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Understanding East Asia's Economic Models |
Understanding East Asia's Economic
Models
The intellectual basis of the economic model that Japan originated, and
encouraged other East Asian ethnic communities to adapt in the 1960s and
1970s, seems radically different to that which has been the basis of Western
economic methods.
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).
In brief the latter refers to:
- the lack of the notion that Western societies inherited from classical
Greece that abstract ideas usefully model reality - and thus:
- an orientation to
intuitive rather than rational / analytical problem solving;
- valuing outcomes that are 'real' or 'concrete' - with little importance attached to 'abstracts' such as ideas,
ideals,
law, financial returns or intellectual property;
- a lack of universalist ethics, or obligations towards those with whom one
does not have a direct relationship;
- the incorporation of Taoism (China's traditional religion which rejects
claims about moral authority) into neo-Confucianism, which allowed learning
from others (as traditional Confucian learning from a study of history had led
China into centuries of backwardness after contacting expanding Western
influences);
- concepts of power in terms of social hierarchy, rather than the right to
make decisions;
- exercise of power through control of access to information which
influences others' decisions;
- government by educated elites whose role is as teacher and guide;
- a preference for invisibly by those who are truly powerful;
- coordination of economic activities through social relationships amongst
elites and Confucian obligations of subordinates to superiors with limited regard to financial calculations;
- the financing of enterprises primarily by debt, because of the desire to
avoid equity owners affecting business decision, and the consequent limited
buffer in the event that losses are incurred;
- a strong savings ethic - noting Confucian notions that wealth should be
accumulated by limiting consumption;
- communitarian / mercantilist
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.
Of particular significance is that the East Asian economic models rely on
neo-Confucian social relationships amongst elites (called 'guanxi' in China) and the
obligations of subordinates to superiors, and give
little attention to financial (ie symbolic) outcomes in coordinating
economic production (see
Structural
Incompatibility Puts Global Growth at Risk, 2003).
While this arrangement can be very effective in creating production
capabilities, 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:
- state-owned banking, and regulatory regimes that tolerate poor balance
sheets in financial institutions;
- avoiding the need to borrow in international capital markets
by suppressing domestic demand
so as to generate cash flows from current account
surpluses (op cit);
- rigging markets to produce favourable outcomes for state-connected
enterprises;
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 were created on the basis of
inflated land values, and invested in excess industrial capacity and
acquiring assets world-wide with little regard to price.
The apparent incompatibility of East Asia's economic models and the
global financial systems based on Western principles has led to increasing
problems since the 1980s - though this was probably not obvious to
average Western observers who had no way to understand the underlying
cultural issues (see
An Invisible Clash
of Financial Systems).
The latter refers to:
- China's conversion from Communism to a variation of the Japanese economic model after 1979
- a very few years after Mao's policies were seen to fail;
- 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;
- the traditional unwillingness to discuss such weaknesses with outsiders;
- the 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.
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 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.
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].
Such explanations, which do not take account of cultural factors and the
similar situation in Japan, are only part of the story. |
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Impacting the Global Economy |
Impacting the Global Economy The necessity to boost
production
and suppress consumption in East Asian societies that adopted variations
on the Japanese 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 unstainable (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).
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 Invisible 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.
Despite their importance most GFC analysts (because of the lack of
information about the East Asian economic models 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'?).
By September 2009, however, the US and Europe had recognised the
necessity for systematic efforts to reduce imbalances (and raised this in
the context of a G20 meeting) - a focus to which China objected [1].
By March 2010, there were signs that the US was 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?)
None-the-less 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?).
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Unsustainable Economic Models? +
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Unsustainable Economic Models?
Large international financial imbalances involving the US can not continue, because of:
The Need to
Reduce Global Financial Imbalances
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).
Even if modest growth resumes in the US and elsewhere in (say) 2010, it will
necessarily be based on much lower levels of consumer and government demand
(and much lower levels of financial imbalances) because of:
- an ongoing requirement to reduce debts;
- the absence of rapid asset inflation to (a) generate tax revenues;
and (b) borrow against to fund household spending;
- the potential difficulties in
funding US budget deficits.
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 has 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 vigourous
campaigns (based on the use of modern communication technologies) to pursue
higher wages [1]
However without radical change, East Asia's growth would continue to depend on
now-unreliable US
demand [1].
New Economic Strategies Must Be Found
Thus 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].
Recognising the
ChallengePeople 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].
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.
The only practical alternative may be seeking 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 Need to Avoid Exposing Financial Institutions
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 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
Invisible 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.
Japan's Predicament
Presumably Japan recognised in about 1990 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 Invisible Clash of Financial
Systems' is the present writer's speculative view of
international events in terms of a 'clash of civilizations' 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 who adopted variations of Japan's economic model.
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 stockmarket 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
- the possible linkage between Japan's predicament and the 'clash of
civilizations' 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.
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 of
they 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?)
China's Predicament
As a result of creativity, effort and the adoption of a variation of the
Japanese economic model, China achieved spectacular progress from the 1980s in the face
of immense difficulties to be seen as a potential economic
super-power.
There was even an expectation some years ago 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 (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 (ie 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', 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.
Some Thoughts on the 'China Era' (email sent 21/8/10)
Professor
Jean-Pierre Lehman
IMD
Re: 'Uncertain
times as we enter the China era',
The Australian, 20/8/10
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.
