China is a very bad model for the left


1:36 pm - January 31st 2010

by Paul Sagar    


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There’s a worrying tendency emerging in some sections of the left to cite China as a positive example for the UK.

At the Progressive London” conference, Ken Livingstone gave a speech in which he declared that the proof that government investment ends recessions lies in China’s staggering rates of state spending, and enormous correlate levels of growth.

Later, John Ross of Socialist Economic Bulletin (and Ken’s former economic adviser) took some time out from claiming that Britain’s national debt didn’t need to be repaid, that the triple-A rating is meaningless, and that all spending cuts are completely a choice and not imposed by brute economic circumstances, to cite China as proof-positive that government-led investment ends recessions. He waxed lyrical about China’s 9% growth in the last quarter, and how the Chinese government simply told banks to lend and – hey presto – they lent.

Don’t get me wrong, I’m all for keeping government spending as high as possible to protect the tentative recovery. But citing China as a model for UK growth is idiotic, and deeply troubling.

Firstly, it relies upon deliberate economic simplification. Why might China be experiencing such high rates of growth? The fact it possess enormous and largely untapped natural resources, which it is beginning to put to use, has something to do with it. That China is still in a stage of rapid industrialisation from what was effectively a peasant society, ravaged by the Cultural Revolution, helps too. Britain is incomparable on both these metrics.

Likewise, Chinese growth is in large measure driven by enormous government-led infrastructure projects (as a component of rapid industrialisation). It also has as an enormous manufacturing base, fuelling western demand for cheap consumer goods. Britain, by contrast, relies heavily on its financial and service sectors. The two economies are thus radically different.

So pointing at China and simplistically saying “look, they have lots of government spending and lots of growth, QED” is stupid. You might as well point to Angola and its 12%+ oil-driven growth, and it would tell you as much about the UK’s situation.

But more importantly than all that, let’s remember a key method by which China achieves its phenomenal growth: by systematically denying the civil and economic rights of its domestic population. Chinese workers have no meaningful union rights. They are paid pitifully low wages (averaging around $0.50 an hour in 2006), and have no hope of securing anything better. That’s a key way in which China’s export-manufacturing sector booms: low wages equal low costs, after all.

Another way China grows is by doing what I observed last summer: going to places like 1000-year old Yancheng, raising it to the ground, and erecting a city the size of Chicago in its place. And what do you think happened to the people living in Yancheng who didn’t want to have their homes demolished.

Do you think they were consulted nicely and offered new places to live with guaranteed legal redress? Or do you reckon they were forcibly re-located as is the Communist Party’s preferred approach?

We have been here before on the left. From the 1930s to the 1980s there were many who persistently claimed that Soviet Russia was a workers’ paradise, a successful alternative to capitalism. The left must not repeat the mistakes of history.

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About the author
Paul Sagar is a post-graduate student at the University of London and blogs at Bad Conscience.
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Story Filed Under: Blog ,Economy ,Far East ,Foreign affairs ,Realpolitik

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Reader comments


I heard hedge fund manager Jim Chanos on the BBC World Service a few days ago giving some cogent reasons why the GDP figures over-state China’s performance (no account of depreciation) and why he thinks they’re heading for a crash:
http://www.businessinsider.com/jim-chanos-china-is-headed-for-a-huge-crash-2009-11

Tim Worstall makes a good point about why I’ve got my figures on Chinese manufacturing wages a bit wrong, which I’m happy to be corrected on:

http://badconscience.com/2010/01/30/1669/#comment-2027

as it doesn’t affect my overall point.

(thought it fair to flag this, in name of openess and honesty etc)

And worrying to hear people compare Western countries, especially the US, unfavourably to China when it comes to “getting things done”, usually with regards infrastructure projects, high-speed rail and hosting mass feats of athletic prowess. Granted, the US congress is a broken institution. How do they think these things “get done”? Is that something we really want to emulate? And could we even if we wanted to? The thing about economic and political development is that people become less and less tolerant of government intrusion and thuggery.

The national debt is never repaid. We grow ourselves out of it and repay maturing gilts at the same time as issuing longer-dated debt.

