Spectacles of State Capitalism: Big Government Low Welfare

I just had a revelation: one secret of China's economic miracle is the unique model of "big government and low welfare". Because of the low welfare, people tend to save more for rainy days. So the government can always use the high saving in government-owned banks for investment. Also because of the low welfare, people have to work hard to earn a living. That's how you get high investment and cheap hard-working labor at the same time. Can the high welfare Europe or the over-consuming America beat that?

Spectacles of State Capitalism: Let the Construction Begin

As millions of French people are protesting against the government in Paris for job security and higher wage, millions of Chinese peasant workers are kicking off construction projects all over China. The Local governments in China are in a frantic race to get a bigger slice of the central government's stimulus package, and they are jump-starting projects even before the central government approves them.

If they cannot get the funding from the central government, they can probably get it from government-owned banks. In the first two months of 2009 alone, banks have given out more than 2 trillion yuan loans, which equals to the whole sum of 2008. In Feb., investment in fixed asset in cities increased 25% year on year. Need more evidence of a new Great Leap? Sales of construction machinery, from excavators to bulldozers, has rised more than 30% in Feb. year on year.

Some of these projects are truly long overdue, like the water facilities in Henan which just suffered a long drought. Some are more like fairetales, for example, the city of Tian Jin's plan to build a whole new ecological city on an empty barren land, which will cost billions. But you cannot say such projects are completely illusionary; don't forget Shanghai's Pudong was turned from a farmland to an international financial center. We don't know whether such projects will be of any value at the end, but at least right now they create some jobs and boost the local GDP number.

Can a nation maintain fast long-term growth by just spreading cement and steel? I'm not sure, China is adopting such a unique model of state capitalism that it's hard to draw upon any historical lessons. Yes the western property bubbles bursted, but they don't have the unconditional backing of government credit and nationalized banks.

It seems that business is as usual in the world despite the recession, the French are protesting, the US are creating money out of thin air, and the Chinese are building stuff.

Who are Stimulated

China and the US have one thing in common: obsession with economic growth. So their stimulus packages have turned out to be much more radical than those of EU or Japan. Yesterday The Fed of the US just announced its plan to buy more than 300 billion dollar worth of Treasury bonds, practically creating virtual money to pump more liquidity to the system. Meanwhile, China's local governments have been kicking off massive infrastructure projects one after another. Before, some of these projects cannot get bank loans because of their vague promise of benefits, but now the banks are pushed by the central government to support these projects. Even the environmental regulations that used to hinder some of these projects are being relaxed. But who do these desperate actions really stimulate?

Buyers of gold and oil in the past several months are certainly stimulated. They have speculated that the US would choose inflation over recession, and they turn out to be right. Even those who bought property might be happy that at least the interest rate will be lower. But those who believe in the green papers are again punished.

China's situation is more complicated. Besides the local governments, real-esate developers seem to be very stimulated. Many of them were on the brink of bankrupcy when at the end of 2008 their over-leveraged projects suddenly cannot find customers. At the beginning of 2009, it seemed natural that the real estate bubble in China will finally burst. But after the average price of houses dropped for about 2% in major cities, the local governments suddenly start to hand out various stimulus for people to buy houses, from tax relief to straight government subsidies. After all, the income of local governments depends on high price of land. Then, the banks started to give new loans to the developers, which saves them from selling their projects at lower prices.

Many consumers have been hoping that the developers will be forced to sell their projects low when they have to pay back development loans to the banks. Now these consumers should probably give up; as long as the developers can get their loans extended unconditionally, they can wait longer than the consumers. The sad truth is many of these consumers cannot wait that long, they might have to get an apartment to get married, or they might have to get an apartment to get residence cards in big cities like Shanghai and Beijing. More importantly, they probably cannot endure the shame of not owning a home in today's Chinese culture very long. That's how you stimulate consumer demand.

Spectacles of State Capitalism

These days the western countries are becoming more and more like China, in the sense that governments are playing a central role in the economy. EU believes that more government regulation is the cure for the collapsing financial system, while the US is advocating for more government spending to stimulate the economy. Despite the obvious difference between the two approaches, they both center on expanding the governments' responsibilities. Some Chinese elites are already cheering: look, our banks are already all "nationalized" and government spending has always been a main engine of the economy, our system is superior after all.

China's state capitalism indeed has some merits. Particularly, the current Chinese government has shown impressive efficiency in mobilizing and coordinating a wide range of social resources for the tasks it determines to fulfill. You can see that efficiency in the well-organized Olympics, or the prompt rescue work during the Sichuan Earthquake. How would this efficiency fare with the economic recession?

The Chinese government has already announced its 600 billion dollar stimulus package. How that money should be allocated is still being debated. Grassroot voices are advocating that more money should be spent on health care, education and social safety net. But according to current plan the majority of that money will be spent on infrastructure, from railroad, highway to airports etc. No one will doubt the government's ability to execute these infrastructure projects well. And these projects will indeed boost the GDP, and absorb many unemployed construction workers.

But you can expect the old problem of corruption as long as the power of allocating resources are in the hands of bureucrats without public oversight. What's more, the concentration of resources on government projects might squeeze out resources for the private sector. Particularly, the banks would rather give loans to government projects than to private small business. Infrastructure construction does not generate as many jobs as small business in retail or service. So we might see a growth of GDP without a growth in employment.

My final point, we should really be worried that some government official will decide to waste huge amount money on building MONUMENTS of THEIR OWN ACCHIEVEMENT again! Just look at the skyscrapers to be built in the coming years.

