, the US, India, Europe and Japan. [1].
A new BRICS Development Bank was established (with $100bn
capitalization) which was modeled after the Washington DC - based World
Bank and the IMF which emerging economies have seen to be too Western in
their approaches to economic assistance [1].
Some insight into where the power would reside in the BRICS Development
Bank is indicated by the reported intent that the Bank's board of directors
would consist of senior bureaucrats from each participating country [1].
Show: BRICS Bank: Another Step in Creating Alternatives to Liberal Global Institutions?
BRICS Bank: Another Step in Creating
Authoritarian Alternatives to Liberal Global
Institutions? - email sent 18/7/14
This article
quoted you as suggesting that this World Bank / IMF alternative has been
established because the latter institutions are too ‘Western’. Might I suggest
that being too ‘Western’ includes imposing constraints on authoritarian social
elites in various countries that the latter find inconvenient?
My interpretation of the above article in which you were quoted: A
new BRICS Development Bank was established (with $100bn capitalization) which
will be modelled after Washington DC - based World Bank and the IMF which
emerging economies have seen to be too Western in their approaches to economic
assistance.
Rather I suggest that it
should be seen as yet another component in a likely effort to create a new
international China-centred trade-tribute regime like that under which Asia was
administered prior to Western expansion (see
Making Progress? in Creating
a New International 'Confucian' Financial and Political Order, 2009). The
latter suggests that attempts to create such an alternative international
financial and political order would be motivated by the urgent need to avoid the
imminent risk of failure that the
non-capitalistic neo-Confucian systems in East Asia face under a global
system based on liberal (ie democratic capitalistic) institutions.
I would be
interested in your response to my speculations.
John Craig
The BRICS groups of emerging powers was seen to be
fighting the (Neoliberal) World (Dis) Order via a new development bank
and reserve fund to offset financial crises.
Show: BRICS against Washington Consensus
The BRICS groups of
emerging powers (Brazil, Russia, India, China and South Africa) is
fighting the (Neoliberal) World (Dis) Order via a new development
bank and reserve fund to offset financial crises. The process
started in Yekaterinburg in 2009 and has now led to the BRIC’s
counter-punch against the Bretton Woods consensus (ie the IMF and
World Bank) and Japan dominated – but US responsive Asian
Development Bank. The BRICS Development Bank has $US50bn in
initial capital – and will invest in infrastructure / sustainable
development not only in BRICS countries. Brazil’s BNDES is the
model. With additional Beijing / Moscow funding this new
institution could leave World Bank in the dust. It would provide
access to real savings rather than US government’s printed green
paper without collateral. And there is also a $100bn pool of
reserve currencies to counter risk of capital flight. The
development bank will be headquartered in Shanghai. This goes well
beyond economy and finance – and is essentially about geopolitics
– offering emerging economies an alternative to the Washington
consensus. This is a key element of emerging China-Russia
alliance. Russia is pushing for all dealings in South America to
bypass the $US. Putin’s writing off Cuban debt had a significant
impact. Xi Jinping is also on tour promoting south-south
integration. The Russia-China commercial / diplomatic initiative
fits the concerted push towards a multi-polar world. However it
will be a lot of work for the BRICS to project a productive model
independent of casino capitalism speculation model – which is
still recovering from the 2007/08 crisis, and faces a financial
bubble that has not burst for good. The BRICS’ strategy is a sort
of running constructive criticism of capitalism; how to prevent
the system perennially financing the US fiscal deficit and global
militarization. Argentinian economist, Julio Gambina, emphasizes
the need for independence. Claudio Gallo (La Stampa) highlights
how neo-liberalism is producing a disastrous anthropological
mutation which threatens global totalitarianism. Argentina is
imprisoned by a chronic foreign debt crisis unleashed by the IMF
40 years ago – and now perpetuated by vulture funds. The BRICS
Bank and reserve pool as an alternative to IMF and World Bank
might allow many emerging nations to avoid a similar fate. The
BRICS strategy is pointing the way. [1]
Claims were made about China's successes in establishing
itself as the center of a new international order in dealing with
European issues, while indicating some nervousness about the
implications.
Show: outline
China is becoming the world's largest economy. At the same time the US has
revealed a major strategic weakness in managing the Iraqi crisis through methods
that would require the world to remain under US tutelage. This indicates a tilt
from a US world to a Chinese world. China's emergence as a player was initially
under the radar in Ukrainian crisis. Political sanctions against Russia forced
it to sign the Russian-Chinese gas agreement on disadvantageous terms. Currently
China's PM is on an official visit to Europe and Russia offering contracts,
investments, business opportunities and a real Marshall Plan for economies
damaged by the Ukranian war. The City was saved from bankruptcy by becoming the
major center outside China issuing Yuan bonds. The ECB is beginning to consider
adding the Yuan to its international reserves. The coming ASEM summit in Milan
will connect Europe and Asia while providing a path to solution of the Euro
crisis, the Ukranian crisis, the Euro-Russian crisis and the global systemic
crisis. The success of this meeting will demonstrates the difference between
alliance with the US (which primarily leads to war) and with Asia (where concern
is with economic recovery). This should be the death knell of the transatlantic
treaty (TTIP). Europe and the world should welcome the emergence of a new boss
on the international scene - while recognising the need to maintain
independence. The emergence of a multipolar world is resuming - though it has
been more painful and more Chinese than would have been anticipated [1]
It was argued that a new world order dominated by the BRICS was
emerging - without pointing to the lack of any principles behind that
push for power.
Show: Some Thoughts on the 'New World Order'
Some Thoughts on the 'New World Order' -
email sent 18/10/14
Your
article suggested that a ‘new world order’ is being created based on the
BRICS. I would like to suggest the need for a close examination of how that
‘new world order’ is being created, and what this would imply in terms of
how it would operate in future.
My Interpretation of your article: The
IMF's annual report confirms that the future belongs to the BRICS with western
economic power declining rapidly. The IMF suggests that China is now the world's
largest economy in PPP terms. Change has been very rapid. In 1990 when the
Soviet Union was collapsing the West stood triumphant. The G7's GDP was $12tr
more than that of the seven largest emerging economies. Now the position has
reversed. In 2005 it was predicted that China would not overtake US until 2005.
And by 2050 it is expected that India's economy will be bigger than China's with
the US a distant third. Russia has now exceeded Brazil and is not much behind
Germany. Given this power shift from West to East, there is a need to change
geo-political hierarchy that has existed since WWII. Reforms are needed to UN,
IMF and World Bank. India's PM argues that it is ridiculous for Britain and
France to by on UN Security Council while India, Japan and Brazil are outside.
IMF shareholding is equally bizarre. IMF realizes that US refusal to allow
reforms endangers the fund. Defeatism and angst has set in in the West. The rise
of the national security state and corporate triumphalism combined with rising
wealth and inequality has reduced government's power to function domestically
and impose imperial power elsewhere. A Third World country is emerging unchecked
within a first world one - a powerless America within a global superpower.
The US's spluttering morale is having a domino effect on the rest of the West -
and its Vassals. The growing economic power of emerging economies gives them the
foundations to establish a new order independent of western international order.
The West will continue to prosper but its ability to steamroller others are
over. The gap in living standards is closing quickly. By 2050 the world's 10
largest economies will all be currently emerging economies - with the sole
exception of the US
Serious consideration needs to
be given to how such as system would work. Mao’s Cultural revolution in China
was apparently
directed towards purging Confucian influences as they were perceived to have
been the basis of centuries of oppression of China’s people. It has
recently
been claimed that China is now much like it was in 1911 – and the social
inequalities this implies have been the basis of political friction in China. It
is also worth considering what the people of Hong Kong face as they are
pressured to become merely another part of China (see
China:
No Turning Back Now????).
I would be interested in your response to my speculations
Regards
John Craig
Russia unexpectedly decided on a
non-interventionist approach to east-west conflict in the Ukraine - which suggested
that China's preferred approach (ie simply doing deals with local elites
rather than trying to encourage favoured political and economic systems
elsewhere) might be gaining ground in the BRICS
group.
There was controversy about whether it would be in Australia's
interest to join China's proposed Asian Infrastructure Investment
Bank. Some saw this as economically and politically sensible, while
others were concerned about the implications of thereby facilitating
China's pursuit of its strategic interests.
Show: observers' views
Australia has baulked at signing up to a powerful new Chinese development
bank because of concern by government that this could be used to expand China's
strategic influence in the region. There have been 21 signatories as founding
members. Australia was asked by US to stay out, but the issue was subject to
earlier uncertainty. The Treasurer had emphasised the economic benefits, while
the Foreign Minister emphasized strategic and governance issues. China has been
unable to provide assurances that prevailing governance standards would be
maintained - thus undermining transparency and governance standards in
developing countries. Peter Drysdale (ANU) suggested that Australia would be
crazy not to sign up - for strategic, economic and political reasons [1]
Australia's former ambassador to China expressed concern about
Australia not signing into the new AIIB. Concerns about governance
should be fixed by being involved. It is not unreasonable for China to
want new international arrangements that go beyond those in place when
the ADB was created. US raised concern about governance, environmental
standards, debt sustainability and whether a new institution in parallel
with ADB was needed. Nev Power (Fortascue Metals Group) argued that
Australia is part of Asia and needs to tolerate different ways of doing
things. Mr Raby argues that China's government has achieved 'finesse' in
managing Hong Kong riots - which was a big improvement on the situation
25 years ago. Australia should not take sides on political issues in the
region [1]
Cabinet's national security committee found against joining the new
China-dominated Asia bank - despite Treasury support for doing so.
PM believes that Australia should join a new multilateral regional bank
- but not one run / dominated by Beijing. China is unwilling to change
its proposal to comply with that. Defense minister had argued that China
could convert financial power into direct military advantage in
vulnerable nations close to Australia. The key question is whether the
proposed bank is an instrument of Chinese national interest or a new
multilateral facility for the region. Defense minister opposed joining
an institution in which Australia would have no say in how funds were
invested [1]
There are significant questions about the AIDB (eg how it would be
governed, whether it would be used to pursue narrow political objectives
and what environmental / labour standards will apply). As China would
have dominant voting and governance arrangements within AIDB this issue
matters. In the past Beijing has offered loans as development assistance
with political and strategic strings attached. The US's role is accepted
in Asia because it is viewed as an impartial shaper of rules and a
provider of opportunity. However by staying outside the AIDB the US (and
others) have missed the opportunity to change the AIDB from within.
China has long frustrated ASEAN efforts to establish a binding code of
conduct over maritime disputes in the South China Sea - but it had to be
in ASEAN to do so [1]
Show: The Future of the Asia Pacific
The Future of the Asia Pacific - email sent 30/10/14
Craig Isherwood
Citizens Electoral Council of Australia
I should like to suggest for your consideration that the
issues involved in evaluation of the Asian Infrastructure Investment Bank (AIIB)
are somewhat more complex than the above article indicated.
My
Interpretation of that article: If
Australia’s government were acting in the national interest it would join the
AIIB. The latter will direct $100bn pa into new infrastructure in the Asia Pacific.
The US heavied Australia not to join. Instead Australia is pushing ahead with
free trade death pact – the Trans Pacific partnership (TPP) – which excludes
China, and elevates the demands of multinationals above national governments and
laws. . Obama represents the City of London / Wall Street financial oligarchy.
Faced with the prospect of a complete financial meltdown the Anglo-Americans are
desperate to preserve their global hegemony. The AIIB should be compared with
the TPP. China proposed the AIIB to copy the process that allowed China to become
the world’s biggest economy – in a way that can’t be suppressed by
Anglo-American institutions. The AIIB will facilitate infrastructure investment.
20 countries signed up. The AIIB will intermediate between investors and
projects – thus making financing straight forward. Little is known about
the TPP. Leaks suggest that it would enable corporations to sue national
governments. 12 countries around the Pacific are involved in negotiations. China
was not invited – indicating that the TPP is part of Obama’s containment
strategy.
Your article highlighted the fact that the Asia Pacific
faces a choice (which is illustrated by the AIIB) between the democratic
capitalist methods that have been the basis for global political and economic
affairs and a supposedly ‘Asian’ alternative which China is currently seen
to be taking the lead role in promoting. While I have no real idea what the TPP
envisages because reliable information is not available, I would like to suggest
for your consideration that the option that the Asia Pacific is being offered by
China is a little like that facing the citizens of Hong Kong in relation to
whether or not their individual freedoms are valued and respected (see
China:
No Turning Back Now????).
Some suggestions about the type of ‘soft fascist’
international order that China is seeking to promote (through the AIIB and many
other initiatives) are suggested in Creating
a New International 'Confucian' Financial and Political Order. However the
issues are not simply of relevance to the Asia Pacific – but in many ways
involve the future of the world. Some overview suggestions about those issues
are outlined in Towards
a New Economic Understanding.
The latter suggests that the alternative to democratic
capitalism that is on offer involves what can best be described as a
‘bureaucratic non-capitalist’ system of socio-political-economy. Amongst
other things the latter involves investment of ordinary people’s savings by
the cronies of bureaucratic social elites with little regard for return of, or
return on, ordinary people’s savings. Rather the goal of investment is to
increase the power of the ethnic community and its elites in particular. This
has been the
basis of economic ‘miracles’ in East Asia – but has left countries
using that model at risk of financial, economic and political crises (eg see
Heading
for a Crash or a Meltdown?). China is now seeking to internationalize that
system out of desperation (eg to create a system that, amongst many other
things, would allow the elite’s nationalistic cronies to invest ordinary
people’s savings through the AIIB with little regard to return on, or return
of, their savings). This is presumably what US and Australian government
expressions of concern about governance standards and transparency amount to.
The fact that China
seems to have recently announced a 100% ‘bail-in’ by those whose savings
have found their way into the poorly considered infrastructure investments by
China’s local governments and shadow-banking system (investments that have kept China’s
economy afloat since the GFC started) illustrates the risks that China’s
ordinary citizens face in such an environment.
I would be
interested in your response to my speculations
John Craig
Show: Looking at the AIIB in Context
Looking at the AIIB in Context - email sent 6/12/14
Your article
on the Asia Infrastructure Investment Bank proposal was very useful. However I
should like to submit for your consideration that the AIIB needs to be
considered in a broad strategic context, rather than by just considering how it
might work if everything goes well.
