State Capitalism and Western Society (Part Three)

What Lies Ahead for China and Western Capitalism?


The Chinese economic success has been beyond what the most optimistic projections originally foresaw.

How to reconcile the traditional Western capitalistic economic model with the Chinese version?

There are three fundamental points to consider:

  • First, and foremost, the essence of the great success of the Chinese economic model resides in a massive —albeit in a highly 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 the not small number of internal structural obstacles standing in the way; otherwise, that success simply would not have materialized.

  • More often than not, state-owned enterprises (SOEs), if anything, are a hindrance but a necessary evil in any economic system. The reason behind it is quite simple: most of the time, SOEs operate with frequent —most of them permanent— impediments and/or costly distortions of the free-market capitalistic system. Both, the explicit and opportunity costs those distortions generate tend to be extremely onerous. China’s case is no exception.

  • SOEs are not exclusive of Communist or former Communist nations. There isn’t a single country on earth that does not have them. Nonetheless, experience shows that, with very few exceptions, SOEs are a liability and not a valuable resource. Albeit to a substantially lesser degree, SOEs are also relatively common in Western society. According to the OECD’s website, at the end of 2012 its 34 member nations had 2,111 fully or majority-owned SOEs, with 5.9 million employees, and a combined value estimated at US$2.2 trillion. As The Economist (January 11th 2014) very aptly pointed out, this is roughly the size of the global hedge-fund industry. Thus, by no means is China alone in this gigantic opportunity, although given relative sizes, China has much more room to grow and to benefit from than the rest of the SOE world, probably even in absolute terms.

The bottom line is: Adam’s Smith’s “invisible hand” concept is virtually impossible to apply in traditionally managed state-owned companies.

The SOEs that are appropriately managed, like Norway’s Statoil [STO], and Colombia’s Ecopetrol [EC], owe a lot of their good management to the savvy application of some basic concepts and practices of private enterprise, like having outside independent directors on their boards, listing the companies in the stock exchange —thus having private stockholders too, coupled with all the mandatory transparency, like publishing quarterly reports, and by applying a strict adherence to the basic principles of good management and good governance, according to the  best international practices.

Being in unexplored territory, nobody knows for sure what —and for how long— comes next in the Chinese economic system development. One thing is for sure, though: The most prosperous China gets, the more it will have to abide by the rules of the capitalistic system, as practiced in the developed world. Of utmost importance, history unequivocally shows that the best fit for a capitalistic economy is its inherent freedom, in all possible orders, including the political one. So, the longer it takes for China to transition into a more transparent system, the more difficult it will become for it to sustain high economic growth rates during the coming years, substantially higher than the developed world, thus eventually being forced by circumstances to develop one of these two mutually exclusive possibilities:

  1. Relative stagnation —in regard to the developed world’s performance— by eventually growing at similar rates than the average of the developed world —way before becoming a developed nation— thereby putting an abrupt end to the economic miracle, or

  1. Also emulate Western political institutions and practices, or some improved version of them, providing China the possibility of continuing its economic miracle. As the old saying goes, “It is not possible to have it both ways”.

Order, discipline, and intelligent hard work are indispensable ingredients for success in anything, including a thriving economy. Where the Western economic system seems to excel with no parallel in sight is with two additional key ingredients impossible to comply with by authoritarian governments: freedom and motivation.

So far, China has been able to cruise ahead at a substantially superior growth rate than the developed world, thereby effectively closing the —still gigantic— gap that separates them at a formidable pace. That feat can be considered “the easy part”, the first stage, which already seems starting to stay behind. From the present stage onwards, challenges are tougher, and therefore, more difficult to overcome, unless freedom and motivation start to appear on the Chinese scene on an ever more frequent and adequate dose.

The flourishing middle class with abundant professionals and yuppies that the economic boom has created is a force that should not be underestimated by the Chinese leadership. This segment of society is permanently connected to the outside world; many of the people in that group has lived abroad while attending a foreign university and/or working for multinationals, more often than not maintaining a close and permanent business interaction with colleagues and company representatives from nations in the outside developed world. This population segment is fully aware about how Western society functions and has a strong desire for a genuine openness and standardization of the Chinese political system, yearning for the type of freedoms and quality of life Western civilization takes for granted.

The Chinese society has already enjoyed, and gotten used to experiencing socio-economic upward mobility. In most likelihood, a growing portion of the Chinese population won’t settle for less. History shows that once the benefits of capitalism have been experienced by a sizeable part of the population, it’s is virtually impossible to reverse the process —the “toothpaste syndrome”; once the paste is out of the tube, it is impossible to push it back in.

State capitalism is not necessarily inherently bad. There are interesting and commendable exceptions, like Norway’s Statoil, Colombia’s Ecopetrol, and Canada’s public healthcare and education system, to name four of the not so many praisable cases around. Nonetheless, for every laudable case there are tens, if not hundreds, of deplorable instances spread around many developing nations —like Brazil and Mexico, just to name a couple of highly visible countries—, and even not that infrequently in developed nations. This assertion is virtually uncontroversial, given the overwhelming statistical and financial evidence in that direction.

