Financial crises show superiority of Chinese model

By John Ross Source:Global Times Published: 2017/10/22 22:03:40

Illustration: Peter C. Espina/GT

This year marks the 20th anniversary of the Asian financial crisis and the 10th of the start of the global financial crisis. As these anniversaries coincide with the 19th National Congress of the Communist Party of China, it seems an appropriate time to analyze the achievements and trends of China's economy in the wake of these major crises and of China's relations with the rest of the world.

Such comparisons are even more necessary because these crises were not purely historical events; their effects continue to shape the present international situation at the time of the Party Congress.

Both crises showed in a striking, practical way the economic superiority of China's "socialism with Chinese characteristics" to the Western capitalist system. China was able to come through these two crises with little economic damage, unlike the West. Indeed, China's successes during these crises sharply increased its standing in the global economy. These events thus demonstrated the superiority of "socialism with Chinese characteristics," not merely in an historic sense but as China's best defense when confronted with the current problems in Western economies. 

Analyzing first the 1997-98 Asian financial crisis, this had devastating effects on most East Asian developing economies. In contrast to the other major East Asian developing economies, China came through the Asian financial crisis without significant economic slowing.

Under the impact of the US subprime crisis, the world economy shrank in 2009 for the first time since the aftermath of World War II. The US economy in 2007-09 contracted 3 percent, its worst performance since the Great Depression.

But even more serious, growth in the advanced Western economies entirely failed to regain its pre-global financial crisis rate. IMF Managing Director Christine Lagarde has accurately described the post-2007 period in the Western economies as a "new mediocre." Average annual US growth for 2007-16 was only 1.3 percent, in the EU 0.6 percent and in Japan 0.4 percent.

Despite this most severe global crisis for almost a century, China's economy continued rapid expansion. In 2007-16 China's economy grew by 106 percent - compared with only 12 percent in the US, 6 percent in the EU and 3 percent in Japan. The combined effect of China's rapid economic development with the West's "new mediocre" sharply changed the situation in the world economy. These trends created a "win-win" outcome between China and the rest of the world. China's economic expansion aided China's own people, while Western living standards were falling. But China's growth also aided world economic recovery - thereby avoiding greater international problems for China itself.

The two crises demonstrated in the most practical way the superiority of China's "socialism with Chinese characteristics" compared with capitalism.

In capitalism, the economy is entirely dominated by private ownership of the means of production. In the US, for example, 83 percent of investment is private and only 17 percent state - with no large state banks that can provide easy finance for private company investment. Therefore, when the collapse of the sub-prime mortgage market led to plummeting US private investment, which fell 24 percent in 2006-09, there was no state mechanism strong enough to prevent the US from falling into severe recession.

This repeated the experience of the Asian financial crisis, when investment in South Korea fell 21 percent in 1997-98, while in 1997-99 investment fell by 45 percent in Indonesia and 47 percent in Thailand and Malaysia.

In contrast, China's "socialism with Chinese characteristics" has a powerful State sector, which in a crisis can maintain investment and powerful State banks that can lend to private companies. More than 35 percent of China's fixed investment is by the State.

Thus, during the Asian financial crisis, while investment was falling sharply in other Asian economies, in China it rose by 22 percent in 1997-99. During the sub-prime crisis, while in the US total investment fell by 18 percent in 2006-09, in China it rose by 54 percent.

"Socialism with Chinese characteristics" was the direct reason China came through the two great global economic crises without the severe problems that affected the Western economies. This State sector provided a precise mechanism through which the CPC could prevent China's economy from falling into a crisis.

However, while China successful economic development after the US sub-prime crisis showed the superiority of China's economic system, nevertheless the combination of China's economic success with the West's "new mediocre" created a new international economic situation.

China's post-1978 reform and opening-up produced far more rapid economic development than in the West. China's average annual economic growth from 1978-2007 was 9.9 percent, compared with 2.6 percent in advanced Western economies. Nevertheless, in that period significant growth among the Western economies created a favorable international economic climate for China - all major economies grew with China growing faster than any other.

But following the international financial crisis, in global economic governance, as the Western economies were in the "new mediocre," they were unable to take initiative to lead the world economy forward, which other economies as well as China required. China therefore took increasing initiatives.

Geopolitically, slow growth in Western countries led to popular discontent within them and increased international instability. In some cases, the traditional Western political elites lost control of key decisions - as with the UK's economically irrational vote to leave the EU. In the US, Donald Trump was elected president against the overwhelming majority of the political establishment.

While China has strongly promoted peace, the risk of such international instability justifies its focus on military reform that strengthens the PLA.

In summary, China's domestic transition to moderate prosperity, combined with the "new mediocre" in Western economies, required a successful series of international initiatives since the 18th CPC National Congress. This will continue at the 19th Congress with great consequences not only for China but the global economy.

The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China. bizopinion@globaltimes.com.cn



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