States Strike Back

Not long ago, many economists were talking about the demise of nation-states under the forces of globalization. Now many are calling for the states to play a bigger role in regulating and rescuing the economy. In the US, Obama has announced the plan to increase government spending and raise tax on the rich. China's government also made plans to add trillions of yuan to government spending and requested government-owned banks to expand loans.

Although I have been criticizing unbridled market economy, I'm worried that wrong kinds of government interventions could protract the recovery of the economy now. When you talk about the role of the State in China's context, you have to recognize the gap between the policies made by the central government and the execution of local officials. In the past, a large part of government spending has been wasted on redudant infrastructure, luxurious government buildings and excessive heavy industry. Not to mention the money slipped into the pockets of corrupted local officials. China is already having the problem of over-production, given the dwindling external demand. If more money are invested in infrastructure and products that people cannot really use, the problem of over-production will get worse. So it's better to put those money from the government directly into people's pocket through tax cut and welfare. That way people can spend their money on what they need, and the industries will produce according to the true demand.

In the US's context, I think Obama is doing the right thing. In the past decade, the US government has been leaning towards putting money in the people's pockets, particularly the rich people's. It reached the stage that people start putting easily available money into real estate and financial instruments, rather than engaging in everyday consumption and productive activities. So it's a good idea that the government will now lead the way in renewing infrastructure and developing green technology, which the private sector hasn't showed enough interest in.

But even democratic governments need to consider voter sentiment and narrow national interests. So you often see protectionist policies come with government stimulus packages. Obama has the "Buy America" line, Sarkozy required French car factories not to move to Eastern Europe, and Brown pandered to the "British jobs for British Workers" protests. What's worse, as the states are trying to draw more resources to their own countries, poor countries suffer more.

My skeptism about the effectiveness of government interventions makes me contemplate on what role the civil society can play for this recession...

The Propaganda Might Become True

In China's media these days, confidence is the buzz word. It seems people want to believe that, as the developed world is in decline China will become the new land of opportunities.

I have been warning people around me that the impact of this global recession on China hasn't fully unfolded yet, things can get much worse before they get better. China cannot rely on export or real estate to continue its growth any more. And it will be a long time before China can have a strong domestic market. The social harmony touted in the media may be destablized by massive unemployment and increasing international trade conflicts.

But there is a reason I came back to China at this moment. I, too, am enticed by the opportunities in China in the future. All the flaws here are also opportunities for development. Throughout Chinese history, crisis motivates important social changes more than anything else.

Yes Chinese products today are distrusted by both foreign and domestic consumers. Maybe some milk we are drinking is still unsafe and some houses we are buying leaks on rainy days. But now that almost none of us can stand this anymore, we might finally all try to produce creative and high quality things whatever industry we are in.

Yes Chinese bureucrats are wasting a colossal amount of taxpayer money on luxurious dinner, on vacations disguised as business trips, and even on their mistresses. But that means if we can curb that kind of corruption, the money we save might be enough to cover all the debts in medical care, education and social safety net.

Yes China's environment is polluted and the natural resources are strained. But that means, unlike resource-rich countries like Brazil or Australia, we will have the urgency to develope green technologies and adopt a more environmentally conscious life style.

Yes most Chinese are still very poor, we have 25% of the world's population but only 5% of the world's wealth. But if we can lift more people out of poverty and give each person the freedom and the means to fully realize his/her potential, China will indeed become a land of opportunities and a new engine for the world's economy.

From the World Factory to the World Market

Although the plunge of export are already hitting China hard, my middle-class friends in Shanghai are still surprisingly optimistic. They work for big international corporations, and they are normally negligent of the workers in the manufacturing sector who are affected most by the recession. They firmly believe that China will do much better than the other countries in this crisis, why not, the government promised a 8% growth GDP.

The government is indeed doing a lot to energize the economy. The huge stimulus package will probably indeed provide a growth in GDP. But the GDP growth will mainly come from the constructions of more roads, airports and office towers, which will not provide enough jobs or truly lift people's standard of living. The investment in infrasture will increase China's production capacity even more, with the demand from foreign consumers sharply decreasing, where can all the goods made in China go?

The American consumers' seemingly insatiable appetite was supported by the asset bubble, from financial assets to real-estate, which has finally bursted. Now many Americans will finally learn to live within their means. This change already has a clear impact on China: China's famous trade surplus has decreased 88% in Febuary from January.

The reason my middle-class friends haven't felt the pain yet is they are not part of the world factory. Instead, they mostly work for global corporations that see China not just as a production site but also as a promising market. These global corporations often are reluctant to cut their investment in China because the Chinese market still has a lot of potential to grow while the consumption in the developed world is likely going to shrink for a long time. But the fate of China as the world market depends on whether it can truly raise the people's spending ability.

The domestic consumption in China has been notoriously weak even in China's boom years. Although China became the second largest market in the world for luxury goods, it's only the small amount of bureaucrats and enterpreneurs that gain strong purchasing power. Most people are reluctant to spend because their income grows slower than China's GDP, they are worried about the high cost of health care, medicine, housing and the lack of social safety net. That's why the overall saving rate in China is so much higher than that of America. This will not change easily. My optismistic middle-class friends should realize that their fate depends on whether China can indeed become a strong market, which in turn depends on whether the wealth and privilege they enjoy can be spreaded to their low class fellow citizens. The only way for China to pull it self out of recession is to adjust the wealth distribution and give people more sense of security through better welfare, the people who have been producing everything for the world should be able to consume what they produce too.