Tag: capitalism

Lessons in Crony Capitalism

From this week’s Washington Post:

Afghanistan’s Central Bank has taken control of the country’s biggest and most politically potent private bank and ordered its chairman to hand over $160 million worth of luxury villas and other real estate purchased in Dubai for well-connected insiders, according to Afghan bankers and officials.

Farther down the page the article continues:

Kabul Bank previously had been shielded by the political clout of its shareholders who, in addition to Mahmoud Karzai [President Hamid Karzai’s brother, who partly owns Kabul Bank], include Haseen Fahim, the brother of Vice President Mohammed Fahim.

If this hostile takeover wasn’t questionable enough, the article goes on to report:

Kabul Bank’s biggest creditor, bank insiders said, is Haseen Fahim, a minority shareholder, who borrowed tens of millions of dollars to fund various business ventures, which in turn won contracts at U.S. bases and sites in Afghanistan operated by the CIA.

So, in an effort to stamp out corruption, which U.S. officials have prodded Afghanistan’s President Hamid Karzai to do, he orders his Central Bank to take managing control of the country’s largest private bank, which, I might add, “also contributed to President Karzai’s reelection campaign last year.”

At the risk of oversimplifying, the above-cited transaction sounds like a stark lesson in crony capitalism: an allegedly capitalist economy based on close relationships between politically connected business figures and the state. This U.S.-led nation-building charade in Afghanistan sounds eerily reminiscent of the state-controlled corruption surrounding Afghanistan’s mineral mining laws:

“Article 4: Ownership of Minerals

(1) All naturally occurring Minerals and all Artificial Deposits of Minerals on surface or subsurface of the territory of Afghanistan or in its water courses (rivers and streams) are the exclusive property of the State.”

Well, it’s nice to see that we are exporting our system around the world!

Pearlstein Wants Tough Trade Measures Against China…and the U.S.

Steven Pearlstein’s ready for the nuclear option.  With the conviction of a man who knows he won’t be held accountable for the consequences of his prescriptions, Pearlstein says the time has come for action against China.  Hopefully, those whose fingers are actually near the button will recognize Pearlstein’s suggestion for what it is: an outburst of frustration over what he considers China’s insubordination.

In his Washington Post business column yesterday, Pearlstein criticizes U.S. policymakers for blindly adhering to the view that China will inevitably transition to democratic capitalism, while they’ve excused market-distorting protectionism, mercantilism, and state dominance over the economy in China.  Pearlstein writes:

Up to now, a succession of administrations has argued against directly challenging China over its mercantilist policies, figuring it would be more effective in the long run to let the economic relationship grow deeper and give the Chinese the time and respect their culture demands to make the inevitable transition to democratic capitalism.

What we have discovered, however, is that the Chinese don’t view the transition as inevitable and that, in any case, they really aren’t much interested in relationships. If anything, they’ve proven to be relentlessly transactional. And their view of business and economics remains so thoroughly mercantilist that they not only can’t imagine any other way, but assume that everyone else thinks the way they do. To try to convince them otherwise is folly.

Pearlstein’s suggestion that the Chinese “aren’t much interested in relationships” strikes me as frustration over the fact that China is no longer a U.S. supplicant.  Perhaps the truth is that China isn’t much interested in a one-way relationship, where it is expected to meet all U.S. demands, while seeing its own wishes ignored.  Calling them “relentlessly transactional” is accusing them of naivety for missing the bigger picture, which, for Pearlstein, is that the U.S. is still top dog and China ignores that at its peril. 

Pearlstein is not the first columnist to criticize the Chinese government for putting its interests ahead of America’s (or, more accurately, putting what it believes to be its best interests ahead of what U.S. policymakers believe to be in their own interests).  In a recent Cato policy paper titled Manufacturing Discord: Growing Tensions Threaten the U.S.-China Economic Relationship, I was addressing opinion leaders who have staked out positions similar to Pearlstein’s when I wrote:

Lately, the media have spilled lots of ink over the proposition that China has thrived at U.S. expense for too long, and that China’s growing assertiveness signals an urgent need for aggressive U.S. policy changes….