The triple-A rating does not have a significant meaning for an advanced mature economy like the UK. Relying on the opinion of a credit reference agency for an obscure company or country in the developing world issuing external debt in foreign currency might be appropriate. However, a fund manager is not doing their job if they need to rely on a CRA to tell them the macro and fiscal position in Britain. If the UK was downgraded gilt yields would spike and sterling would depreciate because market noise slavishly follows such things. However, yields and the currency effective exchange rate would in time return to fundamentals. Why? Because ratings attempt to estimate probability of default and there is precisely zero chance of default by a sovereign issuer.

I agree citing China is idiotic. They are still in the ‘ catch-up ‘ phase of development and every unit of investment capital will achieve a far greater effect on growth than the same investment in a mature economy. Likewise it is silly to expect their growth to proceed at the same level in a linear manner for the next three decades. Like Goldman Sachs talking their book suggest.

There is much to be admired in how China has lifted hundreds of millions of their citizens out of poverty. However, the export-led model using an undervalued currency is not sustainable for them or their neighbours. It can seem impressive to see the development around the coastal cities but the prosperity there is subsidised by the majority who are unseen and are not involved in the export sector, as they are robbed of purchasing power. The splurge in lending has led to a huge bubble and like every bubble in history it will burst. Maybe next year maybe five years but it will burst and have far reaching consequences.

China needs to move away from the export-led model and take serious actions to support domestic demand and direct investment away from the overcapacity in the export sector towards building social safety nets. It is very difficult for them because they see what worked in the past and are reluctant to change. Moreover, the costs of change will fall on the prosperous who benefit from the current model. What they don’t seem to appreciate is the world has changed and if they do not change protectionism will be the outcome. India continually gets more protectionist towards China. There is huge protectionist sentiment from the left and the right in the US. The French have made no secret of their desire to turn the EU into a fortress Europe.

Although one can admire some aspects of China the big challenge is whether they can change. Moreover, can a one party dictatorship survive with a growing educated and prosperous class. Other than throwing off the shackles of democracy and appointing a team of economists to run the UK, I can’t see what lessons Chinese development can teach Britain.

5. J Alfred Prufrock

China is a v bad example for all the original points made. It does seem sometimes that certain sections of the Left will turn a blind eye to civil rights abuse when the Party in power uses the words “Communist” or “socialist” (in my opinion despite being neither). As Mr Sagar writes it’s similar to the old fetishism of the USSR.

Another thing…
When the Right-wing starts holding China up as a beacon of progress you know something’s wrong… http://www.telegraph.co.uk/finance/comment/jeremy-warner/7105004/Capitalism-has-forgotten-to-share-the-wealth.html [last few paragraphs].

On social issues, there are several right-wingers who hold up crazy regimes as a model.

Remember the recent right-wing nut Mayor of Doncaster, who was hailed by the Daily Mail and ConHome as the future, praising the Taliban?? Bizarrely the same media outlets failed to follow that up.

7. J Alfred Prufrock

Yes, they do seem to have an oddly pick’n’mix approach to supporting, er, regimes of dubious merit (to coin a euphemism)… As the old joke has it, the only reason why Bush’n’Blair thought Saddam had WMD was because they found the receipts from the ’80s.
Not to mention the continual backing of Saudi Arabia, training of the Mujadadeen “freedom fighters” in Afghanistan in the ’80s etc etc etc!
Anyway, off topic, oops.

I’m guessing China appeals to anyone with an authoritarian streak, hence why some sections of the Left and Right can cohabit the same space from opposite ends of the spectrum.

8. astateofdenmark

Paul Sagar playing the 21st century Camus, to the not quite modern version of Derrida?

If so well done. China is in catch up phase, so it is easier to grow. It is also easier to spend lots of money centrally, when you have been saving vast sums of money. The appearance of growth is may also conceal the real growth in credit.

It’s understandable that people are in awe of China’s progress, Japan and South Korea were similarly viewed. Let’s not get carried away with ourselves.

Yep, that worried me too. I interviewed Ken back in 2008, and he wouldn’t stop talking about how great China is. I think it’s immensely short sighted, tbh.