I strongly feel that, as long as authoritarian governments remain as such, the West should not be either surprised or particularly afraid of the astounding initial success that state capitalism can generate, as has been the Chinese case.

Either authoritarian governments convert to a similar —or improved— version of Western capitalism, or the initial astounding success will eventually taper off, unless the nation in question truly begins to offer its citizens growing doses of freedom to keep motivation and productivity high, aspiring to outperform the best run governments in the world, for the benefit of their population.

Authoritarianism tends to reward conformism, setting a very onerous ceiling on imagination and creativity. The Western political system does not have that humongous structural limitation embedded in it.

In the fourth and final part of this series……Does China Have What it Takes to Continue its Growth Spurt?

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?


State Capitalism & Western Society (Part One)

Putting China Into Perspective…

Image source: The Guardian Online

Image source: The Guardian Online

The increasing importance in recent years of China as a world power, and to a much lesser degree Russia’s emergence, have arisen some logical unease and questioning about how Western societies will fare in the new world order over the coming decades, given the inevitable interconnectedness among nations.

China’s share of the world’s economy has grown in an accelerated manner during the past three decades. The repositioning of China in the world economic scene during that period has been near miraculous, essentially due to a couple of factors:

  • The huge economic growth differential, particularly noticeable when comparing China’s growth rate against the average growth rate of developed nations.

At present, China’s share of the world’s total output is around 14% —versus the US’ 19% contribution, and the EU’s 18%—; that is China contributes 1/7 of the aggregate global product. Three decades ago it used to contribute less than 1%!

  • The substantial critical mass of the most populated nation on Earth, accounting for almost ⅕ of the total world population.

Stating the obvious, China’s growing world influence —particularly in the economic and the political arena— is chiefly due to its growing economic presence, in a comparative basis.

Through the ages, China has been one of the largest economies, and most powerful nations on the planet in multiple occasions. That status, however, although maintained throughout a great deal of its history, was last held over two hundred years ago, during the Qing Dynasty —1644 to 1912. So, for practical purposes, the contemporary emergence of China as a world superpower has all the feeling of something new.

superpower-showdown-shareAlthough it seems highly unlikely that China will ever again return to the low double digits rates of economic growth achieved during most of the past three decades, it is very probable that China can sustain growth rates of about twice as much as the average of the rest of the world during the coming two decades or so. If that growth differential proves to be right, there are two certain outcomes:

  • China’s economy will become the largest on earth, volume wise, surpassing the US. According to recent statistics, the US’ $16.24 trillion dollar economy is currently only about one third larger than China’s, at $12.26 trillion. Thus, China’s economy is at a relatively striking distance to match and eventually overtake the US economy in size, most likely within the coming 10 years or so, depending on the growth rates of these two of nations.

  • The anxiety and general uneasiness of the developed world will only grow larger, in direct proportion to the differential in economic growth rates of the developed world versus that of China’s.

History shows that every time an emerging world power has jumped into the scene, the internal recomposition among the displaced leading nations has been both painful and unsettling.This threat is more menacing if the emerging superpower, China in this case:

  • Comes from outside the inner circle of the prevailing ruling elite of nations.

  • If the emerging superpower quite often resorts to aggressive and even hostile tactics and attitudes in the multiple interconnections and day-to-day interactions: trade, financial, political, and even military, to name a few.

For China to become again the largest economy in the world will be a feat in itself.

Nonetheless, as previously stated, China’s sheer economic power is currently owed more to volume and huge population mass than to efficiency. In fact, on a GDP per capita basis, China is a rather poor nation, way below the developed world’s minimum level, currently around US $30,000.

China’s present US$9,100 per capita GDP is just a fraction of the US’ $51,700, and still painfully lower than a host of developing nations, like:

  • Romania’s US$12,700,

  • Montenegro’s US$11,600,

  • Peru’s US$10,600,

  • Cuba’s US$10,200,

  • and Thailand’s US$9,500, to name just a few countries.

As previously stated, the major unsettling factor about China’s emergence as a world superpower among the current ruling elite is more due to China’s frequent hostile attitudes and lack of harmony towards the general spirit and tradition of Western civilization than to anything else.

If China’s government leadership learns to abide more by the present world order rules of the game, becoming a powerful yet respectful and harmonious player, the general atmosphere of unease will very likely be drastically reduced. That case in no way would imply any sort of blind submission from China to an already relatively well established world order, but a constructive attitude to learn, to negotiate, and to contribute to the continuous improvement of that world order, which  anyway is a work in progress, far from perfection.

Most fortunately, China’s case appears to be significantly more hopeful than Russia’s.

