State Capitalism and Western Society (Part Two)

China vs Russia, and Then Some…

China vs Russia

Continued from Part One

Both Russia and China shared a roughly similar past during the last century, given that in both instances despotic regimes (Imperial China and Russia) were overthrown through military revolutions by Communist insurgencies, which in the process became authoritarian regimes. However, there are four major differences between these nations:

  1. In China’s case there is a strong and reasonably reliable institution in power —the Communist Party— with plausible rules in place; for instance, presidents are elected through an internal, secret, elitist procedure for a ten-year period, with no reelections allowed. Thus, in the Chinese case there seems to be a relatively solid and reliable political structure in place, with capacity to evolve in a constructive manner.

Russia, in turn, for practical purposes is ruled by a dictator, currently Vladimir Putin. Unfortunately, in Russia’s case, the institutions seem to be a façade, a hollow symbol, and not functioning entities. Like Mikhail Khodorkovsky said: “Putinism is authoritarian state capitalism based around one leader.”

  1. Another important difference between China and Russia is that China’s commitment to capitalism, however imperfect, is very determined, whereas in Russia’s case, it essentially depends on one person’s particular mood: Vladimir Putin’s— disregarding whichever seat he may be holding at the time, as Prime Minister or President. As far as Russia is concerned, Putin is the supreme arbiter and is virtually not accountable to anyone.

  1. China’s economic performance has been stellar, truly outstanding, versus Russia’s barely satisfactory performance. The Chinese economy is far more diversified, with a high concentration on both foreign direct investment, and manufacturing exports, whereas the Russian economy is almost exclusively dependent on the export of commodities, particularly oil and its derivatives.

  1. And last, but not least, the Chinese economy has been booming for over three decades, whereas, the Russian boom has been far shorter and shallower, highly associated with the price cycle of commodities, chiefly oil related.

Though it is clear that China has substantially outdone Russia’s performance with its unique version of state capitalism, at the bottom of this analysis lie a couple of questions:

  • How powerful and self-sustainable are state capitalism models in the long run?

  • Is state capitalism a match for Western capitalism?

On one hand, there is no doubt that since 1979 China was the very first large Communist nation with the vision, courage, and wisdom to try a then relatively radical economic system —a drastic departure from its Communist origins, without losing control of the political system.

On the other hand, Western civilization works under the well-proven premise that free markets under the democratic system developed in the West over the last 250 years has proven to be the best socio-economic structure the world has known so far (read more in Globalization & Capitalism).

Up to a point, the Chinese economic success of the past three decades has been challenging the basic economic assumption of Western civilization previously stated.

That is, the current Chinese economic system has been able to pull out of extreme poverty hundreds of millions of its citizens during the past three decades, in a similar way to what the typical Western Economic model has achieved at its best. Parallel to the Chinese economic bonanza, there is the emergence of a burgeoning Chinese middle class with abundant professionals and yuppies.

So, at the very least, the resounding Chinese economic success may easily lead into confusion when trying to reconcile it with the traditional Western capitalistic model. Albeit, a deeper analysis quickly clarifies the essence of the tremendous success behind China’s economic model.

Unquestionably, the most fundamental pillar of China’s economic success has been the adoption of some of capitalism’s basic tenants:

  1. Private enterprise, including full respect for shareholder rights, which has created a sizeable and powerful base of local businessmen and entrepreneurs,

  1. Not to mention the avalanche of foreign companies that have been investing hundreds of billions of dollars in China during the past three decades.

  1. Quasi-free movement of capital, with relatively few significant restrictions for foreign investors and Chinese corporations. Though Chinese citizens are significantly more restricted in this area, increasing levels of freedom for local citizens are expected in this regard, pending on the inevitable liberalization of the Yuan.

  1. (Relatively) and increasing free movement of labor.

  1. The accelerated development of the Chinese financial system, with a myriad of local companies listed and actively traded not only in local exchanges but also simultaneously in Hong Kong, London, and New York. Unsurprisingly, there is no scarcity of Chinese IPOs in the US.

The incredible abundance of an originally ultra cheap labor, eagerness to learn, relative ease to train, coupled with generous benefits from the government for the initial foreign investors —in the form of tax incentives, very low rents, and so on— proved to be a terrific combination.

In a nutshell, the current Chinese political system is a hybrid form of capitalism with a heavy participation of the state, through state-owned enterprises (SOEs), with relatively few remnants —particularly in the economic sense— of its Communists origins.

Up to now, that formula has proven to be quite successful, albeit with already multiple and increasing manifestations of exhaustion. One of the most visible of those manifestations of exhaustion is the substantial reduction of economic growth in the past three years —around 7%, almost half of what it used to be.

The unprecedented Chinese economic miracle has been basically rooted in the astonishing number —hundreds of millions— of extremely poor citizens that the experiment started with. Deng Xiaoping, the mastermind behind the Chinese economic miracle, was a very wise strategist, by emulating and fast-tracking what Japan and the four Asian Tigers achieved so successfully in the previous decades, and are still achieving.

In the third part of this series……What Lies Ahead for China and Western Capitalism?

 

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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  1. […] controlled way— conversion to capitalism, as stated in the 5 points pinpointed in last week’s Part Two of this series. Although with many imperfections, the Chinese capitalist version has so far clearly prevailed over […]

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