My
Interpretation of your article: 21
countries joined the AIIB. Australia has moved from rejection to joining if
World Bank style controls are introduced. Australia needs to be sensible about
this AIIB is not a traditional multilateral bank. China wants to see it judged
on the projects it delivers, rather than the causes it promotes. Australia needs
to better understand the AIB and can do this by considering how China now funds
infrastructure. The AIIB would invest both debt and equity into developing
market infrastructure projects . It would be located in Beijing with most
capital provided by China. The AIIB would be overwhelmingly a Chinese
institution, and Australia needs to consider whether international membership is
just window dressing. However it seems that China wants genuine member
involvement – and to create an international platform that delivers projects
efficiently and competes with existing multilaterals. It also wants to
internationalize the RMB and help its companies invest overseas. China hopes to
thereby increase its own soft-power in the region and that needs to AIIB to be a
credible, representative and respected organisation. The AIIB might be a
combination of the China Development Bank (CDB) and the Asian Development Bank.
The CDB is China’s main policy bank – and (like the AIIB) would be funded by
the Ministry of Finance. It involved in infrastructure in Asia and elsewhere. It
is more efficient than the multilateral banks but less transparent and less
restricted by political and environmental checks. ADB is the regions key
development bank – which is transparent, has sound political / environmental
checks – but is slow and frustrating in providing funding. A combination
might be beneficial. Australia’s concern would be having enough ADB in the
mix. Australia could pay a useful but limited role in framing the AIIB – and
would have to accept that it was not a multilateral bank – for good and ill.
Strong policy banks are essential to deliver projects in developing markets –
as they are less likely than ordinary banks to be affected by defaults. The US,
China, Europe and Korea all have policy banks – though Australia does not.
China will probably seek to have AIIB member equipment used in AIIB funded
projects. Funding cuts are reducing the role of the multilateral banks.
Recessions and regulatory controls have seen commercial banks downsized in
developing markets. Developers seeking funding with a political risk fix have
limited choices. The AIIB may provide a good balance between adequate controls
and efficient deployment of funds. If Australia is not involved, where will it
be in the region’s infrastructure projects?
facing increasingly severe
risks of financial and political
crises (eg related: (a) to unsustainable
debt-driven growth in recent years
especially for real estate and infrastructure; and (b) a
grass-roots
desire for social equality that is incompatible with the ‘neo-Confucian’
hierarchy through which East Asian economic ‘miracles’ have been
orchestrated);
attempting to head
off those risks before they become crippling by both: (a) domestic changes; and
(b) stimulating (through the AIIB and numerous other vehicles) an international
political and economic order that would be more compatible with the
‘bureaucratic
non-capitalist’ institutions that have contributed to China’s rapid growth
and current financial and political risks than the liberal Western-style
international order that has prevailed since WWII.
In considering
the AIIB from that perspective it is necessary to recognize that: (a) China will
not necessarily survive its incipient crises without severe setbacks; and (b)
there are major problems associated with the ‘policy banks’ that have been
features of East Asian economic ‘miracles’. ‘Policy’ has included
industrial and economic development (not just infrastructure). The limited
concern for profitability in providing national savings to state-linked
enterprises (see evidence)
has arguably: (a) provided a generally
unrecognized subsidy to rapid growth; (b) had a damagingly
destabilizing
effect on the global financial system; and (c) laid the foundations of a
likely Chinese financial crisis like that which Japan suffered after its
debt-binge in the 1980s.
There is
little doubt that China wants the AIIB to be an effective institutions and
(along with other initiatives) to increase China’s ‘soft power’. Moreover
it would undoubtedly be more interested in making projects happen than promoting
(abstract) ‘causes’. Those features are part of traditional ways of doing things in
societies with an ancient Chinese cultural heritage just as much as are: (a)
control through authoritarian hierarchical social networks; and (b) disregard of
abstract notions such as 'profitability' in the use of national savings.
I would be
interested in your response to my speculations
John Craig
It was pointed out that China would have the right to veto decisions by
the proposed AIIB [1]
- ie China would have total control of anything that the AIIB did.
It was noted that China had allowed foreign investment
in certain types of fixed assets - without pointing to the fact that any
such investments would be subjected to strict supervision by China's authoritarian state.
Show: China Opens it Doors to Private Capital - But Not to Independent Initiative by Citizens or Investors
China Opens it Doors to Private Capital - But Not to Independent Initiative by Citizens or Investors - email sent 3/11/14
Your article pointed to the fact that foreign investors are
to be allowed to invest in certain types of fixed assets in China. However it
did not point to the fact that any such investments would be subjected to strict
supervision by elites connected with the Chinese state, and that the benefits
associated with private initiative would thus not be available to either
investors or to the Chinese economy.
My
Interpretation of your article: The past three months have been
impressive in China. Despite a short-term cyclical downturn (eg declining
manufacturing / industrial output; problems in property investment; and weak
export demand), there has been the greatest leap forward since Deng Xiaoping’s
reforms in 1978. 130 sweeping reforms have been announced – including a
commitment to stable growth and quicker reforms. Operation of foreign hospitals
and private oil importers have been allowed, as has private capital
participation across the economy (especially ‘fixed asset investment’ in key
sectors). This provides opportunities for state-subsidized investment in
health-care, education and urban infrastructure. SOEs are also allowed to sell
assets / equity to foreign investors to finance restructuring (and thus
deleverage economy). Renminbi qualified foreign institutional investors (RQFII)
can take advantage of these opportunities. However the Shanghai-Hong Kong
Connect program (which would have allowed global investors direct access to
China’s A-Sharemarket) has been indefinitely delayed. China faces the same
problem as the West – ie stimulating growth / innovation through enterprise /
innovation without risking inflation / loose monetary policies / market
manipulation. China’s ‘new normal’ seeks productivity growth,
technological advancement and consumption-led growth driven by the services
sector. China’s housing market is still critical to economy (at about 15% of
GDP). It has slowed (which has adversely affected commodity prices) but is
expected to recover. China’s provinces are now allowed to issue bonds –
rather than rely on bank lending (and this provides other opportunities for
global investors). Confidence in China’s high-yield bond market has been
restored – and the British government issues 3bn yuan of British Government
bonds denominated in renminbi. The RBA should do something similar.
There is no doubt that China has been under a huge amount of pressure for
reform (especially of its financial system) – eg see
China:
Heading for a Crash or a Meltdown
(2010+).
Your article outlined various ways in which foreign capital would be
encouraged to enter China (hopefully without risking inflation, loose monetary
policies or market manipulation). However in relation to this it needs to be
noted that:
East Asian societies with an ancient Chinese heritage have
difficulties operating in Western-style financial systems (see
The
Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems,
1998). The latter referred to: fundamental differences in the way information is
used; economic goals that emphasise ‘power’ rather than financial returns;
the inseparability of economic issues from questions of social / political
power; and the lack of appropriate legal systems;
The ‘bureaucratic
non-capitalist’ systems of socio-political-economy that have been the
basis of post WWII economic ‘miracles’ in East Asia have involved mobilizing
national savings through state-controlled financial institutions and providing
this to state-linked entities that were presumed to have nationalistic rather
than capitalistic motivations (ie to maximize market power with limited regard
to return on / return of capital);
Those ‘non-capitalistic’ systems have been able to avoid
financial crises only by financial repression (ie directing national savings to
increasing production, rather than to consumption – eg see Mikuni’s
Why
Japan can't deregulate its financial system, 2000). This has resulted in
international financial imbalances that (amongst other things) required that
their trading partners be willing and able (eg by adopting easy money policies)
to sustain the large current account deficits and rising debts needed to
compensate for the demand-deficits in the ‘non-capitalistic’ systems (see
Structural
Incompatibility Puts Global Growth at Risk, 2003 and Impacting
the Global Economy, 2009);
As loose monetary policies have created adverse side effects and
have reached their ‘use by’ date, it has been becoming critical to deal with
the global difficulties posed by East Asia’s non-capitalist systems (eg see
Towards
a New Economic Understanding).
In response China has apparently sought to:
Stimulate the development of a new international order (in
competition with liberal Western-style international institutions) that would be
something like that which existed in Asia prior to European expansion and would
be similar to China’s domestic ‘bureaucratic non-capitalist’ order (eg see
Creating
a New International 'Confucian' Financial and Political Order). For example
an Asian Infrastructure Investment Bank (AIIB) has been established which will
operate under Chinese government control without any assurance of financial
transparency or that the AIIB would not be used to pursue nationalistic
objectives (eg see The
Future of the Asia Pacific);
encourage foreign investment in entities that would be strictly
controlled from China such as those nominated in your article. The scope for
independent initiative by investors (eg by establishing or gaining control of
enterprises and directing them towards profitable opportunities) would remain
very limited – just as it has been in Japan. Though (as
Fingleton
argued) selective regulation by the state and market rigging by cartels can
allow favoured undertakings to be ‘profitable’ at the expense of the rest of
an economy, where there are serious constraints on the pursuit of net
economy-wide profit, it is unlikely that distortions associated with domestic
financial repression and large structural international financial imbalances
could be avoided. The case of Alibaba (which has recently been floated in the US
and involves access to the Chinese e-commerce market through an entity whose
governance arrangements are obscure and unable to be challenged by those who are
merely investors [1,,
2,
3])
arguably needs to be considered in this respect.
I would be
interested in your response to my speculations
John Craig
China seemed to be promoting various initiatives through an APEC leaders summit that appear to
involve an extension into the international arena of the bureaucratic
and financially-undisciplined methods that have been the basis of its
rapid economic development, and of its consequent risk of financial,
economic and political failure
Show: If China is Almost Broke How Can Chinese Investment Save Australia?
If China is Almost Broke How Can Chinese Investment Save Australia? -
email sent 6/11/14
As I interpreted it, your article suggested both: (a) that
China has massive financial problems because of undisciplined large-scale
investment of borrowed money; and (b) that Chinese investment in Australia might
help compensate for the adverse effects of the failure of an expected
commodities’ boom. I can’t see how both of these can be true.
My
Interpretation of your article: It has
been a long time since Australia experienced what is now happening to its
exports - an enormous rout. Demand is falling / stationary while supply is
exploding. $A could go to US75c and bring on recession. One immediate result has
been low wages growth. But there could be real problems in 2015 unless
commodities’ demand rises. China is Australia's biggest market. While it will
try to keep demand high, it is in trouble. Province after province are in deep
financial trouble and the banking system is cracking. The GFC resulted from
similar banking problems in the US. China can't repeat the enormous
infrastructure-driven commodity demand growth of recent years - because it was
funded with borrowed money and this can't continue. China's problems are at the
heart of the commodity rout in iron ore and coal. This is compounded by problems
in Europe and the fact that, while US is doing well, this can't drive the rest
of the world. On the supply side, low cost producers are raising production to
try to drive out high-cost producers. Possible options to reduce Australia's
problems could be Chinese investment on the East coast and a further rise in
tourism.
As far as I can see China has been heading for serious problems that are
largely (but not only) financial (see
China:
Heading for a Crash or a Meltdown, 2010+). These problems seem to be
a bye-product of the ‘bureaucratic
non-capitalistic’ system of socio-political-economy that have been the
foundation of economic ‘miracles’ in East Asia (and which led to a financial
crisis in Japan in about 1990 after it also had an undisciplined
bureaucratically-driven investment boom in the 1980s).
China
will host an APEC leaders’ summit in November 2014 with an emphasis on
economic reforms, connectivity and infrastructure. China's president will
advocate an open economic pattern in Asia-Pacific and on building Asia-Pacific
partnerships. An APEC information exchange will be advocated to increase
transparency amongst US-Led TPP members and the China-led Regional Comprehensive
Economic Partnership members. China has also launched massive growth-driver
projects for the region: the rebuilding of the Silk Economic Belt and 21st
century Maritime Silk Road and the Asian Infrastructure Investment Bank. China
will also push for a massive free-trade treaty (Free Trade of the
Asia-Pacific) (China
to push for APEC Information exchange, BRICS Post, 5/11/14).
It was increasingly suggested that China was seeking to
create an new international order.
Show: examples
Xi Jinping has faced serious domestic and foreign policy
challenges - and has put a lot of effort into a domestic
anti-corruption campaign and enhancing China's international image as
a major country and regional leader. He is promoting the 'China dream'
(a great revitalization of the Chinese race). The CCP announced its
endorsement of a noble-minded emphasis on peace, tolerance,
international trust, justice and cooperation. Yet it has also
emphasized building powerful armies in accordance with China's status
to be able to defend its maritime resources and build a strong nation.
A delicate balance exists between cooperation and hard-line foreign
policy. As long as China's priority is to be a great power, defense
will be prioritized. China became the world's second largest economy
10 years ago and has rapidly strengthened its military muscle. Some
argued that China's approach of biding its time while strengthening
itself is no longer needed. China's shift from passive diplomacy was
first obvious in relation to Japan. A clearer vision of China's vision
for the 21st century international order emerged from its proposal to
US for the formation of a Group of Two (G2). There is a big difference
between the way China has dealt with Japan and the US. However the
more China emphasizes the 'China model' and the theory of 'China's
uniqueness' the more it conflicts with universal, widely accepted
concepts of international society. The world may not accept the 'China
model'. China took a similar path to other developing nations in
modernizing and industrialization. If it agrees to develop the current
international order, rather than trying to forcefully create a new
international order, it will be welcomed. A former Chinese president
pointed to the disadvantages of the injudicious use of force - and
this is in line with China's emphasis on cooperation since the end of
the Cold War. He advocates an international strategy in which China
should contribute from the universal perspective - rather than in
terms of theory of 'China's uniqueness'. [1]
[CPDS Comment: 'Soft power' methods (rather than
military force) are the primary feature of traditional East Asia 'Art
of War' strategy and seem to be preferred in creating an international
order that is radically different from the post-WWII 'liberal'
international order - see above]
China is engaging in diplomatic diversification to escape the old
architecture of multilateralism. In the past China worked in that
system, but now sees that it mainly benefits the US and its allies.