One explanation for the change in tenor is that media pundits, policymakers, and other analysts are viewing the relationship through a prism that has been altered by the fact of a rapidly rising China.  That China emerged from the financial meltdown and subsequent global recession wealthier and on a virtually unchanged high-growth trajectory, while the United States faces slow growth, high unemployment, and a large debt (much of it owned by the Chinese), is breeding anxiety and changing perceptions of the relationship in both countries….

Of course, the U. S. is the larger economy and the chief designer of the still-prevailing global economic architecture.  But the implication that that distinction immunizes the U. S. from costly repercussions if U.S. sanctions were imposed against China is foolish.  But that’s exactly where Pearlstein’s going when he writes:

Getting this economic relationship back into balance is the single biggest challenge to the global economy, not just because of its direct effects on China and the United States, but the indirect effects it has on the rest of the world. The alternative is a return to living beyond our means, a further erosion of our industrial and technological base and a continued loss of ownership of business and financial assets.

By balancing the economic relationship, presumably Pearlstein is speaking about the need to reduce the bilateral trade deficit, which spurs a net outflow of dollars to China, some of which the Chinese lend back to Americans, who in turn can then buy more imports from China, and the cycle continues.  But to tip the scales in favor of the blunt force action he recommends later, Pearlstein characterizes Chinese investment in the United States as living beyond our means, losing ownership of “our” assets, and eroding our industrial and technological base.  That is a paternalistic and inaccurate characterization of the dynamics of capital inflows from China.

First, let’s remember that the Chinese aren’t holding a gun to the heads of the chairs of our congressional appropriations committees demanding that politicians borrow and spend more on senseless programs.  It’s absolutely priceless when spendthrift members of Congress, oblivious to the irony, blame the Chinese for having caused the U.S. financial crisis for providing cheap credit to fuel asset bubbles when it was their own profligacy that brought the Chinese to U.S. debt markets in the first place.  Stop deficit spending and the need to borrow from China (or anywhere else) goes away. 

Likewise, it is a sad commentary on the state of individual responsibility in the U.S. when a prominent business writer thinks the only way to keep consumers from living beyond their means is to deprive their would-be-creditors of capital.  It sounds a bit like the same tactics deployed in the U.S. War on Drugs.  Blame the suppliers.  The fact that U.S. savings rates have been rising for two years suggests that responsible Americans are interested in rebuilding their assets without need of such measures.

There are other destinations for capital inflows from China, which (despite Pearlstein’s disparaging allusions) should be entirely unobjectionable.  Chinese investment in U.S. corporate debt, equities markets, real estate markets, and direct investment in U.S. manufacturing and services industries does not erode our industrial and technological base.  It enhances it.  It does not constitute a loss of ownership of business and financial assets, but rather a mutual exchange of assets at an agreed price.  When Chinese investors compete as buyers in U.S. markets, the value of the assets in those markets rises, which benefits the owners of those assets when there is an exchange.  Chinese purchases of anything American, with the exception of debt, do not constitute claims on the future.  Accordingly, the economic relationship can achieve the much vaunted need for rebalancing without need of attempting to forcefully reduce the trade deficit by restraining imports.

Pearlstein continues:

So if the urgent need is to rebalance the global economy by rebalancing the U.S.-China economic relationship, we are probably going to have to begin this process on our own. And that means establishing some sort of tariff regime that will increase the cost of imports not just from China, but other countries that keep their currencies artificially low, restrict the flow of capital or maintain significant barriers to imports of goods and services. The proceeds of those tariffs should be used to encourage exports in some fashion…

This relationship, however, is one that must be actively managed by the two governments. It should be obvious by now that their government is rather effective at managing their end of things. It should be equally obvious that we cannot continue to rely on free markets to manage our end.

So Pearlstein comes full circle.  He wants the U. S. to impose tariffs on Chinese imports, subsidize U.S. exports, and institute top-down industrial policy.  In other words, he wants the U.S. to be more like China. 

Of course, I would argue, we already have something that encourages exports.  They’re called imports.  Over half of the value of U.S. imports are intermediate goods—capital equipment, components, raw materials—that are used by American-based producers to make goods for their customers in the U. S. and abroad.  Furthermore, foreigners need to be able to sell to Americans if they are going to have the dollars to buy products from Americans.  And finally, if the U.S. implements trade restrictions on China to compel currency revaluation or anything else, retaliation against U.S. exports is a given.

