Sunday, August 26, 2018

Economic Armaments and China's Global Ambitions

Richard Ebeling emails:

Dear Bob,

I have a new article on the website of the American Institute for Economic Research (AIER) on, “Economic Armaments and China’s Global Ambitions.”

Governments use a variety of economic weapons to plan, regulate and control how, where and in what forms economic development will take place in their countries. It may be comprehensive socialist central planning, but it also is seen in the use of selective interventions to influence both
domestic and foreign trade, investment and employment.

One instance of this on the world stage is China, which has used economic policy tools to direct domestic economic activities. The Chinese Communist leadership also has an expansive and aggressive set of policies to establish the country’s place in global affairs, known as the One Belt, One Road Initiative. The latter is basically an application of the Marxist interpretation of “capitalist” imperialism as the template to guide Chinese economic penetration and influence in South Asia and Africa to replace America as the leading world power before the end of the 21st century.

But before panicking that China’s domination of the world is just a few decades around the corner, it is worth remembering the fundamental economic and fiscal reasons why government planning and interventionism always tends to fail with numerous unintended consequences different from what the planners and regulators desire. Also, imperialist policies tend to generate anti-imperialist backlashes by those resenting foreign control and manipulation of their countries.



Below is the full article:

Economic Armaments and China's Global Ambitions
By Richard Ebeling

The world continues to move in potentially dangerous directions. A leading component of this threat is the use of economic armaments by governments to gain political and market advantages in their foreign relations with other countries. Among the leading participants in the use of such economic armaments is the government of China.

First, what are “economic armaments”? In the 1930s, the term was used in reference to attempts for economic self-sufficiency. For instance, the Swiss classical liberal economist and political scientist William E. Rappard (1883–1958) gave the following definition in a 1936 lecture delivered in London titled “The Common Menace of Economic and Military Armaments”:

By economic armaments we mean all those legislative and administrative devices intended to restrict imports and develop domestic production with a view of reducing international interdependence. Economic armaments are the tools of economic nationalism. Economic nationalism may be defined as the policy of national self-sufficiency.… 
As, in spite of all their efforts, all States must continue to import and as none can live on the charity of its neighbors, they must all continue to export in order to secure the foreign exchange necessary for the purchase abroad of what they lack at home. Economic nationalism therefore everywhere recommends both the promotion of exports and the restriction of imports.… Considered from that of the world community, economic nationalism is obviously a self-contradictory policy.

Clearly, today, there are few, if any, proponents of economic nationalism who propose that their respective nations follow a policy of national self-sufficiency. Fortunately, that economic irrationality has not yet experienced a rebirth.

Economic Weaponry for Import and Export Planning

But, nonetheless, governments do attempt to use various economic policy tools — economic weapons — to attain what they consider political and economic advantages for their own nation at the expense of their global rivals. They impose tariffs, quotas, and various regulatory restrictions on the importation of certain goods to limit the types and quantities of foreign-produced products offered for sale in their home country. The purpose is to protect or foster a domestic industry that might not be profitable to fully maintain or bring into existence under a regime of greater freedom of trade.

Or governments provide tax breaks or subsidies and other financial inducements to cover all or a part of the production costs a domestic enterprise incurs, with the purpose of enabling it to sustain its domestic market share or to be able to match the lower prices of its foreign rivals selling their goods in other markets around the world. Import-restricting policy weapons may be considered as a government’s “defensive” economic armaments and its export-fostering policies as its “offensive” economic armaments.

Let’s take a brief look at China in this regard. Many Chinese have experienced a dramatic transformation in their quality and standard of life during the last 30 years. For centuries, China had only known poverty, pestilence, and famine. Under the tyrannical reign of Chairman Mao, the people of China experienced disastrous socialist central planning debacles in the 1950s and 1960s; equally destructive was Mao’s Cultural Revolution during the 10 years preceding his death in 1976.

The economic reforms introduced by Mao’s Communist successors, beginning in the late 1970s, permitted partial private initiative in agriculture, manufacturing, and commerce, which has set loose the amazing industry and trading acumen often observed for a very long time among Chinese living outside of China.

China’s Domestic Economic-Planning Agenda

But these reforms in China have not been those of a truly free market policy agenda. They were planned, regulated, and constrained by the Communist Party. The planning authorities in Beijing determined the types and forms of private enterprises. China’s central bank was directed about which investment projects to fund, in what amounts, at what subsidized interest charges, and in what areas of the country, which often has had nothing to do with real market-based and market-directed profitability.

Dazzling infrastructure projects, massive modern cities rising out of nowhere (often standing partly empty), massive manufacturing facilities directed to specialize in particular industrial tasks and geared for selling in targeted foreign markets, the selection of permitted foreign investors to operate within China (with various political and fiscally corrupt purposes in mind), the controlling of the use and sharing of mass electronic media through censorship, and the planning of technological research and development — all of these have been the Chinese government’s domestic policy weapons to design and direct the development of a new, post-Mao China.