Against the US-EU world of multilateralism, China has founded a
parallel world (eg through Shanghai Cooperation organization, Forum on
China-Africa Cooperation, the China-Arab Cooperation Forum, as well as
the BRICS and other groupings). China has put huge resources into this
effort and is quietly achieving results. The China Central and Eastern
Europe 'group' has a secretariat in Chinese ministry of Foreign
Affairs - but no similar entity amongst potential European partners.
This is partly due to divided loyalties - as the 11 countries that
deal bilaterally with China are unsure about a united entity. The EU
sees this as a competing network - which seems to be aimed at causing
divisions in the EU. However there seems to be quite different
motivations involved. China is seeking friends through this grouping,
while the European counties would simply view it as a means for
accessing China's money [1]
Deng Xiaoping said that China should hide its strength and bide its
time (ie not rock the boat until it was strong). His successors followed
this advice. However in recent years China has acted differently. The US
is seen to be in decline - after subprime mortgage crisis. Beijing has
been flexing its muscles. It has drawn closer to Russia while avoiding
global initiatives (such as climate change). This caused concern around
the region. But in the past few days this has changed (eg with a climate
change agreement with US). Other cooperative agreements have been
reached with US. China and Japan even managed to de-escalate tensions.
After years of brinkmanship China has showed statesmanship in dealing
with global issues and its neighbours [1]
China's most important strategic choice was no
embrace globalization.
Now its it is pursuing Asian regionalization. Economic development is
the only way of tackling all of China's challenges. The central
objective of China's strategy for two decades has been to secure and
shape a conducive security / political / economic environment so that
China can concentrate on its economic / social / political development.
Trade with West is less important than it used to be. The Shanghai
Cooperation Organization (SCO aka the Asian NATO) chaired by Russia and
driven by China has emphasized expansion and economic cooperation
amongst its members. The SCO is an economic / security cooperation group
of China and five central Asian states. Afghanistan, India, Iran,
Mongolia and Pakistan are observers. Belarus, Turkey and Sri Lanka are
dialogue partners. India, Pakistan and Iran will be members in 2015. The
bloc has 15% of global GDP. China (and Russia's) goal is to create an
Asian security architecture independent of the US and its allies.
Genghis Khan's old territories will become a new economic bloc - with a
combined population eventually of 4bn. The infrastructure and economic
corridors have been planned and in some cases actually built. China's
'New Silk Roads' policy involves improving regional connections. A
Maritime Silk Road will connect China to ASEAN and coastal south Asia. A
Northern Silk Road involves rail connections to inner provinces -
reaching ultimately as far as Moscow. In conjunction with India (which
is pursuing a look east policy) a BCIM Economic Corridor (a Southern
Silk Road) is being developed. In May 2014 China's state-owned news
agency suggested that these routes would eventually extend to Europe.
This envisages an economic cooperation group from western Pacific to
Baltic Sea. China's Asian Infrastructure Investment Bank (with 21
participants) is seen as a serious challenger to World Bank and Asian
Development Bank. This will help China by allowing its ($US3.9tr)
foreign exchange reserves to be invested on commercial terms; and help
in internationalizing the yuan. China has sought to internationalize the
yuan since 2000. Its global integration is no longer limited to trade,
but spills over into finance. The Shanghai Free Trade Zone is expected
to allow Shanghai to become an international finance centre by 2020.
Plans for full yuan convertibility in Shanghai FTZ were announced -
which will allow convertibility to be extended to national levels - and
allow RMB to become eventually a global reserve currency. Offshore RMB
centres have been established in many places. A RMB sovereign bond is to
be issued by UK Treasury. China has been rapidly increasing its gold
holdings - while india has been the largest gold importer. Western gold
holdings have moved east. Singapore has plans for a physically
deliverable gold contract. China's commercial, economic and financial
focus is now centered on Asia. A regional currency is needed - and this
seems likely to be founded on a gold standard [1]
China's rise will challenge the US's longstanding presence in Asia.
US opinion is becoming that US efforts to help China have created
problems for US. Similar concerns arise in relation to Russia. But China
and Russia have always been major powers with un-Western worldviews. Some
see individual leaders making a difference. China's leaders claim to
have a strategy for peace in Asia - but this can only happen if China
builds a new empire - which will require it to crush the existing
liberal order as soon as possible. This is a structuralist view (rather
than a view that individual leaders matter). China has been
striving for decades to create a new Sinosphere. This could be
uncomfortable for China's neighbours - either subsumed into China
project or excluded from it. Alternatively those countries might develop
an alliance to resist that outcome - and the US could help catalyse this
[1]
Concern was expressed about the fact that China's solution to many
economic problems seemed to involve building high speed railways of
dubious benefit except in limited situations.
Show: details
In China it is often said that the worse the economy becomes, the
more railway building is emphasized. The flurry of new high-speed-rail
(HSR) proposals suggests policymakers are worried. Railways stimulate
the industrial sector. Since 2008 HSR projects have been China's
stimulant of choice - and have also become a geopolitical tool. China's
population densities suggest that mass rapid mobility is needed.
However in Japan this has led to unbalanced regional development.
Financial returns on HSR are uncertain - and only a few have been
profitable. China has many major international HSR ambitions. These
advertise its technological prowess and extend its influence.
The anxiety about the influence that China gets relative to weaker
neighbors is what stokes concern about governance in China's new
development banks. It is an old-fashioned for of development aid in
which China does everything - and draws upon its prowess in HSR. HSR
customers are governments. Domestically China now invests $US4.5 tr
*24% of the global total) yet it saves $US5tr. It needs ways to invest
the extra offshore, and HSR projects are an alternative to buying US
Treasuries which create real assets that China can build and control.
[1]
China and Australia committed to a free trade agreement which
observers saw as being very beneficial to Australia economically -
without any serious consideration of the broader implications of that
deal. At the same time, China's president gave an
account of China's
benign intentions in an address to Australia's parliament. He proposed
a 'comprehensive strategic partnership' between China and Australia.
This involved: (a) an emphasis on China as the 'big guy'; and (b)
reference to this partnership working through building relationships /
seeking elite consensus (ie to working in the neo-Confucian /
bureaucratic / 'Asian' way - rather than the liberal democratic
Western way).
Show: CPDS Comment
[CPDS Comment: This clearly involved an
offer to Australia of benefits through collaboration in the
establishment of an China-centered trade / tribute system - and posed
a moral dilemma in relation to whether insider-benefits should be
sought through involvement in an unrepresentative / authoritarian /
elitist system at the expense of traditional Western emphasis on
welfare and capabilities of individuals] - see also
Strengthening Australia's
Democracy.
Anti-US European observers suggested that China was succeeding in
creating a new international order. They also speculated
about the
nature of that new order that seemed to be required - without apparently
recognizing its incompatibility with China's actual methods of
operation.
Show: details
The world has experienced a global systemic crisis since 2008. This
has led to the emergence of very large international players who
challenge the world order that the US established after the collapse of
Soviet bloc. Multipolarisation requires reform of existing international
authorities (or perhaps the invention of new forms of global
governance). Europe has a major role to play in this because of its
experience of integrating states of different sizes / kinds. The
Internet is also having an effect through turning the whole of humanity
into a single organic social body - as an alternative to the pyramid
system which has been the basis of current international system. The
world of the future will involve largely self-organised social
networking system whose governance arrangements have yet to be invented.
There will be small, flat political structures integrated by human
networks matching their administrative expertise. The world is currently
experiencing a contest between: 'empire' and mutually independent
political entities; representative democracy versus direct organized
citizen participation; pyramids versus networks; militarized
colonization versus globalized regulated trade; oil versus renewable
energy; a cumbersome economy versus a digital one; banks versus
financial flows; employment versus online professional activity; UN
activity versus BRICS club etc. Significant in this has been China
and the BRICS influence; the end of the Euro-Russian stalemate in
relation to Ukraine; and ending problems in Europe. Now the world has
become Chinese as demonstrated by changes affecting global governance.
Examples involve: US decision to reduce carbon emissions - while China
agreed to a much less restrictive policy; significant progress in many
areas associated with China's leadership in APEC summit in Beijing;
international agreements between China and others on contracts and yuan
currency trades; the ultimatum to G20 conference in Brisbane) to reform
international institutions -which may lead to BRICS group taking over in
making needed changes (eg in IMF); India's ability to gain acceptance of
its food security program through WTO - because the WTOs' survival
depended on this; and efforts by Russia, China and Germany to allow Iran
to take its place in the international scene [1].
It was suggested that China was seeking to create a new
international order because it had not been allowed to take an
appropriate place within established international institutions as the
result of a US belief that China was 'immature'. Elements of the
international order were perceived to involve: (a) making Renminbi an
international currency because of concern that a strengthening $US
will damage other economies; (b) creation of AIIB; (c) development of
trade relationships; and (d) efforts to contain official corruption.
Geo-political considerations were seen to impede the development of
benefits from the free trade agreement that China and Australia were
proposing (see outline of ASEAN, APEC and
CHAFTA below and resulting Interchange with
Daryl Guppy)
Show: ASEAN, APEC and CHAFTA + Resulting Interchange
Relationships in APEC are changing
significantly - as indicated by the speeches by China's and the US's
presidents - and their dealings (together with Australia) at G20. China has
sought a seat at the IMF table (and other post-war economic institutions)
commensurate with its status. This was not offered and President Obama said
that this was because China was not mature enough. So China has created its
own table and issued invitations in ASEAN and APEC regions. Australia was
invited but has declined so far. The 'table' has several legs (eg the AIIB).
President Xi Jinping identified 4 pieces of the jigsaw at APEC meeting. The
first involves strengthening $US (and high $US helped precipitate the Asian
currency crisis). Some are now concerned that strong $US will create
problems in ASEAN. However the region's position is better in that banking
systems have improved, and there are alternatives to $US for funding. China
wants Renminbi to become investment currency as well as a trading currency.
China has second largest economy and healthier foreign reserves than US. To
make a change possible China has: (a) established Yuan trading centres; (b)
use these for investment support; (c) creation of AIIB - which is a natural
reaction to China's exclusion from global financial institutions; (d)
combining the Hong Kong and Shanghai Cross trading platform and continued
development of the Shanghai Free Trade Zone. This will significantly free up
China's capital account. Some see this leading to capital flight - but it
can also be viewed as sensible investment diversification. The 'Hunt the
Fox' campaign is intended to track down overseas movement of ill-gotten
gains of corrupt officials. These steps are changing the financial
landscape. There are now alternative funding sources in the face of rising
$US -given rapid strides being taken to internationalize the Yuan. Australia
FTA with China does not seem to have changed its position much - noting
simultaneous collaboration with US president and Japan's prime minister. The
federal government's hesitancy will constrain state-based initiatives. China
clearly wants to include Australia, and states may need be more obvious in
engaging with China (eg to assist businesses to expand into China and to
attract Chinese investment). The FTA has been treated too casually by the
media. Many saw it as already accomplished. Few highlighted the significant
economic benefits. China's expectations in relation to FTA are not simply
easier investment - but also include: reduced tariffs on imports to
Australia; opening the provision of services; most favored nation status in
relation to investment. FTA also covers travel visas; e-commerce; government
procurement; services and trade rules. Strategically the agreement is seen
to reduce status of US's TPP - which excludes China. China argues that FTA
shows that China wants collaboration and is not a treat as Japan and US
claim. China has broad agenda built around New Maritime Silk Road and FTA
shows that China can build relationship with industrialized countries.
Australia's focus is on money and quick results. China plays a much longer
game. A theme of the APEC and ASEAN summits was the way behind-border
controls can frustrate the intent of free trade arrangements. The latter are
still strong (eg complexity of 457 visa). The FTA will not actually be
signed until 2015. The announcement in November 2014 was merely a heads of
agreement (Personal communication on 1/12/14 from Guppy D. 'ASEAN, APEC and
CHAFTA', Working with China.com, Nov 2014)
Resulting Interchange with Daryl Guppy:
Creating An 'Asian Co-Prosperity Sphere' Alternative to ASEAN, APEC and
CHAFTA?
The point is not that China is not ‘mature’ enough to get a seat at the TPP
table – but that it is now being recognised that China’s aim is to create,
through economic action, something like the ‘Asian Co-Prosperity Sphere’ that
Japan sought through military action in the 1930s and 1940s (ie an
‘East-Asian-style’ international order that is incompatible with liberal
Western institutions).
Response (1/12/14) from
Daryl Guppy
"The point is not that China is
not ‘mature’ enough to get a seat at the TPP table".
These are Obamas words at APEC in Beijing. I was a delegate at
both the NanNing ASEAN and Beijing APEC conferences.
Response (2/12/14) from Daryl Guppy
This article bought together several of my weekly columns published in Singapore and globally via CNBC. You can put this article on your website for reference if you wish as this compiled version is not hosted anywhere on the net. You can pick up some of my background at
www.guppytraders.com Some of these notes are reprinted in the NT ACBC fortnightly newsletter.
.......
CPDS comments on 1/12/14 +
Response from Daryl Guppy on 2/12/14 +
CPDS reply on 2/12/14
Some comments on 'ASEAN, APEC
and CHAFTA' follow:
Attempts to create ‘another table’
have apparently been ongoing for decades – and led primarily by Japan – see
A
Generally Unrecognised 'Financial War'? The latter refers to one
Japan-watcher’s conclusion that China became involved in the process in the
late 1970s. Japan had sought to create the ‘other table’ (ie an ‘Asian
Co-prosperity Sphere’ in the 1930s and 1940s – and Japan’s primary goal in
invading China was to co-opt China (which nationalists regarded as Japan’s big
brother) in that endeavour. The possibility (which is anything but a certainty)
of collaboration between Japan and China’s nationalists in recent decades is
mentioned in Broader
resistance to Western influence?
[DG] This underestimates the level of deep seated anti-Japanese
feeling in China as a result of wartime occupation and atrocities. As
worlds number 2 economy it does not need partners, but it does hark back to
stable border relations established and maintained by trade. The Western
historical interpretation of <tribute> from apparently vassal states
reflects a Western understanding of history rather than a Chinese understanding.