In short, imports are a determinant of exports.  If you impede imports, you impede exports.  So Pearlstein’s idea that we can somehow subsidize exports by taxing and reducing imports is not particularly well-considered.  And though it may be tempting to look at China’s economic success as an endorsement or vindication of industrial policy, it is difficult to discern how much of China’s growth can be attributed to central planning, and how much has happened despite it.  But in the U.S., where one of our unique and core strengths has been the relative dynamism that has produced more inventions, more patents, more actionable industrial ideas, more freeedom, and more wealth than at any other time in any other nation-state in the world, it would be imprudent bordering on reckless to suppress those synergies in the name of industrial policy.

In the end, I rather doubt that Pearlstein is truly on board with the course of action he suggests.  In response to a question presented to him on the Washington Post live web chat yesterday about how the Chinese would react if his proposal were implemented, Pearlstein wrote:

They’d make a huge stink. They’d cancel some contracts. They’d slap on some tariffs of their own. They’d launch an appeal with the World Trade Organization. It would not be costless to us – getting into fights never is. But after a year, once they saw we were serious, they would find a way to begin accomodating [sic] us in significant ways, and if we respond with a positive tit for tat, things could finally improve. They’ve been testing us for years and what they discovered was that we were easy to push around. So guess what – they pushed us around.

I’m willing to chalk up Pearlstein’s diatribe to pent-up frustration.  But let me end with this admonition from that May Cato paper:

 [I]ndignation among media and politicians over China’s aversion to saying “How high?” when the U.S. government says “Jump!” is not a persuasive argument for a more provocative posture.  China is a sovereign nation.  Its government, like the U.S. government, pursues policies that it believes to be in its own interests (although those policies—with respect to both governments—are not always in the best interests of their people).  Realists understand that objectives of the U.S. and Chinese governments will not always be the same, thus U.S. and Chinese policies will not always be congruous.  Accentuating and cultivating the areas of agreement, while resolving or minimizing the differences, is the essence of diplomacy and statecraft.  These tactics must continue to underpin a U.S. policy of engagement with China.

Goodbye to Locally Processed Meats?

The Atlantic has posted (h/t Future of Capitalism) an article by Virginia artisanal meat provider Joe Cloud sounding the alarm about how as regulation intensifies, only producers with the scale and sophistication to deal with it will be left standing:

Although species go extinct on Earth on a regular basis, every so often there is a major event that comes along and wipes out 40 or 50 percent of them. The same thing happens in the small business world. A few businesses fold every year due to retirement, poor management, and changes in the market, and that is quite normal. But then every so often a catastrophe comes along and causes a wholesale wipeout.

For small meat businesses in America, catastrophic events result from changes high up in the regulatory food chain that make it very difficult for small plants to adapt. The most recent extinction event occurred at the turn of the millennium, when small and very small USDA-inspected slaughter and processing plants were required to adopt the costly Hazard Analysis and Critical Control Point (HACCP) food safety plan. It has been estimated that 20 percent of existing small plants, and perhaps more, went out of business at that time. Now, proposed changes to HACCP for small and very small USDA-inspected plants threaten to take down many of the ones that remain, making healthy, local meats a rare commodity.

I’ve been following this particular controversy for a while, and perhaps its most depressing aspect is how very typical the pattern is. In 2008, following demands that it do something about much-publicized Chinese toy recalls, Congress passed the Consumer Product Safety Improvement Act, which devastated many hundreds of smaller manufacturers, importers and retailers of children’s clothing and playthings while leaving relatively unscathed Mattel, Hasbro, and the biggest discount retailers (all of which had in fact supported passage of the law). More recently, major food and agribusiness firms have signed on to support a major new round of federal food safety regulation despite warnings that it could pose big compliance challenges for many local bakers, fruit-baggers, and other small providers whether or not their products pose any notable risks.

I generally share many of the views of the “locavore” movement regarding the value of distinctive local food cultures and the importance to kids and cooks of getting a more direct sense where food comes from. Trouble is, some of us who imagine ourselves friendly to locavore thinking reflexively support whatever regulatory proposals are billed as most stringent and thus most protective. By the time we realize the choices we have lost, it can be too late.