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;
-
the result has
been a 'clash of civilizations' (in terms of financial
systems) that has been largely invisible to Asia-illiterate Western
observers (see An
Invisible 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 won 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;
-
possible
characteristics of a global 'Chinese era' were suggested in
China as the Future of the World?;
-
the probability
that China's (and Japan's) objective is not to exert global influence
(because this is incompatible with their management methods), but rather
merely to ensure that Western-style democratic capitalist practices
are not dominant in an Asian sphere, is suggested in
Creating a New International 'Confucian'
Political and Economic Order (2009);
-
the probability
that East Asian methods of political and economic management suffer
fundamental limitations is outlined in
Balancing Supply and
Demand and suggests that that China is headed for serious economic
problems (see
Heading for a Crash? /
A 'Ponzi' economy);
-
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.
Creating a New 'Confucian' Economic World?
Various observers have suggested that China has been challenging the US
dollar - but China may not be seeking to replace the $US with the Yuan.
Rather China (and presumably Japan) may be seeking (and presumably have been
seeking for decades) to reduce the role which any currency (ie money) plays
in influencing economic affairs, and replace it with neo-Confucian social
relationships within a substantial part of the global economy.
In simplest possible terms the goal could be to reduce the constraints on
the rule by traditional social elites that arise where financial
considerations determine economic activities 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 consensus amongst social elites and their
subordinates) should
dominate over the interests of rational individuals (as electors, politicians, consumers
or entrepreneurs).
The goal would not be to 'rule the world', but
merely to ensure (as Japan first sought in the 1930s) that a significant part
of it is not governed in accordance with Western democratic capitalist
principles.
That such a development (which would make econometricians and many
political scientists redundant) might
be considered and might be consistent with emerging events, is considered
below.
The constraint
on the economic models Japan promoted throughout East Asia lies on the demand side (ie
on its dependence on export demand - especially
from the US, and on the ability that the US had had to productively absorb
surplus savings) and no amount of additional supply capacity is going to solve
that difficulty. In the absence of strong external demand, under Western
global economic principles growth driven by domestic demand would merely run down foreign exchange reserves and
eventually lead to a financial crisis because of the lack of traditional capitalistic
attention to profitability that characterises those models (see
above).
A solution might be seen to lie in creating an updated version of the
China-centred economic 'world' that existed prior to prior to the expansion of
Western influences - which would also give effect to Japan's
WWII goal of creating an 'Asian Co-prosperity Sphere'.
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
[to be completed]
Features of such an international Confucian 'world'
might be expected to involve:
- a China-centred 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 (a) controlled that 'world' and (b) ensured that China's people
work hard for limited material reward, so that 'tributaries' gained real net
benefits from the arrangement;
- primary reliance on socially-coordinated (ie power rather than
profit-seeking) economic transactions within and amongst China and its
'tributaries' - though with profit-seeking enterprise allowed on the
margins;
- rigging domestic markets through 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-focussed' investments could be attracted by rigging associated
industrial activities through cartels;
- 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 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 apparently incompatibility of East Asian economic models and the
prevailing international financial regime have led to indications that alternative
regional arrangements were being considered for decades to consolidate the
long-established role that China's Diaspora have played as a China-focused
economic 'empire' especially through SE Asia.
For example,
An Emerging East Asian
International Order? referred to:
- claims by leading officials that Japan is a 'non-capitalist market
economy' - which is reasonable as profit-seeking (the key feature of
capitalist enterprises) 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.
The possibility that socially-coordinated cartels
(rather than reliance on conventional market transactions) may be being put into
place to promote the 'profitability' of state-favoured enterprises and banks is
suggested by:
- 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 through 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 2009 responses to the GFC may be consistent with a desire to create a
new China-centred trade / tribute empire as speculated above
- though this is by no means certain. Steps taken have 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);
- potentially retaining socially-coordinated 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.
Specifically it is noted (eg see Doing China's Own Thing?)
that:
- 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;
- domestic consumption
has been moderately boosted;
- 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.
China's efforts in late 2009 to subvert United Nations talks intended to
negotiate an international agreement on responding to climate change may
indicate the start of 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'
machinery.
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-centred 'tribute'
system should be recognised. 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.
Other observers have suggested characteristics of the sort of political
and economic order that China might seek.
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]
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 a capitalistic search
for profit), there are reasons to suspect that the alternative
outcome (despite its benefits) would
involve short-term risk, would be not in the interests of
ordinary Chinese people and would ultimately be ineffective.
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.
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 controls 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 Chinese 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 export-led industrialization in the past. However:
- its radically different modus operandi would
prevent the
emergence of any effective and uniform 'global' systems (ie global financial regulation)
- and this would be mildly irritating;
- the renewed inflationary
risk from using monetary policy as a tool for macroeconomic management
(which would arise when cheap imports became less of a constraint on
producers' pricing power) would be a greater problem;
- 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.
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.
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;
-
an autocratic political system subject to constant internal stresses.
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 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.
A Fundamental Problem: Balancing Supply and Demand
[Preliminary]
The 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') would be the lack of
practical 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 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 the past balancing supply and demand has not been an issue that East Asian
economies have had to worry about - because this tended to be achieved by
expansion of (mainly) US demand through easing monetary policy to compensate
for 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 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, 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.
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 for domestically driven growth within a 'Confucian economic world', household incomes (from wages and
investments) would have to increase - or else domestic demand would
be unable to more 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.
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