The right to trade with China was an objective of the surrounding states and
many willingly imitated Chinese traditions. We see the same parallels in the 20th
century with the adoption of US cultural icons and behaviours as we clamour for
the right to trade with the US. The breach of the HaiShan gate by the Manchu was
to a significant extent the result of trade sanctions imposed by the Chinese who
had stopped trade with the Manchu.
[CPDS]
There is no doubt about the deep-seated animosity amongst
ordinary Chinese towards Japan. Forgiveness is not part of East Asia’s
traditions. This makes any public display of collaboration impossible – but
does not prevent behind-the-scenes collaboration perhaps mediated by offshore
Chinese groups whom: (a) Japan helped to adapt the neo-Confucian methods that it
had used for its own economic ‘miracle’; and (b) presumably played an
influential role in China’s late-1970s reform . It is possible (though
unlikely) that China’s leaders believe they do not need partners now – but:
(a) Japan does need partners and had recognized that it needed China as a
partner in the 1930s when capturing China’s emperor was seen as a way to get
China on-side in establishing an ‘Asian Co-Prosperity Sphere’; (b) China
needed partners in the 1970s – and seems to be doing its best to mobilize
partners now (eg via BRICS etc); and (c) Japan’s PM has strongly expressed
ultranationalist sentiment and alluded to Japan’s war criminals as having laid
the basis for Japan’s future (see
The
Dark Side of Japan).
[CPDS]
While the right to trade with China might have been valued
by outsiders, this came at a very high price to Chinese people. The latter were
oppressed so that China’s elites would have the means to make trade with China
beneficial to outsiders and thus make China’s elites internationally
influential (see Likely
Characteristics). That oppression was the reason that
Mao’s
Cultural revolution was directed towards purging Confucian influences from
China, and that the adoption in the late 1970s of neo-Confucian methods like
those that had been the basis for Japan’s economic ‘miracle’ had to be
kept very quiet. What Mao did (ie try to get rid of the social hierarchies
associated with the ancient regime) is still highly regarded in China where
social equality is valued. And this remains a significant factor in potential
political instability in China today (see Communism
Versus Confucianism: The Continuing Contest in China ;
as far as I can see the components of
the ‘other table’ that China is now seeking to create are somewhat broader
than your article illustrated (see Creating
a New International 'Confucian' Financial and Political Order). For example
it includes: the BRICS; influence in the UN; propaganda favouring China’s
autocratic system as an alternative to liberal alternatives; clear confirmation
of the quasi-Confucian (ie authoritarian bureaucratic) character of China’s
government; diverse observer’s recognition that China is seeking to build an
alternative international order. While the implications of this are quite
complex, an attempt to outline this (The
China-Australia FTA: Option 5 ) gained endorsement from one of Australia’s
leading strategic analysts (see also China
as a dominant power and Pax
Americana to give way to a new world order). The latter drew attention to
the relationship between China’s ‘new table’ and Russian militarism and
Islamist extremism in terms of creating major authoritarian challenges to the
liberal international order that the US and its allies have championed since
WWII. The possibility of collaboration between East Asian nationalists and
Islamist extremists in creating a Middle Eastern diversion for the US
administration from the challenges to the liberal international order that were
emerging in Asia was speculated in Attacking
the Global Financial System? (2001);
[DG] There is no need for an ill-defined coalition to attack the
global financial system. The US shadow banking sector did this quite
successfully without the need for any outside assistance or prompts. It draws a
long bow to link the quasi-Confucian ethic with the aggressive, expansionists
and proselyting ethics of Islamist extremists and US liberal capitalism writ
large. Confucian, Daoist and Buddhist ethics lack the proselyting imperative
that effects Western religions and ideology. The immigrant to China can
never become Chinese, unlike the immigrant to the US who can become American.
This is a fundamental difference in world views. The idea that the US supports a
liberal democratic model conveniently ignores the consistent record of US
support, and ongoing support, for some of the most corrupt and authorities
regimes seen in the last 100 years on the basis that they were at a minimum
anti-communist and if possible, pro-American.
[CPDS]
The problems in the global financial system that erupted
with the US sub-prime crisis has many causes (see
GFC
Causes). However the need for dangerously easy money policies in the US to
prevent the global economy from stagnating (because of the financial repression
needed to protect the non-capitalist financial systems that were in use in
major East Asian economies and the international financial imbalances that
resulted from that repression) were arguably the most significant (see
Structural
Incompatibility Puts Global Growth at Risk, 2003+ and Impacting
the Global Economy, 2009);
[CPDS]
While the ideologies and goals of East Asian neo-Confucian
elites and Islamist extremists are different, there are reasons to believe that
collaboration might have been possible and might actually have occurred (see
Geopolitical
Context to a More-Than-Passive Attack);
[CPDS]
The differences between Western and East Asian attitudes
to universal values / truth are as you suggest – and need to be much better
understood as they explain a great deal of the world’s current problems (see
Competing
Civilizations);
[CPDS]
The US has (as you suggest) had difficulties in
championing its favoured liberal democratic model. The ‘blowback’ from
supporting authoritarian regimes who were at least anti-Communist (a
‘realist’ foreign policy stance) has been widely recognised – and was the
basis of the ‘idealist’ agenda of the US Neo-Cons who convinced the US
administration to try to use its power to re-construct (rather than collaborate
with) Saddam Hussein’s authoritarian regime in Iraq. However the
‘idealists’ were no more successful than the ‘realists’ because liberal
democratic models have to be built on cultural and institutional foundations
that are unlikely to exist naturally in a non-Western context (see
Fatal
Flaws). The liberal democratic model has a lot to commend it – but getting
this into place successfully is anything but trivial;
China needs the Renminbi to be accepted
as an international currency on the basis of China’s economic ‘strength’ (ie
production capacity / foreign exchange reserves) because its financial
institutions have shot-to-bits
balance sheets and it would experience a massive financial crisis if those
institutions had to borrow from the global financial system where profitability
is the criteria for investment. China’s financial system (like Japan’s) is
not geared to seeking return on / return of capital (see
evidence)
but merely with building ‘real’ production capacity and accumulating foreign
exchange reserves. It is not for nothing that a flight-to-safety now seems
likely to boost the value of the $US and create massive problems for countries
with cronyist financial economic systems (like China). In the 18th
century there was a contest between mercantilist economies (in Europe where the
goal was to accumulate a stock of treasure / gold as a basis for state power)
and capitalist economies (ie those where a balance between demand and supply was
promoted by seeking profit through investment). The triumph of the latter in the
18th century was the subject of Adam Smith’s ‘Wealth of
Nations’.
[DG] The rise in the US dollar has little to do with safety. If this
was the case, then geo-political events would be more closely linked to dollar
index moves and moves in gold. The Dollar Index reacts to the end of QE and the
certainty of interest rate rises. The carry trade – borrow in US dollars and
invest in high yield currencies and investments – is killed by the end of QE.
The dollar rise creates problems for any economy that is defacto based on a US
exchange rate. Australia is no exception with commodity contacts priced in USD.
Not sure we want to say Australia has a cronyist financial economic system.
[CPDS] The $US rise seems to me to have everything to do with
safety. QE by the US Fed made carry trades possible to areas where higher yields
were achievable (just as Japan’s ultra-easy money policies had made carry
trades possible and contributes to the asset bubble in the US that exploded as
the GFC). Those carry trades were largely to emerging economies with
poorly developed financial systems – where the risk following end of US
Fed’s QE is very significant. Getting back to safer territory made a great
deal of sense;
[CPDS] Australia’s risks are associated with: (a) a large
current account deficit that needs to be offset by constant capital inflow; and
(b) the practice of directing most of that capital inflow into property –
which creates the risk of a real estate bubble (see Defending
Australia from the Financial Crisis? , 2008). Crony capitalism (ie making
capital available to a state’s associates who invest in nationalistic projects
without serious attention to return on capital) has not been the issue
[DG] When assessing the structure of the Chinese
economy it may be more useful not to apply the Keynesian lenses that grow
out of the failures of the capitalist economy as revealed by the 1930"s
depression. This style of economic analysis and its ilk, are suited to
stable and well established economies. These analysis tools are less suited to
an rapidly expanding economy that is driven by massive population shifts.
The paradigm is different and requires different analysis which is perhaps why
the oft touted coming collapse of Chinas has been delayed for so long.
[CPDS]
There is no doubt that the financial risks that China’s
economy faces can’t be properly analysed in terms of Western models and
concepts. However China’s risks are none-the-less huge.
China was said to be establishing a new continental autocratic empire
which was uncertain because it was not based on China's traditions
Show: details
China has revealed an ambition to establish a series of strategic maritime
distribution centers west to Africa and beyond. This would extend the
terrestrial Silk Road through central Asia. A 'string of pearls' through Indian
Ocean has long been denied - in deference to india. But recent naval deployments
show China is now less obliging. China's Maritime Silk Roads needs a presence
and defense. This parallels British coaling stations of olden times. This
all raises questions about how nations recycle excess savings and conduct
corporate state security complexes overseas. Jacob Zuma suggests that China can
help Africa cast off colonial shackles. In Congo they are everywhere - but
behind high walls. These new conquistadores are highly cohesive. The UK acquired
an empire by accident. In the Philippines elements of a US empire were
definitely sought. China's commitment to Marxism makes imperialism an anathema -
though Marx's Bolshevik followers were keen to acquire territory. Europe waged a
Five Hundred Years war on the rest of the world - yet only half way through this
agreed (through Treaty of Westphalia) not to attack one another at home. China
now is a strong proponent of non-interference. Phillips predicts that the world
will continue to be multi-polar subject to a dual hegemony of two preponderant
powers (with US as maritime liberal and China as continental autocratic
anchors). Chinese historians argue that China won't dominate the world the way
Westerners did. The tributaries of traditional Chinese civilization were
comfortable in the Sinosphere. But Tibetans, Uighurs and Mongols might not now
agree. The problem is that China now is not traditional. It resembles the Western
nation-states that emerged after 1648 that professed sovereignty and
non-interference at home but pursued colonialism abroad [1]
China's development of its international linkages were seen to be proceeding
rapidly - and this could create Eurasian integration as a new
global model as an alternative to the spreading 'empire of chaos' that
the US presides over.
Show: details
History was created when a train recently left Yiwu in China for Madrid -
13000km. This illustrates Eurasian integration and is the start of China's 'New
Silk Road'. This could eventually become a high speed rail link - and shift most
container traffic from ships to land. Transport costs will be reduced, while
China's construction companies expand. The US is pivoting to Asia while China
pivots to Europe. China's president announced the 'New Silk Road' in September
2013 and a Maritime Silk Road one month later. The aim is to draw on historical
aura of Silk Road to bridge civilizations. A $40bn infrastructure fund has been
authorised to build facilities initially in China - and then expand. After
decades of importing capital, China is now planning to use its own capital in
neighbouring states. 22 Asian countries supported the creation of an Asian
Infrastructure Investment Bank which like BRICS Development Bank will finance
transport / energy and telecommunications. This is an alternative to Asian
Development Bank which works within framework of Washington Consensus. This
signals a new order in Asia. China is already largest trading partner for many
in Asia - so what is envisaged in drawing together China, SE Asia and Indian
subcontinent. Whatever most think about what China calls its peaceful rise, they
seem to shy away from Washington / NATO dominated trade and commercial world and
the trade and investment pacts (TTIP and TPP) that would go with it. China is
also offering Russia some access to credit. Russia and China are now also
conducting joint large-scale joint military activities. Across Eurasia, Russian
not Western pipelines are likely to prevail. This all suggests a major
geopolitical shift. The US CFR is lamenting the loss of superpower
exceptionalism. The US's China Economic and Security Review Commission blames
China's leaders for being disloyal, adverse to reform and opposed to
liberalization of their economy. China is seen to be upsetting the
international order and dooming peace and prosperity in Asia. China does face
massive external and internal challenges. Its president is seeking to suppress
corruption graft and waste. A great deal of investment currently produces only
overcapacity. There needs to be a high transfer of resources for China to jump
from middle income to high-income status. However China won't fall apart, and
its leaders are looking to boost relationships with Europe. At the same
time the US is opting for an 'empire of chaos' - a dysfunctional global system
that breeds mayhem and blowback across Middle East, into Africa and to European
periphery. A 'new cold war' paranoia is likely in US. US agenda of isolating /
crippling Russia is dangerous and likely to fail. Russia is currently the only
power capable of negotiating global strategic balance with US - and limiting its
empire of chaos. Russia like China is betting on Eurasian integration - though
this is complicated by Ukraine situation. Germany may one day lead parts of
Europe into strategic alliance with Russia and China [1].
In early 2015 there was a strong push by China to have the renminbi /
yuan accepted as a global reserve currency
under the IMF's Special Drawing Rights system. One observer suggested that
doing so would help draw China into the international financial / economic
system. However there was also the possibility that doing so might assist
China in creating an authoritarian / elitist alternative to the
international system.
Show: China does not have a normal 'currency'
China does not have a normal 'currency' -
email sent 27/3/15
Your article suggested various reasons for including
China’s renminbi as one of the world’s reserve currencies, eg that: (a)
this would force internal reform in China, and stabilize its rickety
financial system; (b) the PBoC’s reason for seeking to have its currency added
to IMF’s SDR system is probably to promote domestic reform – noting that the
objection to doing this was that renminbi is not freely convertible; (c) the
yuan is becoming increasingly accepted as a store of value; (d) freeing yuan
would loosen China’s leader’s grip on China’s economy, revolutionise how
companies do business and have many other effects; and (e) force China to become
more transparent.
I would like to suggest an alternative way of viewing the
issue – namely that:
There is a profound cultural incompatibility between the
foundations of East Asian political and economic systems and the current
international order that is based on liberal Western practices (see
Background
Note);
China seems to be seeking to create an international order that is
based on East Asian cultural traditions, rather than seeking to adapt to the
Western-style international order (see Creating
a New International 'Confucian' Financial and Political Order). Pushing for
the creation of new international institutions would allow China’s social
elites to expand the influence of their domestic ‘bureaucratic
non-capitalistic’ systems into other countries;
The ‘value’ attributed to the renminbi is more a product of
the mercantilist economic tactics that have been the basis of East Asian
economic ’miracles’ (ie accumulate a stock of ‘treasure’ rather than the
building of a balanced economy). ‘Value’ in a currency in the sense of
gaining a return on capital has not been part of that process (see
Evidence).
