Last year’s model: China’s superman economy is mortal after all

It’s been a tough year for the “China model,” the economic policy apparatus that favors state-guided capitalism, and for most who have adopted its tenets to run their economies.

All over the world, emerging market (EM) countries that reveled in the West’s come-uppance in 2008, when radical deregulation in the US nearly took the global economy over the cliff, are now moving to reintroduce the market into their own economies as bloat, corruption and rampant bureaucracy have crept in.

The BRICS — Brazil, Russia, India, China and South Africa — have all faced drops in growth, sometimes radical ones.

Brazil barely grew at all last year and has suffered from large urban protests. South Africa’s economy sputters along, staggered by collapsing commodity prices and deadly labor unrest. India, once trumpeting its intention to outgrow China in this decade, will be lucky if its growth remains at about 5 percent — far too little to transform the lives of its vast armies of destitute citizens.

Corrupt and oil-price-dependent Russia grew at just over 1 percent in the last quarter, and its prospects dim with every shale gas and tight oil well sunk in the US Midwest. 

In China itself, the happy story of state capitalism producing near-double-digit growth for the foreseeable future has ended. The country is suffering through a real estate and credit bubble, combined with slack demand for goods in its once reliable Western export markets, while pressure at home to keep living standards on an improving trajectory has only increased.

Stock markets in Shanghai and Hong Kong have had their worst year in a decade as policymakers thrash around to curb excessive property speculation, stimulate faltering manufacturing sectors and pump ever more capital into state firms that employ millions but produce little other value.

China’s superman economy, in short, is looking quite mortal these days.

A little perspective is needed here. For all the angst in business columns about “the end of the China model,” China will grow at around 7.5 percent this year — quite a bit off the double-digit pace of recent decades, but no economy keeps that up forever.

Still, the slowdown, if that’s what it is, concerned China’s leadership enough for them to announce a “mini-stimulus” in mid-July targeting small businesses and a few strategic sectors like the railways and export industries.

But in the global game — the geopolitical tussle for influence that exists in the minds of Chinese and American ideologues and policy academics — this looks like an important moment. Beyond the BRICS, once stalwart global examples of China’s state-directed development model have faltered, sometimes badly.

On one side is Venezuela, whose economy is a shambles after a decade of shock Bolivarian revolution. The country led until recently by the late Hugo Chavez has been rocked by a corruption scandal that goes right to the top of his party.

On the other side is Myanmar, which in the starkest affront yet to China’s economic tutelage rejected the closed investment model when it began opening up last year, in favor of a Western-style system that allows high levels of foreign ownership in its assets.

Perhaps an even better indicator of the drift of things is Mexico. As the first country to have nationalized foreign oil holdings (in 1937), Mexico’s introduction last week of an energy reform bill that would reintroduce foreign companies into the faltering state-owned giant, PEMEX, is nothing short of revolutionary.

And, again, a sign of the geopolitical times.

Some in the West, primarily on the right, are crowing about the “end of the China model.” This is nonsense. As my colleague Andrew Gilholm, Control Risks’ lead Asia analyst, has said, the real debate now should not be whether China’s economy will implode, but what the recent hiccups will prompt the central government to do.

More from GlobalPost: Is ‘state capitalism’ killing emerging markets?

If Chinese policymakers use the next several years to intensify market reforms — and indications ahead of an important October plenary meeting in Beijing suggest this may be the case — the larger debate over the Chinese versus Western model could become irrelevant. As China absorbs the lessons of overcapacity and allows the market to point the way, and the West reintroduces intelligent regulation to its market-based system, the two should converge. 

But reform is very difficult, and there are some basic realities that China’s state directed system is running up against:

·       There is a limit to the amount of cheap consumer demand in the world.

·       There is a business cycle which causes export-dependent countries like China to lose customers in hard times simply because the customer must tighten his belt.

·       Moving an economy from being export-dependent to a consumer model stressing domestic demand — what economists call “rebalancing” — is precarious and risks massive dislocation.

·       There is a tipping point for any workforce when incomes and awareness of global standards rise enough to spark demands for higher wages, safer factories, environmental restraints and other improvements.

·       There are genuine losses to be incurred when one goes on a market-cornering commodity shopping spree when prices are high and then finds the price of those commodities has collapsed.

·       There is always somewhere in the world where “cheap labor” would be even cheaper — Bangladesh, Laos, Cambodia — not to mention India and virtually untapped sub-Saharan Africa.

Yet most of the problem with “the China model” appears to be the same old plague that haunted earlier forms of state-directed economics: human beings. Production quotas, opaque laws on private property ownership, mass urbanization drives and a central government that acts as an open tap to thousands of inefficient state and private firms can stave off some ills.

But they also breed corruption and draw government investment to places that would be best allowed to die, or at least to shrink. They create overcapacity that is, in effect, an asset bubble as dangerous to the global economy as the US real estate bubble was in 2008.

The China model has real problems, and they are showing up in every variant — from Venezuela to Russia to Brazil. But it is far too soon to count it out.

Michael Moran is Foreign Affairs Columnist at Global Post and Vice President, Global Risk Analysis at Control Risks, an international political, integrity and security risk consultancy.