In the second part of this series…State Capitalism & Western Society (Part Two): China vs Russia, and Then Some

#1 Best of Globalization Blog 2013

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#3 Best of Globalization Blog 2013

Did poor economic policy create the development of the largest financial crises in the history of the United States and the European Union? And , how does the juxtapose with developing nations and their crises in the lat 1980s through the 1990s?

In our post “From Hydra to Phoenix: The Transformation of Developing Nations,” published on May 27, 2013 is another of our most read posts and the most “Like” on Facebook.

We think this post it important for a number of reasons. Chief among this is how they are “outperforming the developed nations’ growth rate in a significant way.” We argue:

Contemporary political systems are highly dysfunctional, trapped within their worn-out way of doing business.

From this launching point, we brought you the following posts, which examine the political structures of first-world governments:

While these will give our “#3 Best of Globalization Blog 2013” post more context, we didn’t want you to miss this pivotal content.

From Hydra to Phoenix:

The Transformation of Developing Nations

Indeed, occasionally it is both amazing and truly ironic how the global socio-economic cycle evolves.

Not so many years ago, during the late 80s and early 90s, most of the underdeveloped world was in shambles, overburdened with debt, high levels of inflation, and frequent recessions and currency crises. Developing nations were, at that time, a basket-case.

globalization and economic development

The typical –understandable– reaction of most of the developed countries to those frequent and severe crisis was to admonish the troubled and disorganized countries to put their affairs in order, learn to behave prudently and to live within their means.

What a difference a few years can make!

Around two decades later, both the EU and the US are now the ones experiencing the aftershocks of highly uncontrolled public finances which have resulted in incredibly high levels of debt. As a group, most western economies are still struggling to overcome unusually sluggish growth combined with persistent high levels of unemployment.

The irony resides in the fact that fortunes have made a 180 degree turn and the two largest economic blocks on earth, the EU and the US, are in a situation (in many respects) very similar to the one the developing nations were in during the late 80s and early 90s.

globalization and economic developmentConversely, most of the developing nations currently hold an enviable fiscal and debt position. Nowadays, most of the developing world has a relatively low (and very low in some cases) debt level, manageable fiscal deficits and are growing at rates normal for their nature, consistently outperforming the developed nations’ growth rate in a significant way. In the past two decades, most of the developing nations have managed to behead the mythical multi-headed hydra that held them captive, and have been transforming themselves into a phoenix that is rising from the ashes.

How can such a dramatic turn of events have occurred in such a relatively short time?

globalization and economic development

There are several reasons for it.

First, contrary to a common belief, the level of political development of the developed nations, in many respects, is an unfinished business. To the contrary, it is safe to state that contemporary political systems are highly dysfunctional, trapped within their worn-out way of doing business. Hence, in many respects, the current dire situation of the two largest economic blocks on Earth is a patent manifestation of the insufficiencies and limitations of contemporary political systems. That is the major reason behind the “new normal” of unusually sluggish growth and persistently high unemployment in most Western, developed economies.

Second, parallel to the previous point, on a relative basis, during the last couple of decades most of the developing world has made a substantial catching-up effort. Developing nations have been rapidly closing the political gap versus the developed world. Granted, without disregarding the merit this progress implies, it has to be acknowledged that what has been done to date, in many ways, is the easy part. So, the misalignment in political systems between both groups of nations has been substantially diminished. It is fair to state that the day-to-day functioning of most developing nations’ political systems are highly comparable, in essence, to their developed brethren.

A superficial reasoning would lead us to conclude that the developing world now seems to be a role model for developed nations. Not so! Most of the progress achieved during the last decade of the XX century and the first decade of the present one, as substantial as it is, is not necessarily irreversible. Not at all.

To a great degree the substantial progress accomplished to date is a hard-earned dividend for the great pain and suffering the late 80s and early 90s crises inflicted upon them. A great deal of fiscal adjustments were made, their central banks became independent, their currencies were finally left to float like major currencies do, a good deal of markets liberalization and deregulations flooded these countries. In short, the ongoing stability and prosperity of most of the developing world seems to be a one-in-a-lifetime phenomena.

Once the temporary part of those virtuous changes runs its course, developing nations will have to face the harsh realities of the many limitations and insufficiencies of contemporary political systems.

The breadth and depth of the challenges ahead require a profound transformation of contemporary political systems. The incentives structure has to experience deep changes. Statesmanship and the common good should be rewarded. Winning elections should not stand on the way of the two major objectives just pinpointed, as it currently does. The current status quo of political dysfunctionality should not be tolerated any longer.

The world has been increasingly moving further away from its long/term potential economic growth rate. The opportunity cost of the current state of stagnation and mediocre growth is immeasurable –in the trillions of dollars a year. Imaginative solutions have to be implemented ASAP to rectify this monumental misalignment. Click here to read more.

Profound, lasting transformations in contemporary political systems are required, to avoid falling into the otherwise inevitable case of beheading the hydra, only to realize than shortly thereafter a new one, as pernicious as the one cut, has grown.




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