Rational economic policies drive growth

By Mike Cormack Source:Global Times Published: 2016/9/8 1:03:40

Illustration: Peter C. Espina/GT

The recent Global Times article "China's socialist model outperforms capitalism" caught my attention, with its bold claim and certainty of expression. The British writer, John Ross (a senior fellow at Renmin University), suggests that Laos, Vietnam and Cambodia have adopted China's development model, are the fastest growing developing economies, and thus "China's socialist development model should be considered a huge success in contrast to the Washington Consensus." He goes on to say that "the overwhelming economic superiority of countries following a socialist development policy, more in line with the Chinese model, shows that it not only outperforms capitalist alternatives but that the Communist Party of China has a better grasp on the situation than Western economists."

Unfortunately this reading of political and economic development gets most of the basic facts right but misreads their consequence. For one thing, Ethiopia, Cote d'Ivoire and Papau New Guinea are in fact currently the fastest developing economies. All are growing at above 9 percent, with Laos, Vietnam and Cambodia enjoying growth of between 5-7 percent annually.

Ross is certainly right to say that the development model pushed by the US and its instruments of hegemony, such as the World Bank and the IMF, has been doubtfully helpful. Their insistence on free markets, flexible labor and unfettered capital for growth, and as conditions for aid, is rather better for highly developed nations. Indeed, Naomi Klein's book The Shock Doctrine thoroughly documents how crises, from the Russian post-Soviet shock to the Asian Financial Crisis of 1997 to post-invasion Iraq, have been used to impose radical free-market policies, even when proving flagrantly deleterious, under the guise of economic reform.

This is, in essence, what a hegemonic power does: it pushes policies that are good for it as being good for the world.

But it is not China's economic model that has resulted in Laos, Cambodia and Vietnam having strong growth. Nor is it particularly socialist, unless you think any state economic action is socialism. But we should examine the facts by what they are, rather than by their labels. The development model practiced by these developing Asian nations is the protectionist model that most every developed nation has pursued. (African nations, often weak in governance and reliant on foreign loans, have been less able to follow suit, and remain consequently largely agricultural). By protecting their economic development behind a wall of tariffs, quotas, subsidies and legal protections, countries have been able to build their productive capacity and to prevent unbalancing deficits. This was true of China's astonishing growth in the reform and opening-up period after 1978. Once economic planning was decentralized and farmers were able to retain and sell their excess crops, growth proved stellar, generating the capital to industrialize. A cheap currency, quotas, legal protections and tariffs enabled industries to grow.

Manufacturing thus developed from the lowest value-add to highly skilled, high capital factories like Foxconn in Shenzhen. Lenovo, Huawei and Alibaba blossomed, as trade barriers have been slowly removed.

But this is not specifically a Chinese model, nor has it anything to do with socialism. The US and Germany took similar routes in the 19th century, when facing competition from the UK, the first nation to industrialize. Japan, Singapore, and South Korea followed suit after World War II. The US' aggressive promotion of open markets is thus a case of "do as I say, not as I did."

The conclusion to be drawn is not that socialism has been proven better than capitalism, as Ross is obviously keen to do, but that protectionism can work for countries that do it right. This is not to argue for closed economies, which by removing any competition destroys living standards. It is simply to say that industrial development often needs a level of protection before it can compare internationally, and that trade policy has macroeconomic effects that a government must consider. Opening markets too early can cause trade deficits, inflation and unemployment, as the domestic population prefers trendy imports to local products.

Laos, Vietnam and Cambodia are demonstrating rapid economic development because they are encouraging capitalism, in a structured way as befits them as developing nations. Cambodia is now Asia's tenth largest garment producer through low labor costs and foreign direct investment-friendly policies. Foreign direct investment in Vietnam reached $23 billion in 2015, a rise of 12.5 percent on 2014, and nearly 10 percent of nominal GDP. All three are becoming manufacturing hubs due to the rise in Chinese labor costs, but they are wisely shielding nascent industries. Vietnam, for example, has tariffs of up to 100 percent on cars. Cambodia charges 35 percent on "finished products, alcohol, petroleum products, vehicles, precious metals and stones."

This is simply self-interested, rational economic policy, not socialism or indeed a China model. To suggest otherwise shows the most cursory understanding of economic history.

The author has been a freelance journalist in China since 2008. bizopinion@globaltimes.com.cn

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