Giddy with domestic success, the Chinese leadership under President Xi Jinping went “public” in 2013 with the declared goal of “making China great again” on the international stage of global power politics. In President Xi’s mind and those of other members of the Communist entourage in Beijing, for two centuries China had suffered political, economic, and cultural humiliation at the hands of the British, the French, the Americans, and the Japanese. China was taken advantage of because of “bad trade deals” and foreign military intervention imposed on the country’s imperial government in the 1800s and then continued in the first half of the 1900s when the country had a weak central government and plundering warlords who controlled different parts of the country. (However, see my article “Shanghai’s History: A Tale of Successful Capitalism” about the city before the Communist takeover in 1949.)

China’s “One Belt and One Road” Neo-Imperialist Designs

But now China is to be positioned as the major international rival of the United States for world political and economic domination. If the 20th century was the “American century,” the 21st century is to be China’s time. The economic armaments to bring this about were presented as the One Belt and One Road Initiative. This represents China’s planned neo-imperialist strategy for restoring the country as the Middle Kingdom around which the rest of the world will revolve.

Being the good Marxists they no doubt consider themselves to be, President Xi and the Chinese Communist leadership accept the Leninist interpretation of imperialism, in which capitalist countries extend their exploitive control to the underdeveloped parts of the world to gain access to needed resources and raw materials for further profitable industrialization of the capitalist home countries.

The capitalist countries come into conflict with each other in the pursuit of maintaining their imperialist power over these less developed parts of the globe, a conflict out of which some industrial nations will remain standing as the others fall by the wayside. This futile attempt to sustain the capitalist system by extending it around the world ends up leading to the eventual triumph of socialism — or so Lenin and other Marxists have believed.

Clearly guided by this Marxist-Leninist interpretation of imperialism, President Xi has instructed the undertaking of development and infrastructure projects in countries in South Asia and Africa through multibillion-dollar loans and investment projects that will make these countries economically dependent on and politically subservient to their financial masters in Beijing.

The “road” part of the One Belt and One Road Initiative requires the creation of a network of tightly woven economic relationships connecting China with countries in Southeast Asia and across the Indian Ocean to Africa. The “belt” component of China’s neo-imperialist strategy is the opening of trade routes through infrastructure projects in the countries of former Soviet Central Asia and the Middle East, leading China to Europe.

China’s Economic Designs in Africa

President Xi’s vision is of a Eurasian landmass under the economic domination and political influence of the Chinese government. Satellite continents like Africa are to supply the raw materials to feed China’s industrial and technological growth in the coming decades.

The Chinese dangle huge, corruption-inducing sums of money in front of African government officials in return for often-exclusive monopoly concessions for access, mining, and extraction of crucial production inputs. The resulting debts burden many of these African or Asian governments, which makes them dependent on the Chinese for new bridge loans, refinancing of debt coming due, or partial debt forgiveness to remain economically afloat.

At the same time, just as 19th-century Western nations had military bases around the globe to maintain their imperial power, so the Chinese are attempting to gain exclusive control over commercial port facilities in a number of these countries through long-term leases handsomely paid for by Chinese companies that are fronts for the Communist government in Beijing. To this has been added China’s first formal foreign military base in the East African nation of Djibouti at the southern end of the Red Sea, which is nominally rationalized as being needed so China can help in the protection of Indian Ocean shipping threatened by pirate ships.

If imperialism has been the Western capitalist nations’ playbook in the past for world domination, then enlightened Communists dedicated to the rebirth of China’s national socialism with Chinese characteristics can use the same methods and techniques to bring China to its place in the sun, as the United States wanes as the single post-Soviet superpower in the world.

China’s Understanding of “Free Trade Imperialism”

While the Chinese government in the face of Donald Trump’s neo-mercantilist protectionism presents itself as a good player of multilateral free trade on the international scene, theirs is, again, a neo-Marxist view of what is sometimes called “free trade imperialism.”

In the last decades of the 19th century, the imperial German government moved away from economic liberalism and back toward domestic interventionism, welfare statism, and trade protectionism. Their ideological apologists known as the German historical school insisted that British advocacy of free trade was a ruse for British industry to gain control of foreign markets that could not match Germany’s own manufacturing cost-efficiencies, leaving those countries importing British goods and in a state of permanent underdeveloped dependency. (See my article “American Progressives Are Bismarck’s Grandchildren.”)

This was economic imperialism under the banner of freedom of trade, these German writers said, to which the only response by underdeveloped nations was trade protectionism and domestic subsidies to foster manufacturing and industrialization in those less developed parts of the world to get out from under British commercial control. In the post–World War II period, this same idea was referred to as import-substitution policy in Third World countries to make these less developed nations self-sufficient in what were called vital parts of their domestic economies — with many disastrous and fiscally wasteful results.

China’s Planned and Corrupt Marketplace

China’s Communist leadership realized it needed foreign technological knowhow, foreign capitalist investment in strategic sectors of the Chinese economy, and importation of various managerial skills and commodities. Rather than the older economic policy weapon of prohibiting foreign involvement in these areas and creating a center of economic isolation and self-sufficiency, the Chinese government has welcomed the “foreign devil” back into the Middle Kingdom, but on strictly controlled conditions.