The structural / deflationary demand
deficit that was needed to avoid financial crisis had major adverse impacts
on the global economy (because
global growth would have stagnated without VERY easy monetary policy
elsewhere) - and remains a significant factor in the deflationary
risks that currently put global growth at risk. Changing this would be a
massive
cultural challenge;
Making a currency internationally tradable does not necessarily
lead to domestic economic and financial reforms that are compatible with the
liberal international system (eg see
Why
Japan can't deregulate its financial system);
China is arguably facing a massive financial crisis if it is not
able to convince the world that its currency should be internationally accepted
on the basis of its past mercantilist economic practices (see
Ongoing
Uncertainty).
It is possible that the benefits that your article outlined
might be achieved. However the alternative scenario (ie that what is happening
involves an attempt to create an authoritarian /
elitist ‘Asian Sphere’ that exists in parallel
with, and thus undermines, the liberal Western style international system) also
needs to be considered.
John Craig
In the face of vocal US objections many Western countries joined China's Asian Infrastructure Investment
Bank (AIIB) - on the grounds that its goals (ie
infrastructure investment) were valid and its operations would be
transparent. There seemed to be no recognition of the significance of the
legitimacy that the use of 'quasi-bureaucratic' consensus building by an
unrepresentative elitist regime to develop such a 'transparent'
institution(see Acquiring Soft Power above) gave
to the international role of unrepresentative elitist regimes.
The US Treasury argued that multilateral development banks have have a valuable role in
financing development countries, and that criteria for their success included:
transparency and good governance; ensuring that debt is sustainable;
environmental and social responsibility; ad high standards in project
management. The AIIB and BRIC's Bank could join this group of
multilateral development banks - and the US would welcome their
participation [1]
US analysts highlighted the dual geopolitical and economic implications
of China's proposed AIIB.
Show: About the Context to: China & the Asian Infrastructure Investment Bank
About the Context to: China & the Asian Infrastructure Investment Bank - email sent 18/4/15
Wells Fargo Economics Group
As your article (China
and the East Asian Infrastructure Investment Bank, 16/4/15) pointed
out there are both geopolitical and economic factors in play in China’s
leading role in establishing an Asian Infrastructure Investment Bank. The
following is an attempt to suggest the broad context in which that initiative
needs to be considered.
At one level the AIIB will
allow China’s regime to engage in economic activities in other countries in
the same way that it does within China (ie without the financial and democratic
constraints associated with the liberal (ie democratic capitalist) international
order that the US has championed since WWII). The likely implications (through
the creation of the AIIB and in many other ways) of expanding the ‘bureaucratic
non-capitalist’ systems of socio-political economy that have been the
basis of East Asian economic ‘miracles into the international arena are
suggested in Creating
a New International 'Confucian' Financial and Political Order.
However it probably
inappropriate to view what has happening as primarily a Chinese initiative –
as Japan was the leader in the undeclared ‘war’ against liberal
Western-style economic and financial institutions for decades before China’s
economy became significant (eg see
A
Generally Unrecognised 'Financial War'?). And, as for the methods used
elsewhere by the Asian ‘tigers’, China’s rapid economic advancement has
been argued
to be wholly or partly a product of guidance from Japan (as still
seems to be happening in relation to China’s risk of a financial crisis).
It is anything but unreasonable to view post WWII developments in East Asia as
an Imperially-mandated continuance of Japan’s 1930’s ambition of creating an
‘Asian Co-prosperity Sphere’ using traditional
Art
of War tactics – following the failure of the military tactics that Japan
used unsuccessfully in its 1930s’ attempt to mobilize China’s support for
the creation of an international order that was compatible with East Asia’s
traditionally elitist and authoritarian cultures (see
The
US's Most Significant Intelligence Failure?).
John Craig
A former US Treasury secretary argued that China's establishment of the
AIIB represented the end of the US's role as the underwriter of the global
economic system. The AIIB challenges the World Bank / IMF - traditional
funding sources in which the US has a strong voice. Though US has had
dominant global economic influence, countries are now falling over
themselves to align with China [1]
It was also argued that China would be the only winner from the
proposed AIIB.
Show: details
East Asia's path to industrial success has been well trodden - first by
Japan, then the four tigers and now China. It combines Soviet-style financial
repression, urban industrialization,a mercantilist focus on exports, and
protection for home champions. Can South, Central and SE Asia repeat this
process? John Lee (Hudson Institute) has pointed to obstacles: (a) robotics is
tilting advantage to capital intensive rather than labour intensive
manufacturing; and (b) rather than a small number (150m) of people seeking to
export to a large number of wealthy consumers (400m), there are now about 2bn
striving to grow on the basis of exports to 1bn wealthier consumers. China may
succeed in becoming both a consumer market and a competitive exporters - but its
size means that others will be unable to follow that path. China's overseas
development assistance is commercially focused. China firms expect to gain over
90% of the value of projects financed by AIIB. Others will only get
sub-contracts. Indonesia sees the AIIB (which will build things) as
complementing the World Bank's emphasis on little things (eg literacy,
sanitation, opportunities for women). Unless the little things are right, the
big things can't produce ongoing benefits. China is not alone in favouring
turnkey infrastructure projects as both Japan (via ADB) and Russia have done so.
What they provide are commercial deals, not charity. Comparisons with the
Marshall Plan are misplaced [1]
China was suggested to be sharing the benefits of its urbanisation
emphasis with other countries (through AIIB and its 'One Belt, One Road'
strategy- as China's urbanisation emphasis was seen as a key element of
its economic strategy. Infrastructure will be built to speed up
urbanization and thus drive growth [1]
Show: CPDS comment
CPDS Comment: China's emphasis on infrastructure and
property development in the post GFC environment seems to be the major
reason that it came to face the risk of a debt crisis
China was seen to be relying on massive infrastructure and cross-border
trade to cushion its economy as it transitioned to more sustainable growth.
But this could do more harm than good. The One belt, One Road (OBOR)
project aimed to connect China to central and south Asia, the Middle East
and Europe. However China's long term problem can't be solved without
boosting domestic consumption. OBOR seeks to export China's savings and
import foreign demand. This is just a continuance of China's old growth
model [1]
The 'new normal' that China saw as the basis for its future growth was
portrayed as the key determinant of the economic future of its whole
region (see Australia's economy
and the 'new normal').
China seemed to be seeking to arrange a
massive external program of infrastructure
investment and thereby stimulate economic growth [1].
At the same time it seemed seems to be encouraging large scale off-shore
property investment (eg see
"Mum and Dad" Chinese Investors
- You Must Be Joking, 2015).
Show: comment
CPDS Comment: In relation to this
it is noted that:
large-scale domestic infrastructure and property investment was
China's solution to the challenge posed by the GFC - and also the
source of its domestic debt crisis because it was funded by an
unprecedented explosion of credit (see
Heading for a Crash or a
Meltdown?). Thus, unless a considerably more disciplined approach
is taken through initiatives such as the AIIB and the 'One Belt, One
Road' strategy), all that will be achieved through stimulating
regional growth via large scale infrastructure and property investment
is a dramatically expanded debt crisis. The lack of apparent disciple
involved in China's investment into speculative property developments
in Australia (see 'Mum and Dad' Chinese
Investors, op cit) is reminiscent of Japan's external investment
splurge in the mid 1980s (which, in effect, 'bought the world at the
top of the market' and contributed to Japan's later crippling
financial crisis).
Perhaps by encouraging other countries to become partners in the
AIIB (and perhaps other large scale investment vehicles) it might be
expected that any debt crisis that results from China's leaders'
directing major investments so as to boost their regional / global
influence would not be solely China's responsibility;
external capital flows (in the past mainly into US Treasury bonds)
have been needed to counterbalance the current account surpluses that
resulted from domestic financial repression in East Asia's major
non-capitalist economies (ie Japan and China). This suggests that
China might now be seeking to find alternative destinations for the
external capital flows that are needed to head-off or postpone the
domestic debt crisis that would result if its current account
surpluses were phased out through boosting domestic demand and it's
financial institutions with highly-suspect balance sheets then had to
borrow in international financial markets. Maintaining current account
surpluses (and thus capital outflows to a new set of trading partners)
might again head-of or postpone China's debt crisis, but it also
continues to contribute to the global demand deficits that make
sustainable growth impossible (eg see Putting the Economic Risk of Deflation in Context, 2015)
China apparently believed that a
financial market 'miracle' could be achieved by methods like those
used for 'real economy' miracles - ie encouraging investment in particular
markets through social networks and backing this with state funding - in
the hope of thereby boosting China's national balance sheet (see
Context to China's
Sharemarket Boom and Bust and
A Made-in-China Disaster Waiting to Happen). If this had been successful
it could
have provided a way to get around the constraints implicit in the lack of
emphasis on return on / return of capital in the
financial systems that have been part of East Asian 'real economy'
miracles.
China's Premier announced $billions of financing and trade deals
with Brazil - as part of a program to deepen ties despite economic
slowdown. Investments involved infrastructure. Announcements of Chinese
investments have become common recently as Latin American countries
dependent on China have experienced difficulties. However only about 1/3
of such announcements ever materialize [1]
A FTA agreement that China entered into with
Australia in mid 2015 was seen to be highly beneficial to Australia and to
have involved few Australian concession to China. This was quite different
to the negotiations with the US in relation to a proposed Trans Pacific
Partnership [1]
Show: CPDS comment
[CPDS Comment: Australia's government
(whose DFAT advisers have previously
demonstrated a dangerous lack of Asia-literacy) here traded economic benefits for
economic and political dependence on China's
'princelings' - without any suspicion that this was the core of the
imperial trade-tribute regime by which Asia was administered from
China prior to Western expansion - see above
- and which China now is clearly seeking to
re-establish as an alternative to liberal Western practices. Getting
the economic benefits that the FTA promises depends on the continued
cooperation of China's 'princelings' and, given a compliant population
without democratic accountability or a rule of law, the latter can
potentially gain large political and economic benefits from this
dependency].
China's efforts to create a new international order were seen to
have historical precedents and to create opportunities for both China and
Russia in a renewed focus on Eurasia.
Show: details
China is the most
historically-minded nation. Mao based his conquest of power on
Sun Tzu who lived around 500 BC, and Confucianism (which emerged
at about the same time) remains at the heart of China's social
thinking despite Mao's attempts to suppress it. President Xi's
'New Silk Road' initiative in 2013 paralleled a silk road
initiative 2000 years ago that opened routes of trade and cultural
exchange across Asia, Africa and Europe. China promotes
'multi-polarity' - the notion that the world should have multiple
poles of attraction (rather than the uni-polarity of a US /
Western dominated world. It rejects the idea that there is a
single civilizational ideal or any one right way of doing things.
Eurasia is an old idea whose time is seen to have come again. It
has been suggested that eight trade circuits existed in 13-14th
centuries between Europe and China under Pax Mongolia - which
Western imperialism is seen to have superimposed itself on without
obliterating them. Islam continued to spread, while Indian and
Chinese migration continued. The old system has a chance to
re-emerge because the West was humbled by the 2008-09 financial
crisis - and the interests of China and Russia (two potential
builders of Eurasia) have converged. China's motive for promoting
Pax Mongolica is clear - its growth model based on exports of
cheap manufactures to developed countries has run out of steam (eg
because of stagnation in the West and rising protectionism).
Rebalancing the economy towards domestic consumption poses
problems for China's communist party - so reorienting investment
and exports towards Eurasia seems a better option. As China's
labour costs rise, production is being shifted to western
provinces - which suits the New Silk Road concept. Russia also has
a motive for developing Eurasia - because it is mainly an oil
exporter. Russia, Armenia, Belarus, Kazakhastan and Kyrgyzstan
have established a Eurasian Economic Union - similar to EU - a
scheme that takes the sting out of West's Cold War victory. Russia
favour joining the EEU with the New Silk Road concept into
'Greater Eurasia. On 8/5/15 Putin and Xi signed agreement for
coordinated political institutions, investment funds, development
banks, currency regimes and financial systems to serve a vast
free-trade area linking China with Europe, the Middle East and
Africa. Russia and China both feel encircled by the US and its
allies. China's anti-hegemonic aim is to secure tolerance amongst
civilizations. Putin has increased anti-American rhetoric. Two old
rivals now seek to exclude Western influence from Eurasia -
perhaps because the US blocked China's role in the IMF and
Russia's desire to join NATO. Whether China and Russia's union will
be enduring (or be a threat to world peace) remains to be seen.
However, for the time being, this arrangement seems better to them
than being lectured by the West [1]
China's economic transition was seen to be having disruptive international effects
but also creating opportunities that needed responses. [CPDS Comment:
Evaluating what is on offer requires some depth of understanding of
East Asian history and cultural traditions - see China
Won't Get Far Along Its New Silk Road If It Suffers a Political
'Flat Tire'].
Show: outline of article and CPDS Comments
Outline of Callick R.,
'China's Bumpy Ride Along the New Silk Road', The Australian,
29/8/15): A new Chinese revolution is starting to have external effects (eg
stockmarket collapse, devaluation, slump in manufacturing, government
responses) and challenging others benign view of China's economy. These
are indicators of changes China has been seeking for years. World expects
China to drive 40% of global growth. Many have seen China's military /
political arrangements as bad, and its economy as good. Yet China is more
complex - and has economic impacts that Soviet Union never did. European
and US analysts can't understand cultural factors any more than they could
with Japan. China's decision makers operate quite differently - ie they
are not subject to political / public pressures. China has done all it can
to sustain global demand - by infrastructure spending - yet its future
policy direction is unclear. China's changes are causing problems
for Australia (as China bought 1/3 of its exports last year and commodity
prices are falling). Australia's unions are seeking disengagement
from China despite its rise and search for external partners and
opportunities. For the first 18 centuries after Christ, Asia accounted for
over 75% of global GDP. But it was left behind by the industrial revolution -
until Asia started to industrialize when the pendulum swung back. China's real
wages have been growing at 11.4% pa this century. Now instead of just
enjoying cheap Chinese products the world finds that China has global
economic significance. The world benefited when China spent heavily but
unproductively to maintain its economy after GFC. The 'Australia in the
Asian Century' white paper was intended to educate Australians about this.