There’s another point here: namely that China has very little in the way of welfare: pretty much everything – health, higher education – is pay as you go and insurance markets are either rudimentary or nonexistant. It’s this that helps drive China’s enormous savings rates, which in turn provide the money the government can use for domestic infrastructure projects, investing overseas and buying up US debt.

There was talk last year about the establishment of some kind of NHS/single payer system in China precisely to free up savings for more domestic consumption. As it happened, the government decided to direct its stimulus programme to capacity building against the day when US and Western markets would recover.

So firstly, Ken LIvingstone and John Ross are proposing an alternative model that socializes most risk to the poorest sections of Chinese society in order to create the state-led investment model that they like so much. And secondly, this isn’t an alternative model at all, since it’s still designed largely to facilitate exports and inward investment: as such it’s entirley complementary to the finance-led economy of the US and other western countries.

A few years ago, many people predicted economic liberalism in China would lead to social liberalism and eventually a democratic government. Based on what had happened in other countries. There is a bit more social liberalism in China — homosexuality is no longer an offence — but democracy seems far away.

The Chinese economic model itself is unusual, founded on a controlling state that permits capitalist enterprise by its rules. In many ways it has imitated Asian Tiger economies, such as Singapore and South Korea, which themselves are less liberal than “traditional” Hong Kong. But China is so big and so disparate that it is not comparable with anything that precedes its development.

The Chinese government has crushed (not literally) peasant farmers and factory workers in order to construct railways, dams and Olympic stadia. When the peasant farmers and factory workers become more wealthy, it will become more difficult for government to take away the land.

And when the wealthy peasants become in conflict towards government, it will be about land ownership or (brain dead) ethnicity. Not human rights.

“So firstly, Ken LIvingstone and John Ross are proposing an alternative model that socializes most risk to the poorest sections of Chinese society in order to create the state-led investment model that they like so much. And secondly, this isn’t an alternative model at all, since it’s still designed largely to facilitate exports and inward investment: as such it’s entirley complementary to the finance-led economy of the US and other western countries.”

Excellent point, Jamie.

John Ross is in the comments thread at my place, trying to argue his corner. Frankly, I’ve wasted enough time on him today.

If anyone feels like taking over the reigns of refutation, be my guest.

Tiananmen Square.

Screw the left and the right.

Freedom from tyranny for all.

Who are the idiots on the left who say China is an ideal world, well I suspect the way Brown is going with ID cards CCTV and DNA data bases, it’s new labour, I’m a so called lefty, no way do I believe that Russia or China or North Korea is the way to go for god sake. Freedom was earned and fought for, I left labour after 40 years in it because of this pathetic New labour style of government

10. jamie
‘ As it happened, the government decided to direct its stimulus programme to capacity building against the day when US and Western markets would recover.

So firstly, Ken LIvingstone and John Ross are proposing an alternative model that socializes most risk to the poorest sections of Chinese society in order to create the state-led investment model that they like so much. And secondly, this isn’t an alternative model at all, since it’s still designed largely to facilitate exports and inward investment: as such it’s entirley complementary to the finance-led economy of the US and other western countries. ‘

That model could only survive as long as the current account deficit countries could absorb the huge Chinese surplus caused by the state directing investment to the favoured export sector. At the heart of the problem is the undervalued RMB. China continuing their model of development are attempting to export their overcapacity problems to others and this will inevitably lead to a reaction. The level of personal debt and rising unemployment in the deficit countries means their consumers can no longer absorb the Chinese surplus. Unless China changes, protectionism and trade conflicts are inevitable. Moreover, it is not just the Western nations involved, as China are also in effect trying to export their overcapacity to their Asian neighbours.