The controls have been part of China’s domestic economic armaments to serve the “national interest” as defined in the grand schemes of the Communist Party. Such a politicized environment of domestic and foreign investment and manufacturing around the country has also provided the cultivatable soil for bribes, kickbacks, and corrupt connections in the network of municipal authorities, members of the Chinese military, and local and national decision-makers in the Communist hierarchy.

What in 19th-century China was called the “squeeze” — that is, just the right amount of political leverage over someone’s profit or loss that they had a strong incentive to show their financial “appreciation” to those determining their economic success or failure — has remained alive and well for those in power to extract political profits (“rents”) from both Chinese and foreign enterprisers desiring to do business in modern China.

China’s Fiscal Overreaches at Home and Abroad

However, before concluding that China’s domination of the world is just a few decades over the horizon, some skeptical observations may be in order. First, many of China’s domestic economic gains are no doubt sustainable. But the heavy hand of the government in virtually every corner of Chinese economic life has meant huge amounts of investment capital have been directed to projects likely to be shown at some point in the future as serious if not severe malinvestments of labor and capital.

The Bank for International Settlements estimates that nonfinancial debt in China is around $30 trillion, part of which could easily end up nonperforming if an economic crisis emerged in China. The Chinese central government’s debt is over $4 trillion, and Chinese local-government debt is figured to be about $2.5 trillion. But if local government-business partnerships are included in this number (because if they go bad, the municipal authorities likely would be responsible for their debts), Chinese local-government debt rises by an additional $2.7 trillion, for an overall $5.2 trillion. This means China’s total government debt is around $10 trillion.

With a gross domestic product of $12 trillion in 2017, Chinese government debt is nearing 100 percent of GDP. The debt-to-GDP ratio is 400 percent if private sector debt connected directly or indirectly to the government is included, since little happens in the private sector that does not have its ties to the Communist government.

The One Road and One Belt Initiative has been estimated to have the ambitious price tag of between $900 billion and $1 trillion, of which the government has expended over $350 billion to date. Any partial or total defaults on loans and investments made by the Chinese government and its crony partners to foreign governments or their agencies would increase the financial strain on the Chinese government’s fiscal affairs.

This picture does not include China’s social-insurance problems as its population continues to age. Private and government resources will be allocated to meet the retirement expenses of the growing number of elders in the society. The United Nations calculates that in 20 years the Chinese aged will make up over 20 percent of the total population. This too will place a drag on the Chinese government’s foreign-policy spending ambitions, given its socialist obligation to care for the elderly, especially since many analysts say the shortfall in the Chinese pension system is rising rapidly.

Imperialists Always Generate Anti-Imperialist Backlashes

There is also the fact that imperialism is often found not to be popular with a growing number of those at the receiving end of the imperialists’ activities. For years, resentment and hostility have been increasing in a number of African countries that have been recipients of Chinese investment, loans, and “aid.”

The Chinese workers and managers sent to oversee infrastructure creation and other activities have been found to be insulated from and arrogant toward the natives of the host country. Huge sums of money are seen to line the pockets of the local political plunderers with nothing to show from the Chinese projects other than accumulated debt, with investments perceived as offering few if any real opportunities for the citizens in those nations. Thus the Chinese have discovered that imperialists usually are not popular, whether they are European or Asian.

The government of Sri Lanka became unable to meet its debt payments on Chinese loans. The Chinese demanded that the Sri Lankan government make good on its financial promises and got that nation’s authorities to turn over control of a major port facility to a Chinese government-controlled harbor-engineering firm, as part of a 99-year lease agreement that included over 23 square miles of land around the harbor. (The former Portuguese colony of Macau on the South China coast not far from Hong Kong contained less than 12 square miles. Welcome to China’s new territorial empire abroad, similar to the “concession” areas controlled by Western nations near or in port cities along the Chinese coast in the 19th and early 20th centuries.)

The recently elected government in Malaysia, however, has said it is not interested in extending or adding to the number of “unequal treaties” involving Chinese infrastructure projects that offer little return other than tens of billions of dollars of increased Malaysian national debt. Others are, for the time being, enthusiastic about relations with China, such as the Pakistani government, which looks for closer Chinese connections as a counterweight to both India and the United States and as a source of more military weaponry.

The Chinese hope to use their economic weaponry to establish their place under the global-political sun during the 21st century. But if there is one thing economic theory and historical experience suggest, it is that central planning almost never works in the ways the social engineers expect, and it carries with it numerous unintended consequences the central planners can neither anticipate nor master.

The Chinese government’s insistence on “making China great again” through various forms of command and control (at home and abroad) suggests that things are not likely to work out according to plan.

Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.

He is also the co-editor of When We Are Free (Northwood University Press, 2014), an anthology of essays devoted to the moral, political and economic principles of the free society, and co-author of the seven-volume, In Defense of Capitalism (Northwood University Press, 2010-2016). 

The above originally appeared at AIER.

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