But now Australia is less willing to change to accommodate this. Paths to
higher productivity are being blocked. Change is also being resisted in
China. China's elites share a notion of China restoring its status of
power and dignity - and this is a huge political asset for its president.
China's biggest problems are political - ie how to arrange the
distribution of power. To date all that has been shown is brute power.
They need to be able to outline a political vision to accompany the
economic one. The economy is not its president's main priority - as China
will now grow almost by gravity. But his job is harder because China's economy
now matters globally. It does not matter whether China has financial
strength, all that matters is that people believe that it has. The Communist Party thinks it is best placed to
price risk (ie it should intervene if markets get it wrong). China is
promoting new 'Silk Road' infrastructure initiatives, not to gain
colonies, but so that all roads will lead to Beijing. This will soften the
blow of China's slowdown. Australia is also expected to play a major role
in the new 'Silk Road' - and this like the FTA is an opportunity that
China is making available. China matters to Australia because: (a)
Australia is a proxy for China in financial markets; (b) this relationship
interferes with Australia-US relationships [1]
China Won't Get Far Along Its New Silk Road If It Suffers a 'Flat Tire' -
email sent 1/9/15
Your article (outline above) pointed out that European and North American
analysts have generally not understood the cultural factors that affect major
East Asian countries such as Japan and China. However, your article also implied
that Australia should now take advantage of the economic opportunities that China is
offering without any more serious effort to understand East Asian cultures than
others have made (eg by
entering a Free Trade Agreement with China and encouraging
China’s new ‘Silk Road’ projects).
I should like to submit that the first deficiency (ie a
lack of understanding of the implications of East Asian cultures) needs to be
remedied before appropriately informed decisions can be made about the
implications of participating in arrangements that would (as your article
suggested) result in ‘all roads
leading to Beijing’.
My reasons for suggesting this are outlined in my
Comments
on ‘China’s Bumpy Ride along the new Silk Road’. Its seems likely that
those arrangements would involve taking a subordinate status within a
politically and economically illiberal international system controlled (as Asia
was before Western expansion) by unaccountable and authoritarian ethnic Chinese
social elites. It also seems
possible that China will suffer a political, and thus economic, ‘flat tire’
the largely eliminates the opportunities that seem to be available.
And once again the latter risk is arguably much easier to understand if
one actually tries to understand what is different about East Asian cultures.
It is undoubtedly correct to point out (as the
article outlined above does) that European and US analysts have
not really understood what they have been dealing with in major East Asian
economies such as Japan and China.
However, while the 'Australia in the Asian Century' white paper pointed
out that the region was now politically and economically significant, it
made no attempt to overcome that lack of cultural understanding (see
Australia in the Claytons Century: The 'Asian'
Century you have when you are not having an Asian Century, 2012). The
white paper simply assumed that Asia would rise economically within
something like a Western style social, political and economic framework.
That assumption is anything but realistic and understanding of radically
different ways of thinking and doing things is vital to coming to grips with
what has been happening. Reasons for this are suggested in:
East Asia: The Realm of the Autocratic and Intuitive Ethnic Hierarchy (2001+) - which described a way of
thinking / epistemology that seems foundational to regional cultures
that have an ancient Chinese heritage that is quite different to the
emphasis on 'rationality' (ie the manipulation of abstract concepts)
that Western societies inherited from their classical Greek roots;
Babes in the Asian Woods (2009+) - which
dealt with the implications of those cultural differences in general
terms;
Creating a New International 'Confucian' Financial and Political Order
(2009+) - which referred to the authoritarian international order that
China seemed to be seeking to put into place as an alternative to
liberal Western institutions (ie to those built on the independent
initiative of rational individuals);
Comments on Australia's Strategic
Edge in 2030 (2011) - which addressed security dimensions, and
also suggested that it might have been possible to help China avoid its
current precarious economic and political predicament if only the
cultural issues involved had been studied and taken seriously;
Context to China's
Sharemarket Boom and Bust (2015) - which referred to the possible
impact of China's history and culture on current China-sourced
disruptions of international financial markets.
Several of the points raised in the above
article arguably need re-consideration in the light of a serious attempt
to understand the history and culture of East Asia. For example:
it was suggested that China had aided the global economy by
providing strong demand in the post GFC era - even though much spending
been poorly directed. However the global economy had a serious demand
deficiency because (for cultural reasons) East Asian systems do not take
profitability (an abstract concept that can be used for rational
decisions by independent enterprises) seriously but rather control
resource allocation to maximize 'real' production primarily through
consensus and obligation within hierarchical social networks (see
evidence); - and thus:
it has been necessary in such economies to suppress domestic
demand (and create global demand deficits / savings 'gluts') in
order to protect banks and enterprises with bad balance sheets (see
Structural Incompatibility
Puts Global Growth at Risk, 2003);
huge international financial imbalances have resulted that
amongst other things required easy money policies to create excess
demand elsewhere to compensate and ultra-low interest rates (over
decades) were a major factor in giving rise to the GFC and the
subsequent constraints on global economic recovery (see
Impacting the Global Economy, 2009);
while there is no doubt that China's main problems are political, a
serious consideration of China's history and cultural traditions is
needed to really understand what is involved - ie that a powerful
neo-Confucian social hierarchy centered on the so-called 'Communist'
Party (and China's President) is both: (a) needed to orchestrate China's
change to its hoped-for new economy; and (b) strongly resented by
grassroots Chinese people (see
Context to China's
Sharemarket Boom and Bust, 2015);
it was suggested that it does not matter whether China really has
financial strength - only that people think that it has. In reality
China's financial strength is a sham - given traditions that do not take
return on, or return of, capital seriously and creative accounting
practices (see
China's 'Super-Ponzi' Financial System). And under
prevailing international financial practices (ie where industrial
investment is driven by profit-focused independent enterprise rather
than by the consensus of social elites and their subordinates sense of
nationalistic obligation) China has been headed towards
the same sort of financial crisis that Japan suffered (see
Heading for a Crash or a Meltdown?). Whether China has the financial
strength that markets have presumed, can only be irrelevant if there is
a change in the international order like that mentioned in
Creating a New International 'Confucian' Financial and Political Order
(2009+). However creating a situation in which the power of ethnic
social elites would not be subjected to either democratic or financial
constraints would be incompatible with liberal Western-style
institutions. It it is not only China's ordinary citizens who should
think seriously about the new China-centered international order that
has been being promoted.
China was seen to be trying to leverage
international influence on the basis of its possible future (rather than
its present) economic strengths - and that those future expectations may
not materialize if China becomes caught in a middle income trap. Other
examples of China's apparent attempts to do this are
here.
Show: details
Reference was recently made to Australia's need to avoid getting involved in
a conflict between Japan and China - apparently because it was believed that
Australia was critically economically dependent on China. China has used its
potential power for current leverage / gain. However this depends on its ability
to escape the 'middle-income' trap. China achieved rapid growth by the world's
largest fixed-investment surge in history - and is now starting the pay the
price. As its growth slows, it won't be able to use future economic strength for
current leverage. China is the world's factory - but export-manufacturing is
dominated to foreign firms / investors. 2/3 of china's trade is processing. It
is not a strong source of demand - and thus can't offer demand to other
countries. And China's FDI is dwarfed by that from elsewhere. As China's growth
slows it ability to threaten others with future economic costs from upsetting
China will decline. China can't enforce economic sanctions against advanced
economies. There is an assumption that China was becoming more 'normal'. Its
fourth generation of leaders described its model as unsustainable. China has
claimed to be changing. But its 2015 position is showing signs of problems. Some
analysts argue that China's dominance is assured. But this may not be so [1]
China was seen to be creating an unconventional form of international
power that others need to understand
Show: outline
In 2007 questions were raised at a conference about whether
China might displace US international power. This continues to be
debated. Some see US power as eclipsing - while China's rise is
seen to be imminent or some way off. However it is not clear what
is being measured. China is already the largest trading partner of
140+ countries and is the world's largest economy on some
measures. However per-capita incomes are poor; a lot of trade
involves getting energy and resources China does not have; and a
lot of exports are low-tech / high-input. And while China's
military power has risen rapidly it is not close to US yet. The
only other types of power are cultural, diplomatic and symbolic -
and in these areas China's position is not good. China is often
portrayed as being strong - whereas it is actually quite weak.
China has some prospect for exerting power in cyberspace. And it
is pursuing claims in the South China Sea. China is not seeking to
take anything like US's role - but is rather trying to change the
framework / terms of reference for considering this. China's
exploration of a new type of power is likely to be well received
internationally - but create conflicts with existing structures.
The only thing that is real is the US's sense that it is losing
influence [1]
In late 2015 expert Sinologists reportedly characterised China under Xi
Jinping as: promoting a concept of 'shared destiny' domestically and
internationally; combining Marxist / Leninist / Maoist thinking with a
revival of Confucian statecraft; building power exclusively under China's
'princelings'; and possibly causing concern to China's neighbours about
the nature of the 'shared destiny' that China intended to lead them
towards
Show: outline
China's President Xi Jinping is adopting Maoist approach to foreign policy -
according to Geremie Barme. This is seen as 'foreign policy acupuncture'. China
is promoted as part of a 'community of shared destiny. While neighbours worry
about China's activism, Xi has rejigged concepts of imperial dynasties to enable
Communist Party to assert uniquely 'Chinese' ideas in world affairs. Barme (with
Linda Jaivin and Jeremy Goldkorn) has exited third China Story Yearbook
for China in the World Centre at ANU. Barme says XI is adopting a (disruptive)
Maoist stance. 'Shared destiny' is the catch-all concept. It provides a
framework for revived concept of 'all under heaven' - which assumes that China
can be moral, political and economic great power. Deng Xiaoping worked hard to
demolish personality cult of Mao - and to prevent mini-Maos re-emerging. Xi
however is going in the opposite direction. Xi has more titles than the Qianlong
emperor in 18th century. He is China's chairman of everything. His
status as member of red 'princelings' encourages the view that his mission is to
restore communist party as China's salvation - believing that history is created
by 'Great men'. He has a Marxist-Leninist-Maoist worldview - tempered by
revived Confucian statecraft - known as 'imperial thinking'. All 48 'tigers'
(high level officials charged with corruption under Xi after Bo Xilia's
downfall) are from 'commoner' families. None are Xi's peers - 'the second red
Generation' (children of Communist Party founders. The 'shared destiny' concept
is new but party has always claimed to express a community of shared aspirations
/ values - with an emphasis on collective / party probity / traditional over
Western values / quelling Internet / repressing dissent. While many in the Asia
/ Pacific agree that they have a shared destiny with China, many may not share
the increasingly-confining vision of Communist Party[1]
The IMF announced that China's currency would be given 'reserve
currency' status in its Special Drawing Rights system. Most observers
viewed this as a positive move (eg to encourage China to liberalize its
financial systems and join into the international financial system).
However as noted in
China Does Not Have
a Normal 'Currency' above, the issue is quite complex.
Show: outline of some observer's views
IMF added Chinese yuan to its elite basket of reserve currencies - a move
designed to spure greater liberalization of the world No2 economy. It confers
international status on the yuan as China starts to ease restrictions on
exchange rate and financial system. It also raises risks (eg in terms of
volatility in China's trade and potential capital flight). What has been done
acknowledges China increasing economic importance (ie 15% of global GDP - up
from 5% a decade ago). It is also part of China's efforts to boost its economic
leverage (eg with lending to foreign governments, encouraging use of yuan for
trade and launch of AIIB. However reserve currency status is largely symbolic -
as the IMF uses reserve basket to denominate emergency loans - not to create an
internationally traded asset. Having yuan truely accepted as reserve currency
will depend on China's success in deepening its financial system and adding far
greater transparency [1]
Chinese yuan is to join IMF's basket of currencies. This could lead
to investment flows that disturb global financial system. This market
the end of $US dominance that did not keep pace with global economic
changes and weakens Western control over global market machinery. IMF
deemed yuan to be 'freely usable' despite China's tight capital controls
and bungling in Shanghai stock market. IMF believes that China's reform
drive will create more robust international monetary / financial system.
China's central bank may be using IMF push to defeat opponents of
free-market policies. The change looks merely symbolic - but actually
has profound implications. The global currency system has been
dangerously unbalanced - because of dependence on $US - eg as revealed
by $9tr of cross-border lending in dollars outside US juresdiction . $US
centric world led to 'global savings glut' before GFC - and then swamped
emerging markets with excess liquidity created by US Fed - a process
that is now reversing. global $US standard is incompatible with
multi-polar trading system as many emerging markets are more dependent
on China. Thus finance and trade have been out of alignment. China could
face problems from opening its system (ie floods of money in or out).
$17.3 tr may be in Chinese deposit accounts (mostly held by rich
Chinese) would could be able to switch half their assets in to foreign
assets. There is concern about capital flight after devaluation scare in
August. This could trigger a yuan devaluation that set off a
deflationary shock to world economy. Some believe that $2.2tr is waiting
to leave - but this could escalate. Authorities are trying to keep tight
exchange-rate control because of this. Yet China can't have independent
monetary policy, an exchange target and open capita account. Central
bank believes that open capital account is the solution - but does not
know how to do this safely. However there may also be a torrent of
foreign funds wanting to get into China's bond market. China's hopes for
this may however have gone backwards because of heavy-handed stock
market intervention. China's hope for a superpower currency depends on
establishing rule of law, competent supervision, consistency and global
trust [1]
IMF has given Chinese yuan reserve currency status - but gaining real
acceptance for yuan by reserve banks as a currency to hold foreign
exchange reserves in will require much more reform by China [1]
IMF has included Chinese yuan in its SDR currency baet. However this
is largely symbolic and is unlikely to have significant effects in the
short term [1]
In December 2015 China was accused of again trying to 'scuttle'
international climate change agreements as it had done
in 2009. China raised high expectations of its contribution prior to
conference - but these have not been met in negotiations and the Like
Minded Developing Country group (of which China is a member) seemed to be
trying the block progress and slow negotiations [1]
Show: CPDS Comment
CPDS Comment: In fact China with US took leading roles in
getting agreement to ambitious goals for dealing with climate change which
ignored uncertainties about mainstream scientific assumptions about the
issue - see Significant
Climate Science Issues Remain Unresolved)
China's One Belt One Road initiative was seen to be very, perhaps
unrealistically, ambitious.
