US gropes, muscular China wrestles By Benjamin A Shobert
Several decades have passed since the United States-China relationship was
first marked by the sort of mutual suspicion and acrimony that currently
pervades.
In the aftermath of the 2008 financial crisis, the US model, broadly reliant on
free-market forces coupled to political liberalization, is perceived by many in
China as flawed. Coupled to this is the feeling that America's recent political
misadventures over its deficit show that Western democracy is hardly always a
conducive or productive vehicle for ensuring society's best interests.
Washington seems only tangentially aware of how its political strife and
economic malaise is reverberating around the world, sending the uncomfortable
message to even America's most
resolute friends that this is a country deeply in the grip of a crisis of
vision, leadership and execution.
While Washington sinks further into the morass, conversation in China is
becoming more focused on how the Beijing model can be further refined, and
where the country's existing development track might have been too heavily
reliant on Washington's policy recommendations.
Western understanding of China's internal political dialogue has always
struggled to peel away the veil surrounding the Chinese Communist Party's
internal workings. This is why, in part, understanding the various ideological
camps within the party has been so problematic. But even China's authoritarian
grip on information is incapable of completely obscuring the various factions
that have proposed their own ideas about how China's politics should change
given what the world has learned about capitalism post-2008.
These opposing views are wrestling not only with criticisms of the capitalist
free-market model, but the governing realities Beijing is facing: rising income
inequality, the dislocation effects of economic development, political unrest,
and inflation. For those in China who have the responsibility of governing the
country's economic policies, while these are in many ways the problems born of
success, they also hold the potential to give rise to the sorts of issues that
could destabilize the country.
Within China, two primary political camps exist: the New Left (xin zuopai)
and the Rightists. The Rightists have traditionally been the vanguard for the
Washington Consensus within China. They believe the country should pursue a
path of further economic reforms and political freedom in line with the most
common practices of Western governments. In contrast to the Rightists stand the
New Left.
According to a July 2011 report published by the Center for Strategic and
International Studies (CSIS), written by Charles Freeman and Wen Jin Yuan, the
New Left "believes that China should gradually move toward a political system
based on 'democracy with Chinese characteristics'; in terms of economics, they
think the current economic reform should not only focus on boosting the
economic growth but also on establishing a solid social safety net and
enhancing social equity."
The New Left, long suspicious of the ability of an unrestricted transition to a
free-market economy to address China's income inequality and agrarian poverty,
had been limited in their ability to stop Beijing's reform of the State Owned
Enterprises (SOE), the smashing of the iron rice bowl, and the elimination of
price controls that marked China's economic reforms from 1988 to 1993.
With the collapse of America's economy, the New Left's criticisms have once
again been elevated and are now gaining traction in Beijing. As the CSIS report
states, "In recent years the New Left's views have gradually become popular
with the Chinese people, who are increasingly dissatisfied with the current
economic development path and seek alternatives to solve the inequality problem
arising from the market reform."
Among the New Left's most prominent criticisms of the Washington model was
their belief that a strong SOE sector in China's economy is essential to
assuring labor wages remain high and that job security is extremely stable;
these both fly in the face of the previous Chinese model which sided with
America's view that China should force SOEs to compete for labor, capital and
market access.
Perhaps most poignant of all these push-backs may be how Washington's
intervention to save certain key industries - automotive, banking and insurance
specifically - has empowered China's New Left to argue for the truth behind
their particular idea about state involvement in key industries. For the New
Left, Washington's decision to nationalize certain companies was an
acknowledgement that the free-market is prone to certain ills that require the
state to become involved.
The New Left believes that rather than making this engagement only in the
throes of a crisis, a government should structure the national economy in such
a way as to anticipate which sectors - and even which companies - are the most
vulnerable, and ensure they remain under the control of the Party.
Zuo Dapei, an increasingly popular economist in China, is a good example of the
New Left's criticism of the American model. According to Freeman and Yuan's
analysis of his work, "China's current pro-market economic development model is
a blunder since the financial crisis has already illustrated 'the bankruptcy of
the privatization idea'; he points out that the advanced Western economies all
have had to nationalize their major banks, thus proving that in the current
world, China still needs SOEs to serve as the 'pillar of the economy'."
As outsiders attempt to understand how much influence the New Left has on the
Party's thinking, policies such as Indigenous Innovation have come into focus.
Beijing's Indigenous Innovation policy appears to be a direct result of the New
Left's desire to see China elevate technological development ahead of economic
policies focused on protecting low cost, labor intensive manufacturing.
According to the CSIS report, "indigenous innovation becomes a national
strategy mounted by the Chinese government to enhance the development of
technological innovation in domestic firms so they could eventually have the
ability to produce high-tech products and no longer rely on the research and
development accomplishments of foreign firms."
For a group of ideologues that are heavily reliant on economic nationalism, the
indigenous innovation policy offers one way to couple their view of a strong
state with their analysis of what is likely to stifle future job growth across
China.
In the midst of America's economic problems, it is easy to see the New Left's
criticisms as valid, and to take their ideas about what China needs for their
economy to continue growing as gospel. But this could well be a mistake,
because in the New Left's advocacy for a strong and protected SOE sector, China
could be sowing the seeds of a future crisis.
The CSIS report highlights two of these concerns: first, that because SOEs are
typically funded by state-owned banks and are the recipients of below-market
rates for capital, many of these SOEs have badly over-expanded. Also as a
consequence of this, many of these SOE businesses would not be able to pay
higher or at-market rates for capital; should a crisis force interest rates up,
Beijing would have to directly intervene to capitalize businesses whose profits
are not sufficient to make up for the increased expenses.
But a second criticism raised by the CSIS analysis written by Freeman and Yuan
is most troubling: that spending by SOEs has been heavily directed towards
infrastructure versus stimulus for individual consumer spending. This is
because infrastructure remains the best way of creating jobs for China's
migrant workers. These protected industries not only stand a very good chance
of losing their protected status at some point due to an economic crisis where
additional infrastructure simply cannot be justified, but when they do, the
economic dislocation the SOEs will spread will be extreme.
In their report, Freeman and Yuan quote Yao Yang, "an economics professor from
Peking University ... 'Whereas governments in most advanced democracies spend
less than eight percent of government revenue on capital investment, this
figure is close to 50% in China ... Residential income as a share of national
income is declining, making the average citizen feel poorer while the economy
expands'."
The New Left also has some legacy problems with its approach, not least of
which is answering the question of whether the SOEs chosen to remain protected
are those most critical to China's economy, or simply the most lucrative? For
all the ideology surrounding the role of state-owned and state-directed
industry, the nagging question of who benefits from this segment being walled
off from outside competition is worth considering.
In many ways the political conversation taking place within China between the
Rightists and the New Left is not unlike that between the Republicans and
Democrats within the US. Both the Rightists and the Republicans want their
respective governments to get out of the way and allow for greater competition;
both the New Left and the Democrats believe government has a role to play in
protecting the interests of the common man through ensuring the viability of
key industries.
In this way, the dialogue is a reminder of how much the two countries have in
common with one another, but also a warning that any solution to each country's
problems is clarity and resolution within your own house before seeking
remedies outside our respective borders.
Benjamin A Shobert is the managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses
bring innovative technologies into the North American market.
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