Brexit Financial Neoliberalism

The Chinese Economic Model: Threat or Future

Reading Time: 5 minutes

The collapse of the Soviet Union brought with it the end of the Cold War and an apparent end to any challenge to Western capitalism. Fukuyama famously called it “the end of history”, others called it the end of ideology. Western neoliberal hegemony and “free markets” were to be the new unchallenged normal.

It wasn’t long before this myth was tested. In the West, the free market economics of Thatcher and Reagan had hollowed out manufacturing bases even before the Soviet collapse. In the East, originally led by Japan, a new economic model was announcing its arrival. Now known as “state guided capitalism”, the state would determine priorities and commission the work – but then hire private enterprise to carry it out.

This model was so effective that it posed an existential threat to neoliberalism. By the end of the 1980s Japan had become one of the leading economic powers in the world. Their model had been exported to, and was proving successful in, South Korea and the other “Asian Tiger” economies.

When the Soviet Union collapsed, many of the former communist countries started looking to this model (and the success of the likes of Japan and South Korea) as viable alternatives to the neoliberal model of debt-based money and “free markets” promoted by the IMF and USA. Fukuyama’s “end of history” narrative had met an immediate challenge.

In “A Century of War”, the author William Engdahl wrote:

The [Asian Tiger] economies were a major embarrassment to the IMF free-market model. Their very success in blending private enterprise with a strong state economic role was a threat to the IMF free-market agenda. So long as the Tigers appeared to succeed with a model based on a strong state role, the former communist states and others could argue against taking the extreme IMF course. In east Asia during the 1980s….. rising social security, universal education and a high worker productivity were all backed by state guidance and planning.”

The response from the Western powers was all to predictable. In much the same way as the US had engaged in the Cold War to destroy the Soviet Union, now Western financial interests set out to destroy the Tigers. To cut a long story short, Japan and the other Tigers were “persuaded” to adopt a free market system and open up their economies to foreign investors. Vulnerable economies were then taken down one-by-one by Western speculators in the Asian crisis of 1997-98. Post 1998, China remained on its own as the sole threat to the Western model, and it is this threat that explains the current trade and currency war.

The emerging “Cold War” between China and the US is not an exact copy of “Cold War 1”. China, while being a socialist country run by a Communist Party, is much more sophisticated diplomatically and flexible ideologically than the Soviet Union ever was. I will allow myself to digress here a bit to head off a very predictable “critique”. Some leftists will object to my description of China as “socialist”. Rather than argue that here, I will simply say that in this case lets just follow Parenti’s advice.

You don’t have to call it “socialism” if you don’t want to. Call it “curtains” for all I care. What is important is that China’s economy is fundamentally different from the USA’s, and it is this difference that explains the current tensions. And make no mistake about it, in China business is very highly regulated and government directed – unlike in the Western model. Private businesses of course have the right to operate, but they have very strict social and environmental responsibilities – neglect those responsibilities and they lose the right to operate.

Lets try to make things a bit clearer by considering some current events. US politics are currently dominated by the Trump presidency, while British politics are dominated by Brexit. Linked to both are recent developments regarding each country’s currency. In the US the Federal Reserve recently cut interest rates, a move that market experts explained was to prevent the dollar from becoming overvalued.

In the UK, Sterling has become almost 1:1 with the Euro, which Brextremists argue is a good thing for a post-Brexit British economy. The theory of both the Americans and the British is that a cheaper currency will make their products more attractive in foreign markets, thereby providing a boost to their manufacturing bases. And this could have been a valid point, if the neoliberal model these countries follow hadn’t already hollowed out their manufacturing bases decades ago.

The problem with this theory has been brilliantly explained by the economist Michael Hudson. As Hudson explains, making our products cheaper abroad will do very little for our economy because we no longer have a competitive manufacturing base. Our workers today are in the service sector. A cheaper dollar (or pound) abroad will only make consumer goods more expensive in our shops.

What is mainly devalued when a currency is devalued, according to Hudson, is the price of the country’s labour and the working conditions of its labourers. The reason our workers cannot compete with foreign workers is not that our currency is overvalued. It is due to the higher costs of housing, education, medical services and transportation. In competitor countries (like China), these costs are typically subsidized by the government. In the USA, and increasingly in the UK, they are not.

America’s rival in the trade war is obviously China, a country which subsidises not just worker costs but the costs of its businesses. The government owns 80% of the banks, which make loans on favourable terms to domestic businesses, especially state-owned businesses. If the businesses cannot repay the loans, neither the banks nor the businesses are typically put into bankruptcy, since that would mean losing jobs and factories. The non-performing loans are just carried on the books or written off. No private creditors are hurt, since the creditor is the government and the loans were created on the banks’ books in the first place (following standard banking practice globally).

As Hudson makes clear:

“If China had been crazy enough to have students loans and leave its graduates impoverished, instead of providing free universities, China’s central bank could simply wipe off the student loans. No investors would lose, because the banks are owned by the government. Its position is, “If you’re a factory, we don’t want you to have to close down and unemploy your labor. We’ll just write down the debt. And if your employees are having a really hard time, we’ll just write down their debts, so that they can spend their money on goods and services to help expand our internal markets.”

Western banks, following the IMF neoliberal model, are owned by stockholders and bondholders. They would never consent to the banks forgiving many categories of loans. That’s why public banking is so much more efficient from an economy-wide perspective than private banks. It protects the individuals, and by protecting them allows them to continue to take part financially in their local economy, which in turn keeps the local economy healthy. Private banks protect only the wealthy elites. That’s why banking should be a public utility, not privatised.

China thinks this public owned banking model is superior to the private Western system focused on short-term profits for private shareholders – and this creates tensions between them and the West. American policymakers consider China’s banking model, and its subsidies to its businesses and workers, to be “unfair trade practices.” They want China to put an end to state subsidisation and its other protectionist policies in order to “level the playing field”. But Beijing contends that the demanded reforms amount to “economic regime change.”

As Hudson points out, this is the fight that Trump has against China. He wants to tell it to let private banks run China and have a free market. He says that China has grown rich over the last fifty years by unfair means, with government help and public enterprise. In effect, he wants the Chinese workers to be as threatened and insecure as American workers.

They should get rid of their public transportation. They should get rid of their subsidies. They should let a lot of their companies go bankrupt so that Americans can buy them. They should have the same kind of free market that has wrecked the US economy.

What Trump (and the Brexiters) fundamentally don’t understand is that you cannot make your country “great again” by employing a currency devaluation “race to the bottom” strategy. And we cannot improve our economy by putting up trade barriers (deliberately by Trump or indirectly by a no-deal Brexit) that only cut us off from the benefits of cooperative trade.

In banking, the Chinese have proven the effectiveness of their public banking system in supporting their industry and protecting their workers.

Rather than viewing this as a threat, why not look to this model ourselves?

By Beinn Irbhinn

 

 

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