Show: outline
It involves many
infrastructure connection between China, Russia, Central Asia and the
Indian Ocean - and is complemented by ports etc across Indian Ocean in
'Maritime Silk Route'. The AIIB and Silk Road Fund have been established
to help finance this. This reflects China's ambition to remake the world
around it and dominate the Eurasian continent. But there is skepticism
about how much will be built. Elements in Indian Ocean seem just about
long term aspirations. Progress requires cooperation from unstable /
corrupt / conflict-ridden regimes - especially in Indian Ocean. The
Maritime Silk Road is poorly defined and possible elements that have been
developed are not integrated - and nations embroiled in maritime
territorial disputes with China look warily at port proposals. India is
particularly wary. Whatever happens in the Indian Ocean will be much
slower than is normal for China's activities. [1]
China warned those involved in financial markets who did not
invest in accordance with China's official economic strategy that it
would act to ensure that they did not profit (eg from trading in
financial markets which (say) put China's currency, the yuan, under
pressure) [1];
Japan indicated
that it was interested in coordinating economic policies with China -
eg to defend the yuan.
In early 2016 it was reported that China was seeking to attract the
children of foreign elites to study at China's universities [1]
Show: CPDS Comment
CPBS Comment: The significance of this is
perhaps that the international order which China seems to be
seeking to create would involve coordination by China's social
elites of networks of social, political and business elites
worldwide
It was argued that China was positioning itself as the centre of an international economic system that could dominate the world.
Very large Chinese investments were being directed along the One Belt One
Road route. The world economy was seen to be being driven by China's urbanisation, population growth and consumerism [1]
In April 2016 it was
argued that, by opening its huge bond markets to foreign investors,
China's was: (a) trying to spread the risk associated with the huge debt
levels that have been incurred to drive growth; and (b) putting the
international financial system at risk - as China does not have financial
markets as others know them as these are just a political tool.
After having been the cause of concern for some years there was
increasing alarm about China's risk of a financial crisis because of
its very high debt levels and economic dependence on rapidly increasing
those debt levels.
A new Philippines president who had encouraged the use of ruthless
methods to deal with drug addicts and dealers decided that it would be
desirable to end his countries' economic and military links /
collaboration with the US in favour of China and Russia - while at the
same time announcing apparently constructive economic options which
presumably had been suggested by Chinese connections.
The 2016 US presidential campaign was seen to have resulted in a loss
of confidence in the US in Asia [1]
The BRICS countries agreed to establish their own credit rating agency
to cater for the needs of developing countries better than those based in
Western countries [1]
Indonesia indicated that it was not prepared to be involved in disputes
about China's military expansion into the South China Sea because of its
economic dependence on Chinese capital [1]
Illiberalism was seen to be rising in Asia
Show: outline
Due process and human rights have been ignored in the Philippines in attempts
to deal with real drug problem. In Thailand a Hong Kong democracy activist was
arrested at China's request. Debate about Asian politics is related to strategic
competition between US and China as they different views of the region's
strategic order. But another differences relates to the competition between
liberal and illiberal Asia. Hopes that economic progress would lead to
liberalism have proven illusory. Following the spread of democracy in 1990s and
early 2000s, the forces of illiberalism have been rising. Thailand has resumed
military rule. The Philippines has a proto-strongman who care little for liberal
niceties. Malaysia is in political crisis. Japan's Abe government has attacked
media freedom. The only liberalizing story is in Myanmar. Liberalism does not
just imply democracy but also the impartial rule of law, free expression /
association; limits to state power; and the prevalence of markets in shaping
economies. Indonesia and Australia are liberal. China, North Korea and Laos are
not. Other countries are somewhere in between - with illiberal forces rising [1]
China participated an agreement to establish a marine park in
Antarctica that was brokered by the Commission for the Conservation of
Antarctic Marine Living Reptiles - after it (and Russia) had frustrated
such proposals for many years [1]
China has been actively involved in seeking international agreements on
economic activities and improved global governance - and in using its
developing services demand to boost the competitive position of Asian
brands relative to Western competitors
Show: outline
During recent G20 China's president promised emphasis on supply
side reform - and urged global leaders to join him in 'real action ..
not talk'. China is using pledges made at G20 to turn 'China dream into
a 'China program' - as a step towards a 'China solution' to the world's
problems. The Communist Party flew global leaders to an October
meeting - and participants praised China's efforts to promote
international cooperation and global economic governance. They praised
public goods provided by China to global economy and global governance -
eg through OBOR project to generate new demand by increasing effective
supply. Despite this China is having trouble rebalancing its economy.
.... Fixed asset investment remains over 50% of GDP - but it used to be
70%. The 'other' category of China's GDP used to be 3-5% and is now 19%
(including education, logistics, tourism, e-commerce, software. R&D,
healthcare). Most growth is driven by private sector. China's
private-dominated sectors are providing investment options for brands
from the rest of Asia to become more competitive with Western brands.
[1]
Show: Will China Again Become the 'Middle / Coordinating / Organizing Kingdom'?
Will China Again Become the 'Middle / Coordinating
/ Organizing Kingdom'? - email sent 3/11/16
Your article (which I have outlined
here)
highlighted indications of China’s efforts in both global and Asian contexts
to re-establish a controlling role like that it had in Asia as the ‘middle /
coordinating / organizing kingdom’ prior to Western expansion (ie by engaging business and
political leaders from other parts of the world in exploring economic and global
governance options that China’s unaccountable authoritarian regime would
initiate and control). Other indications of such efforts are on my
web-site at Creating
a New International 'Confucian' Financial, Economic and Political Order.
However I noted your observation about the continued
escalation of China’s debt levels – and, in the absence of any serious
political effort in the Western world to defend the liberal -international
order, debt may be what stops China’s current ‘soft
power’ bid for global economic / political dominance.
The neo-Confucian
methods that China has used to engineer ‘real economy’ miracles since
the late 1970s do not involve resource allocation with a view to ensuring return
on / return of capital (as decisions are based on elite consensus about
increasing market share /cash flow
rather
than financial calculations). And though economic growth is now
occurring in China mainly through enterprises that are not state-owned, it is
likely that their growth is also being facilitated by a similar process (see
indicators in China’s
Problem is Neo-Confucianism Not ‘State Capitalism’). As you noted
President Xi is emphasising the maintenance of complete state control. China’s
education system is apparently seeking
to create a compliant population. And supposedly ‘private’ enterprises
in Japan’s ‘non-capitalist
market economy’ were able to be developed very rapidly (until the late
1980s) by its neo-Confucian economic and financial bureaucracy (ie MITI and the
MOF).
Your article indicated that China now seems to be using
similar methods to boost the role of
increasingly-internationally-competitive services on the supply side of its economy
and the economies of those (especially in Asia and emerging economies) who are
prepared to accept the role of political ‘tributaries’. This can be expected
to have an effect in the services sector similar to the de-industrialization
that Europe and North America experienced in the 1960s and 1970s as a result of
the post-WWII development (initially by Japan) of cheap
increasingly-internationally-competitive supply-side capabilities
in mass-production manufacturing. After the de-industrialization challenge to
Europe and North America was recognised, market liberalization strategies (which
reduced political obstacles to economic change) were used to speed adjustment
into new higher value-added sectors, mainly services (ie the sectors that are
now potentially subjected to a new ‘de-industrialization’ threat). Market
liberalization tactics were and remain an inadequate response – for reasons
suggested in
Defects
in Economic Tactics, Strategy and Outcomes (2000+).
Given chronic Western ignorance of
the
nature of the challenge and of better policy options, China’s main
constraint is that (while neo-Confucian methods can be effective in engineering
‘real economy’ miracles) they can’t do this without creating
ever-worsening domestic balance sheets, both in China and probably elsewhere.
China’s efforts to overcome its balance-sheet constraint by using the methods
that worked in generating ‘real economy’ miracles to achieve real estate and
stock market booms over the last few years did not seem to work (see
Importing
Risks from China).
Politically Western societies’ ability to now mount any
effective defence of the post-WWII liberal international order seems weak to the
point of non-existence.
Why: Political infighting
is widespread as is a desire to withdraw from global engagement. The latter
would leave the field open to China to take a ‘middle / coordinating /
organizing
kingdom’ role (as your article indicates that it is increasingly doing). The
Obama administration in the US sought as part of its Asia Pivot to establish a
Trans-Pacific Partnership (TPP) as a future oriented framework for economic
activities in the Asia-Pacific which would exclude China. Both US presidential
candidates have now indicated
that they would not support the TPP. Both are also
keen
to challenge China – but would seem unlikely to do so successfully.
Clinton would reportedly try to do this by legally enforcing international
agreements against a Chinese regime who: (a) seem intent on displacing
Western-style ‘rule of law’ arrangements with a ‘rule of man’
international system; and (b) showed scant regard for the international legal
systems in relation to China’s South China Sea expansion. Trump would
reportedly impose high tariffs on imports from China at a time when: (a) the
main competitive challenge that the US is likely to face is in
tradable / increasingly-high-value ‘services’
(rather than ‘goods’ to which tariffs can be applied); and (b) China is not
only seeking to engineer a ‘supply side miracle’ in its service industries
but to boost service supply capacity in other countries to boost incomes and
thus create stronger markets for its goods and services outside the US and
Europe.
However, even though there do not currently seem to be any
prospects of effective political challenges to the ongoing rise of China’s
illiberal rule-of-man system, public recognition of the problem is likely to
eventually encourage a serious response (eg perhaps along the lines suggested in
Making
Democracy Work Again).
John Craig
In late 2016 it was argued that a new Russian-led
China-backed Eurasian-centred world order may be in the making - and that
a confrontational approach to China by US president-elect could serve
China's interests.
Show: outline
Suggestions that Russian president is seeking to create a Russia-led
China-backed Eurasian-centered world order may been extreme - but are not so far
fetched against backdrop of US allegations of Russian cyber-warfare against US,
German intelligence sounding the alarm, East European leaders having their fears
confirmed and Moscow / China reaching out to Western supporters of the idea.
There is a pattern in Russian moves that would serve China's interests
especially if Trump adopts a confrontationist approach to China. Russian
activity is seeking to undermine trust in democratic structures and manipulate
elections. Factors supporting Eurasianist idea include: support from Turkey's
leadership; Russia's efforts to fuel populist resentment in the West and to
interfere in former Soviet states; and China's One Belt, One Road initiative
which would link Eurasia for infrastructure and trade. Russia sought to
influence the outcome of US presidential election and German intelligence
agencies have warned of similar possibility in coming German elections. Russia
seems to be providing funding for Alternative for Germany party. Russia is also
seen to be seeking to boost Eurosceptic populists. The US and the West have a
long history of waging disinformation and de-stabilization campaigns. Moscow and
Beijing have been reaching out to Western intellectuals and journalists who have
been charting Eurasianist advances. This does not prove that a Russia-China plot
exists, but it could be dangerous for the West to ignore the possibility [1]
Malaysian Prime Minister Najib Razak
visited China in November 2016 where he signed a series of deals,
including a significant defence agreement, raising concerns that Malaysia
could be veering away from its partnership with the United States. [1]
Thailand and the Philippines are seen distancing from the US and
leaning toward China. This should not be understood as switching
allegiances but as refusing to choose sides and diversifying their
economic, diplomatic and military relations with multiple regional powers
[1]
China's president offered a vigorous defence
of free trade to World Economic Forum - while emphasizing China's desire
to create a play a greater global role as the US turned inward. He
cautioned countries against blindly pursuing their national interests in
apparent reference to 'America first' policies of US president-elect
Donald Trump. Given Trump's inward-looking approach and trouble in Europe
a vacuum has been created that China is eager to fill. Many WEF sessions
were focused on Asia. WEF founder Klaus Schwab suggested that the world is
looking to China. Former Swedish PM referred to vacuum in economic
leadership that China aims to fill. Though Xi pained a picture of China as
'wide open' trading partners are concerned about restrictions on
investment in China while China invests offshore. President Xi announced
an intent to ease limitations on investment in China's banks. Bob Moritz
(PWC) suggests that the world will need to watch how China pivots over the
next year. China is the world's top exporter and depends on free trade. Xi
acknowledged that globalization has benefited some while harming others.