President Obama’s Poor Understanding of Voluntary Exchange

As explained in an excellent letter to the editor of The Washington Post:

Capitalism’s friends never had to cede moral ground to its enemies, but they will have to replace the current power structure to make room for a revival. President Obama summarized his understanding of free enterprise in his 2009 commencement speech at Arizona State University: “ruthless competition pursued only on your own behalf…”

That markets are built on voluntary transactions – mutual exchange for mutual benefit – is an alien concept in the academic environment that produced Mr. Obama and many of his staffers. That one accumulates wealth in a free market by providing value to willing buyers – the exact opposite of acting “only on your own behalf” – is another idea unlikely to penetrate the zero-sum mentality that dominates this administration.

The author is one Michael Smith of Cynthiana, Kentucky, a gifted and prolific letter-to-the-editor-writer.

Well-Worn Ideological Grooves

This week, over drinks at a fresh, new watering hole on up-and-coming H Street, NE, my companion and I struck up a conversation with a local resident, artist, and dandy. (Yes, dandy. His hair is what got the conversation started.)

We all three appreciated in varying degrees the change coming to the street. Having been about to up-and-come for quite a while now, H Street seems actually to be taking off. There’s quite a lively scene on the eastern end now, known as the Atlas District.

Change isn’t always easy, though. Increased commerce and gentrification along the street are apparently already raising property values and increasing property taxes, which some longtime local businesses can’t afford.

So it is with capitalism, though, remorselessly serving the tastes of the masses, shoving aside the businesses—institutions, really—that can’t keep up.

Now ask yourself: Where is it part of “capitalism’s” nature that increased property taxes push out long-time local businesses?

Note how the ideological grooves people trace again and again don’t quite match actual events.

(If you’re the kind of person who would debate this kind of thing at the bar, though, don’t come to H Street. It’s still too cool for you.)

China’s Dilemma

In the Wall Street Journal, Ian Buruma puts Google’s conflict with China in its historical context: the long struggle by China’s leaders to have the benefits of knowledge and trade from around the world without loosening their own hold on the Chinese people:

One way of dealing with this problem was to separate “practical knowledge” from “essential” culture, or ti-yong in Chinese. Western technology was fine, as long as it didn’t interfere with Chinese morals and politics. In practice, however, this was not feasible. Political ideas came to China, along with science, economics, and Western religion. And they did help to undermine the old established order. One of these ideas was Marxism, but once Mao had unified China under his totalitarian regime, he managed for several decades to insulate the Chinese from notions that might undermine his power.

Once China opened up to the world for business again in the late 1970s, under the leadership of Deng Xiaoping, the old problem of information control emerged once again. Deng and his technocrats wanted to have the benefit of modern economic and technological ideas, but, like the 19th century mandarins, they wished to ban thoughts which Deng called “spiritual pollution.” The kind of pollution he had in mind was partly cultural (sex, drugs and rock ‘n’ roll), but mainly political (human rights and democracy).

Way back in 1979, David Ramsay Steele of the Libertarian Alliance in Great Britain wrote about the changes beginning in China. He quoted authors in the official Beijing Review who were explaining that China would adopt the good aspects of the West – technology, innovation, entrepreneurship – without adopting its liberal values. “We should do better than the Japanese,” the authors wrote. “They have learnt from the United States not only computer science but also strip-tease. For us it is a matter of acquiring the best of the developed capitalist countries while rejecting their philosophy.” But, Steele replied, countries like China have a choice. “You play the game of catallaxy, or you do not play it. If you do not play it, you remain wretched. But if you play it, you must play it. You want computer science? Then you have to put up with striptease.”

As I wrote on the eve of the Beijing Olympics, China is launched on a long process of economic growth and openness to the world, which is inevitably leading to political unrest and challenges to established authority. I believe that the changes in China over the past generation are the greatest story in the world – more than a billion people brought from totalitarianism to a largely capitalist economic system that is eroding the continuing authoritarianism of the political system. In the long run, I think that the attractions of growth and openness will overwhelm the rulers’ attempt to maintain their hold on power. But that process is rarely entirely peaceful, and we can expect conflicts of all kinds as this struggle proceeds.

Global Markets Keep U.S. Economy Afloat

Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:

  • Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
  • James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
  • Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.

As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.