China’s Historical Lessons in Building its super economy

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2020 stands as a most significant year for China. President Ji Xin Ping will announce China’s grand economic strategy to propel its economy to what he describes as the building of a Socialist economy aimed at giving the Chinese people it deserves–a moderately progressive society. There are three (3) things that Xin Ping must consider if his country really intends to build a global Socialist economy: first, it must re-imagine the rules of the capitalist game by convincing those under this economic system to adhere to a rules-based regime. Second, China must exert all efforts at maintaining political stability especially in territories where significant investments have been placed thru the Belt and Road Initiative (BRI) and third, minimize the level of corruption within its ranks.

The first two are external issues which China must address either thru bilateralism or multilateralism using existing international or regional trading or inter-state security cooperation regimes. The last issue is definitely internal, and necessitates a stronger political position for Xin Ping in the communist hierarchy. These issues complement each other, with one influencing the achievement of the other. Without re-writing the rules, China will be subject to the same historical mistakes or what Schumpeter and other economists termed as systemic disruptions experienced by developed and developing capitalist states, which eventually lead to a situation now experienced by Europe and the United States.

Thru historical experience, China has already figured out how to escape these disruptions by eliminating or mitigating risks and losses. In a purely classical capitalist system, the state does not absorb the losses and risks of purely private enterprises, causing disruptions which begin at a smaller level and eventually infects the conduct and behavior of other firms, leading to massive disruptions.

Unlike previous observations on the behavior of the capitalist system, these disruptions are normal in an open and asymmetrical system. As they say, losing is part of the game. What capitalists did not put into their equations is that disruptions affect the socio-economic and even the political situation such that, it destabilizes the entire system altogether. In the present system, the banks absorb these losses thru insurance. The capitalist still gains from his loss.

It is at the social level that affects the entire system. When bankruptcies happen, especially in small and medium-sized enterprises, the system notices it thru the drop in employment. The effects of unemployment are being absorbed not by the banks or the capitalist system but by the state which is expected to provide palliative measures such as temporary job placements or in the case of the Philippines, the PP system which gives monthly living allowances to those considered as living in a pauper state. What began as an economic issue, eventually turns social and in the end, political, as the state is expected to fund measures aimed at providing for the basic sustenance of workers who lost their source of income.

China already identified and provided solutions to these by absorbing business loss, even from private enterprises. Since most of its industries are composed of firms initially created by the state and now funded by private capital, the China government initially agreed to absorb bankruptcies and thereafter fund or finance existing business ventures and enterprises especially during the early and middle part of the nineties, which saw the rise of public debt.

One thing that China learned early on is that losses can be mitigated properly by lessening corruption both in the public and private sector. Addressing corruption is more of law enforcement than anything. Hence, for corruption to disappear or at least minimize its effects, government must strictly lay down the rules and enforce them otherwise there will be a free for all.

A rules-based system is most appropriate for market economies, because it assures a level playing field at the same time, discourage capitalists from indulging in greed and thereafter, corruption. This is where China sets itself apart.

Under highly liberal democratic regimes, a level of corruption is tolerated. In the United States, for example, legislators are given the privilege of getting commissions out of government funded projects.

In China, corruption is considered a high crime punishable by either execution or life imprisonment. How can you discourage corruption if you treat offenders with kid’s gloves? In liberal democratic countries, only rapists and murderers are executed while those who commit billions of dollars worth of scandalous investments which led to loss of incomes and homes by the millions, are meted, at best, life imprisonments.

By mitigating corruption and assuring entrepreneurs and capitalists that their investments are secured and will yield significant returns if invested on a long-term basis made China’s economy a more viable and more preferred investment site than the United States or other Western economies.

Another unique feature of the Chinese economic system is the existence of a state-business dyad. In classical capitalism, the most preferred situation is that of the state exercising “non-interference” in trade affairs.  A company may produce or manufacture as many products as it wants based on its estimation of demand and of course, price. Supply is usually and often subjective, and driven by the profit motive.

This is where capitalism is most criticized because of what economists termed as accumulation of surplus capital. Profit drives surplus, since the manufacturer’s intention is not just to flood the market of its goods, but to dominate the market. There is this thinking that even if there is surplus, over time, the capitalist can very well still recoup and still get huge profits from his production.

The solution to excessive accumulation of surplus capital is production planning something which involves both the state and private enterprises. The state has the monopoly of data. It looks above the tree tops so to speak, while the capitalist only looks at the trees.

By taking part in a firm’s production plans and schedules, the state influence the behavior and conduct of firms by providing them with knowledge on how to avoid producing excessively high volumes of surplus. Again, surplus is inevitable and is a common feature of the capitalist system. Yet, thru the dynamics of state-business dyad, surplus can be managed by the state identifying where these surpluses may be distributed to avoid higher business risks for the capitalist. It is in the interest of the state to sustain stability in the system; hence, what is wrong with influencing private business decisions thru constant reportage of economic performance in every sector of the economy? In some places, this is the function of a national economic development agency which digs or mines economic data and thereafter, reports it to the general public. The only difference here lies in the use of the data. Private firms may or may not use the data for their own purposes. In China, especially in the local levels, firms are directed at following the data for their production. This is part of a rules-based system where one of the rules in order to play these economic games is for the firm to allow minimal state influence in production planning.

Now, the question that everyone is asking for years already— how will China be able to influence other developed and developing states to adhere or follow its successful economic path? China’s historical experience and its scientific approach to problem-solving have been perfected to a t that it practically solves what Schumpeter and Wallerstein have noted in the previous past?

Read my second take on this…

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