It is always the problem when discussing China that so much of the analysis is cheerleading. Any criticism leads others to point out how many have been lifted fro poverty. However, the model is no longer sustainable and they need a different model to spread prosperity to the hundreds of millions who still live in abject poverty. Professor Michael Pettis of Peking University has an excellent blog discussing the distortions and contradictions being built into the Chinese system.

http://mpettis.com/2010/01/

The triple-A rating does not have a significant meaning for an advanced mature economy like the UK. Relying on the opinion of a credit reference agency for an obscure company or country in the developing world issuing external debt in foreign currency might be appropriate. However, a fund manager is not doing their job if they need to rely on a CRA to tell them the macro and fiscal position in Britain. If the UK was downgraded gilt yields would spike and sterling would depreciate because market noise slavishly follows such things. However, yields and the currency effective exchange rate would in time return to fundamentals. Why? Because ratings attempt to estimate probability of default and there is precisely zero chance of default by a sovereign issuer.

Wrongo… On a few levels really, The first is that ratings agencies are like the press – they don’t shape opinion as much as they follow it. Rating downgrades are preceded by large increases in credit spreads: the market recognises that a country’s debt is riskier, and the ratings agencies just formalise this. Look at what happened to Spain, and Greece, over the last year.

The second point is that while few sovereign issuers default (Russia, Argentina etc), lots of them resort to inflating their debts away. From a lender’s perspective this is basically just as bad. In one scenario the borrower just tells you that he’s not paying you. In the other he’ll pay you – with worthless money. So: it’s not just default you need to worry about; it’s inflation.

If the ratings agencies do downgrade UK gilts (and S&P have already downgraded the UK banking sector) then it will also have a follow-on effect of making borrowing more expensive (as well as reflecting the fact that borrowing has become more expensive). That leads to higher interest rates, and makes our public borrowing less affordable – meaning that we have to borrow more, which makes our debts less attractive and so on. It’s not a good situation to be in. At present the agencies are factoring into their calculations the probability that the next Govt will institute fairly dramatic fiscal tightening moves. If that looks less likely, then a cut in the ratings may well follow.

A de facto default through inflation is not something the CRA consider when rating.

Too much attention is given to sovereign credit default spreads. There is no implied default risk in the price as they are over-the-counter illiquid instruments. For example, what is the point of CDS on US Treasuries? It’s like buying insurance against the end of the world. You will not be around to collect. And if the US ever defaulted on their debt there would be no functioning monetary system left. I know very well the mechanics of rising yields in response to a downgrade but my point was with a sovereign issuer who issues debt in their own currency there is zero risk of default. Spain and Greece do not have control over their monetary policy.

I know that the market would react irrationally. However, gilt yields in an efficient rational market would only rise to increasing inflationary expectations and in expectations of interest rate rises. The UK banking system has an infinite capacity to absorb gilts as the central bank has an unlimited capacity to provide liquidity. That is the difference between issuing debt in your own currency as opposed to foreign currency. The only reason we have to worry about CRA is because we choose to play a game with the primary dealers.

Any comments about this in Saturday’s press?

“THE security service MI5 has accused China of bugging and burgling UK business executives and setting up ‘honeytraps’ in a bid to blackmail them into betraying sensitive commercial secrets. . . ”
http://www.timesonline.co.uk/tol/news/uk/crime/article7009749.ece

A de facto default through inflation is not something the CRA consider when rating.

That’s just too simplistic. What the rating agencies use to determine their ratings is the affordability of the debt. The markets (not the agencies) factor in inflation risk as a part of the premium they will pay for the debt. If inflation is high (or there is seen to be a risk that it will become so), they will either demand higher interest rates (thereby making debt more expensive and less affordable) or will demand inflation-linked bonds (thereby making borrowing no less expensive if inflation does rise).

Which ultimately means that inflation, or the risk of inflation, makes borrowing more expensive, which tracks directly into the rating agencies’ calculations on the rating. And if you think this is all strictly irrelevant and theoretical, look at what happened to Greece’s borrowing costs when they were downgraded.

http://ftalphaville.ft.com/blog/2009/12/22/117886/greek-bond-blow-out/

Portugal is likely to be next.

with a sovereign issuer who issues debt in their own currency there is zero risk of default. Spain and Greece do not have control over their monetary policy.

Russia? Argentina?

20. Eats Shoots and Leaves

“raze”, not “raise”. So your post could read:

“Another way China grows is by doing what I observed last summer: going to places like 1000-year old Yancheng, razing it to the ground, and raising a city the size of Chicago in its place.”