Globalization was not seen to be to blame for the GFC - as excessive
pursuit of profit was responsible. Last years WEF was concerned by the
risks of a hard economic landing in China. Those concerns eased though the
IMF warned tht there were still problems - and some economists argue that
China would be the biggest global risk if the US had not become such a
centre of uncertainty [1]
There were signs that China realized that its heavy dependence on debt
created financial risks - and that managing that risk would lead to a hard
landing in China which might be offset - though probably only to a minor
degree - by increased foreign investment (see China's
Likely 2017 Financial Crisis)
China's president warned against
protectionism to WEF in January 2017. He was accompanied by
heavyweights of China now huge private sector. President-elect Trump
criticised China's admission to WTO as a one-sided deal that allowed the
greatest job-theft in history. But, while China gained access to markets,
it also had to open its own - eg by cutting tariffs from an average 15% to
5%. In November 2016 China's president had said that openness is vital for
regional economic prosperity and pledged to open China further. There is a
gap between China's rhetoric and reform that undermines its authority to
exercise global leadership. It average tariff is 4.5% (double that of US)
and there are many complaints from foreign governments and companies about
non-tariff barriers to trade. Similar problems apply to investment. The
OECD compiles an index of restrictions on investment. In 1997 China's
index was the world's highest. It has since fallen but is still 4 times
that of the US and second worst only to the Philippines. In relation to
trade China has loosened it's restrictions and now has FTA's with 10
countries. But it has a long way to go to be regarded as the new champion
of an open world economy. China recently indicated an intent to be be more
open to investment - and it might provide international leadership in this
respect. Globalization is viewed positively in China and across
Asia. Australia also favours and open economy - and this is the source of
Australia's biggest trade surplus [1]
American companies don't feel welcome in China any more. And while
Chinese President Xi Jinping defended globalisation at the World Economic
Forum in Davos, US companies say his government is not practicing what he
preached. [1]
"Xi Jinping, at the World Economic Forum, posed as the champion of
globalisation, even preaching against protectionism and populism. “Just
blaming economic globalisation for the world’s problems is inconsistent
with reality, and will not help solve them,” he said. [However] if every
nation in the world practised globalisation in the way China does, it
would be a world of constant chaos and near inevitable conflict. ....:
China does not practise free trade. It rigidly and politically polices
foreign investment, frequently showing investors the door once it has
achieved technology transfer. It controls its currency. It directs capital
from its banks, often unprofitably, to favoured industries. It shamelessly
subsidises industries. If foreign businessmen transgress often extremely
opaque regulations, and fall out with the local powers that be, they can
find themselves in jail with months and months going by before charges
are even identified, much less laid. " [1]
The mood in Boao Forum for Asia was much
different to last year when there was uncertainty about China's outlook -
due to slowing economy and banking system problems. Commodity prices had
collapsed and then stabilized - and there was uncertainty about whether
this was sustainable. Though China's economy slowed in 2016 it still
contributed 30% to global growth. Supply side reforms have included
reducing uneconomic steel / poor quality coal production and pushing ahead
with infrastructure. This has increased commodity prices. Nev Power (Fortescue
CEO) said that commodity prices had risen too high and might now ease -
but were better than a year ago. Jason Clare (Opposition trade, investment
and resources spokesman) noted a bullish feeling on iron ore and coal
prices. Forum (China's Davos equivalent) also highlighted China's role in
global leadership related to free trade and globalization - because of
Trump's retreat into his America First rhetoric. The Forum had boosted
cooperation in Asia and its global influence. China's One Belt, One Road
strategy is being pursued as an example of its commitment to
globalization. Trump's 'border adjustment tax' was discussed was seen as a
big risk to global trade - and to the US economy. Trump's isolationism was
seen as improving China's prospects of establishing its Regional
Comprehensive Economic Partnership. This is now the only multilateral
option for Australia. Jason Clare suggested that this might be in place
next year [1].
While US pulls out of trade deals, China's
President styles himself as the defender of gobalization. Centerpiece of
this is One Belt, One Road Initiative. Critics suggest that it is a murky
program that could be a massive waste of resources. A summit on OBOR is to
be attended by representative of 60% of world population and 30% of world
GDP. Projects have been underway for a few years but little is expected to
be achieved for years. EU Chamber of Commerce in China sees OBOR as more a
political vision than a practical plan for investment. China's
development money flows mainly to Europe, US, Australia and Canada - with
little in OBOR region. And China is reluctant to accept foreign investment
in China. Others want to China to do domestically what it wants to do
elsewhere [1]
China will announce further $117bn for OBOR
projects at Summit of national leaders. It has been compared with US's
post-WWII Marshall Plan. It is seen as partly a 'soft power' exercise -
and as a way for China to deal with overcapacity. China needs to climb up
global value chain. China infrastructure spending has caused booms in
Malaysia - and likely in Philippines. Benefits to Australia would be
indirect - ie in emerging trade and investment relationships in (say)
Africa. OBOR is a global initiative. It would provide demand for
Australian commodities. Australia's involvement would be compatible with
national interest - according to Trade Minister (Stephen Ciobo). EU
Chamber of Commerce in China criticises the proposal - because there would
be a need for 2-way trade flows to make it successful and China needs to
make it as easy to invest there as Chinese companies find in investing in
the world. Otherwise it would be a waste of money. Plan is also criticised
for giving preference to Chinese companies (eg Australian engineering
company John Holland now wholly owned by Chinese SOE [1]
Australia's economy is a derivative of
China's in many ways, so what is happening there matters. Leverage in the
financial system is being reduced. This drives up short term interest
rates which is often a precursor to a recession. But this may not apply in
China where the financial system is different, Central bank constantly
manages flow of liquidity. $130bn has been drained from money markets so
far in 2017. Commodities Index peaked in early 2017 and hit lowest
point in 10 months in May. China's tightening is affecting commodity
prices. China is probably firmly in control of the situation. It is
'orderly to take some speculative heat out of the market. China is still
directing credit to real economic projects - and just wants to eliminate
easy / destabilizing speculation. China is known for large infrastructure
projects - and is now taking this to the world. A summit on One Belt, One
Road program was held - an immense project to bring old Silk Road trade
route to 21st century. President XI described it as embodying spirit of
peace and cooperation, openness and inclusiveness and mutual benefit. A
new type of international relationship featuring win-win cooperation;
partnerships in dialogue with no confrontation and friendship not
alliance. This is not how the US operates. ABC suggested China would spend
$1tr on infrastructure with aim of growing world trade by $2.5tr. This is
China's attempt to become the dominant global power for trade / economic
output - as it was from Middle Ages to mid 19th century. The vision will
take decades to play out. It will benefit Australia [1]
India did not send an official delegation to
China's OBOR summit - but rather warned of unsustainable debt burden on
countries involved. Indian foreign minister said India would not
participate in a project that compromised its sovereignty - as projects
would pass through Kashmir and Pakistan disputed regions where India and
China have fought wars . Countries in which Chinese banks and companies
carried out projects might struggle to repay loans. Projects that create
unsustainable debt burdens for communities need to be avoided. India's
criticism as China pledged $124bnand called for old models based on
rivalry and diplomatic power games to be abandoned. India argues that
initiatives need to be transparent and based on international norms, good
governance, the rule of law and equality India is also worried about
expansion of China's economic and diplomatic influence in countries it
considers to be under its sphere of influence. [1]
Though massive and difficult adjustments would be required in East Asia
to adapt to the dominant global order (ie involving a rule of law and
resource allocation based on independent profit-oriented initiative), there are reasons to suspect that the alternative
outcome (despite its perceived benefits) would
involve short-term risk, would be not in the interests of
ordinary Chinese people and would ultimately be ineffective.
Show: short term risk
In the short term the hypothesised plan would involve a race against time.
It would be vital to create alternative 'tame' markets within a
China-centred trade / tribute regime before foreign exchange reserves
became depleted - in an environment in which recovery by major past export
markets was not assured, and the latter's ability / willingness to sustain large
current account deficits would be limited.
Show: problems for China's people
From the point of view of China's ordinary people such an
arrangement may have been best assessed by a former premier of China who was
critical of the path that China's leaders took at the time of the
Tiananmen Square massacres because of: (a) the lack of political stability
where only a few rule; (b) the commercial focus of those with political
power; (c) rampant corruption; (d) social inequality; (e) pervasive
inefficiencies; (f) the lack of benefit to ordinary people of their hard
work
Zhao Ziyang (former Chinese premier) argued that parliamentary democracy would
be the best option for China. After believing that socialist nations' 'peoples
congresses' were better than parliamentary democracies, it was recognised that
the former resulted in rule by only a few. Without a broadly based parliamentary
democracy societies can't be politically stable or have a modern market economy,
and developing countries will run into problems that have plagued China such as
commercialization of power, rampant corruption and polarisation between the rich
and poor. For China the transition requires allowing the existence of other
parties and more democratic processes in the Communist party. [1]
Zhao Ziyang was one of architects of China's economic boom but condemned its
political leadership following the Tiananmen Square massacre. His urge for
reform was based on recognition of deficiencies of China's economic system.
Removing those deficiencies and the creation of an effective market economy were
seen to require the creation of property rights. His initial concern was with
increasing efficiency - which required transparency and freedom to trade.
Ensuring that Chinese people gained returns for their labour was more important
than pursuit of production growth. However under new leadership that path has
been reversed. The dominance of SOEs in industry and banking is a major problem
- and regulators are unable to control them because of the influence of
government policy and the party. There is no separation of China's political and
legal systems. Though growth allowed the emergence of a middle class, the GFC
has strengthened the position of party whose default position is control. There
are many examples of economic inefficiency in China. Economic and political
reform is inextricably linked. Without parliamentary democracy China can't have
a modern market economy. [1]
It can be noted also that China:
tries to control the flow of information to its
own citizens who may thus be unaware of the fact that under such an
arrangement their hard work would remain largely unrewarded so that
China's elites could control a new trade / tribute empire;
From the point of view of the rest of the world, a China-centred trade /
tribute empire that was more-or-less self contained in terms of net supply
and demand would be less macroeconomically risky than has been the case
for that dependent on favourable international financial imbalance in the past. However:
external investors would probably find that
their projects remained forever marginally profitable unless they received
official state patronage - as legal and financial
systems would never be created to allow independent success in those terms.
Concerns expressed in January 2009, that Chinese policies that promote
domestic firms and create barriers for foreign ones might cause US firms
to lose interest in China, may be noted [1];
states
that were not full participants in the system would find that the local
influence of 'Diaspora' was reflected in attempts to gain economic
benefits through insider political influence;
conspiracy theorists would
find entirely new factions to gossip about.
Show: long term challenges
However in the medium to long term, quite severe problems could well arise
internally within such a trade / tribute 'empire'.
China's future aspirations are limited by diverse environmental,
demographic and political challenges which constrain its ability to create
the sort of 'world' speculated above.
Show: examples
Constraints (in
China's Development: Assessing the Implications) referred, for example to:
economic issues including: unbalanced state driven development;
'blunt' economic management tools; a weak private sector; a tendency to
cronyism; problems with economy driven by market-share (rather than
profitability from meeting customer demands); poor competitiveness rankings; imbalance between production
and consumption;
potential future financial bubble if dependence remained on massive
investment with limited concern for return on capital; 'blunt' tools for
reforming financial systems
environmental concerns, which external observers have suggested must
limit its growth and development;
demographic challenges related to the world's most rapidly aging population;
Though the creation of an alternative political and economic
'world' might reduce some of the economic and financial constraints,
the others would remain.
While there may be ways in which an economic system could be organised
primarily on the basis of neo-Confucian social relationships and with limited reliance
on money as a means of exchange, store of value and indicator of the need
for economic change, such a system would probably eventually prove unworkably complex
and inefficient.
Show: Another Structural Problem: Balancing Supply and Demand?
Another Structural Problem: Balancing Supply and
Demand?
A major challenge to the creation of 'Confucian economic world' (no matter
how effective it could be in organising production and rigging markets to
provide some with an appearance of 'profitability') could be the lack of
satisfactory means to balance supply and demand - which are critical to
sustainable economic growth.
Mercantilist economic models prevailed in Europe in the 18th century
where the goal was to use state power to boost economic production - so as to
accumulate a stock of treasure (eg gold). Adam Smith's
Wealth of Nations
critiqued those mercantilist economic models. He suggested that
wealth would best be achieved by a free market. A key characteristic of the
latter is the
ability it provides to balance supply and demand - through an effective price mechanism and
sensitivity by producers to profits.
These have not been features of East Asian economic models so that no matter
how effective the latter are in strengthening the production side of an economy
and arranging markets so that favoured enterprises are 'profitable',
unless a satisfactory way can be found for (say) 'Confucian' obligation to balance supply
and demand internally, they are not likely to prove any more
sustainable than: (a) the European mercantilist systems that Adam Smith
criticised; (b) the Soviet Union, whose command economy was seen to achieve
sensational growth in the 1950s by producing goods that no one wanted; and (c) Japan in the 1980s.
In recent decades balancing supply and demand internally has not been an issue that East Asian
economies have had to worry about - because demand has tended to be expanded
elsewhere (mainly in the US) by easing monetary policy to prevent global
growth stalling in the face of demand deficits in East Asia.
In addressing export markets, the strategies of 'East Asian' producers can
(over-simplistically) be said to have involved maximizing market share (and
cash flow) in export
markets (through low cost quality goods) rather than maximizing profits.
Though some
claim that seeking market share laid the foundation for long term profits (and
there is no doubt that there can be synergistic gains from
the relationships that can be established between diverse activities even if
none are individually profitable) low cost quality
goods were achieved (amongst other things) through modest wages and a high
savings rate to provide capital for investment which did not have to be used
particularly profitably.
While an economic system that targets market share and cash flows has a
sensitivity to demand, this is not likely to be macroeconomically balanced.
Show: example
Example: Development of a solar panel industry in China was supported
by soft loans and subsidies from government. The result was the creation of
global overcapacity (by a factor of two) and an 80% fall in product prices
which has rendered those companies insolvent (though government subsidies
remain) (Grigg A, 'Suntech
shows China's folly', Financial review, 4-5/8/12)
For domestically driven growth within a non-capitalistic 'Confucian economic world', household incomes (from wages and
investments) would have to increase - or else domestic demand would
be unable to closely balance supply. Thus there could be no high savings
to provide ready access to capital for investment. Moreover capital would need to be used efficiently - in ways that minimize costs (rather than merely
relying on modest wages, and fabricated 'profits'). This requires that firms be genuinely profit
sensitive, which seems incompatible with organising production and markets primarily on the basis of social relationships.
In April 2010 it was noted that emerging economies are challenging developed
economies in their presumed residual area of competitive advantage (ie
innovation) and are doing so on the basis of what has been called 'frugal
innovation' to make new products at very low costs [1].
If valid this involves an improvement on the supply side of such economies,
and does not reduce their dependence on strong external demand.
However the political and economic obstacles to China's
system appeared to be becoming very severe and such proposals may be born
of desperation to gain diplomatic victory before the severity of those
problems becomes obvious (see
Heading for a Crash or a
Meltdown?). The latter referred to structural problems such as:
dependence under the current global financial system on favourable
international financial imbalances which can't continue much longer;
an incompatibility between the social equality aspirations of China's
nominal Communism and the social inequalities needed by the methods for
rapid economic modernisation that Japan originated; the inability of
China's leadership to play a sustainable role in a Western style
international diplomatic system; etc.
It can be noted in passing that an intense geo-political context between mercantilism (state-driven
efforts to strengthen national economies so as hopefully thereby to
increase political power) and capitalism (ie independent profit-oriented
investment) was won by the
latter in Europe in the 18th century (as recorded by Adam Smith in The Wealth of Nations),
and such an outcome may be repeated in the 21st century especially given the likely
difficulties of balancing supply and demand
within non-capitalistic economic systems themselves.