[Chinese workers] are paid pitifully low wages and have no hope of securing anything better.

Given the growth in China’s per capita GDP, I’d say they have very realistic hope of getting higher wages in the future.

“Given the growth in China’s per capita GDP, I’d say they have very realistic hope of getting higher wages in the future.”

There are also things like the labour contract law introduced in 2008 which formally at least gives Chinese workers more rights in the workplace than US workers (enforcement is another matter).Peasants have also been given improved land use rights amounting to leashold status, which has tended to boost rural wages, or at least buffer them against the effects of recession. There’s also been a lot more investment in central and western China in recent years, where infrastructure is needed.

I mean, on a micro level, there are actually some good things you can point to from the Hu administration – and things, moreover which look fairly good from a leftist standpoint. But these are the sort of things that people like Ross and LIvingstone ignore in favour of huge macro-level development schemes basically designed to keep the wheels turning until Americans are ready to spend again.

In answer to Richard J @17: I’m aware of the issue and of Michael Pettis’s blog: I don’t think that China’s continued reliance on exports will lead to protectionism, basically because there’s nothing to protect and no political will to repatriate the industries that migrated to China and elsewhere. As we’ve seen, the political classes have no more desire in the West than in China to change the rules of the game. Ironically, the best hope of an industrial revival in Europe would be to free up China’s savings to promote domestic consumption and create a larger export market.

19. Tim J

‘ Russia? Argentina? ‘

Their debt crisis was related to foreign currency and their pegs to the USD. Nearly all debt crisis in the developing world are related to foreign currency borrowings. Moreover, all currency pegs eventually lead to a crisis. Nearly all ( in the region of 99.9%) of UK Treasury borrowings are in GBP. The only gilt-edged promise, hence the name gilts is to pay the coupon and principal in pounds sterling. Since the government are monopoly suppliers of pounds sterling there is zero risk of default. I am not disagreeing with you on the mechanics of rising sovereign yields. I worked within the beast for long enough to know what happens when markets turn against companies and states. However, for sovereign issuers it is all a phony war to restrain governments from spending money. There will be huge sums of money being made playing the yield curve and CDS in the Greek crisis. Unfortunately the ordinary Greek citizen will be totally oblivious to the money being made from their ‘ crisis ‘ as they lose their jobs and public services are cut. When the same forces are finished with Greece they will move onto Portugal, Spain and finally Italy.

2. jamie

‘ Ironically, the best hope of an industrial revival in Europe would be to free up China’s savings to promote domestic consumption and create a larger export market. ‘

I agree. And the best way of convincing Chinese workers to stop saving such a high proportion of their income is for the Chinese state to build social safety nets.

Eats Shoots and a Leaves,

You are quite right.

I realised that yesterday afternoon, and hoped nobody would notice!

That should be “razing it to the ground” – sorry, second time I’ve seen the error on this site. You could only raise something to the ground if it was sunterranean beforehand.

That should be “razing it to the ground” – sorry, second time I’ve seen the error on this site. You could only raise something to the ground if it was subterranean beforehand.

28. Groundhogs of the World Unite!

Matt’s obviously excited that it’s groundhog day today

29. Groundhogs of the World Unite!

Matt’s obviously excited that it’s groundhog day today…

30. Groundhogs of the World Unite!

Matt’s obviously excited that it’s groundhog day today….


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    China is a very bad model for the left http://bit.ly/bSNQ9I

  2. Alexander Hayman

    RT @libcon: China is a very bad model for the left http://bit.ly/bSNQ9I

  3. Claire Butler

    RT @libcon China is a very bad model for the left http://bit.ly/c6gU3j

  4. Left Outside

    RT @libcon China is a very bad model for the left http://bit.ly/c6gU3j

  5. Alda Telles

    China is a very bad model for the left http://bit.ly/dA9Bgc (liberal conspirancy)

  6. uberVU - social comments

    Social comments and analytics for this post…

    This post was mentioned on Twitter by libcon: China is a very bad model for the left http://bit.ly/bSNQ9I

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