The horizon is not so far as we can see, but as far as we can imagine

Category: Development Economics Page 1 of 4

How To Use China To Make Your Left Wing Government Succeed

Back in 2016 I wrote a piece called “Seven Rules For Running a Real Left Wing Government.” It proved to be one of my most popular pieces, particularly loved by activists. Since then I’ve often been asked for an more and I’ve finally written a partial update and companion piece.

The Sixth Rule was “Reduce Your Vulnerability to the World Trade System.”

This rule is still true, but how it is applied has changed — you can use a relationship with China to, over time, reduce your dependence on the old system which required you to stay poor and dependent..

Back in 2016 China was massively important, but the rules of the system were still all-powerfully American. Those rules are breaking down now and your government can take advantage of that. Though the title of this piece is about China, much applies to bilateral relationships with other countries. China’s the biggest and most advanced and most useful right now, however.

What working with China can do for you.

  1. Movement up the industrialization chain;
  2. Modernization
  3. one time infrastructure
  4. cheap loans
  5. Training and teching-up your scientists, engineers and designers.

All of these benefits are available, but you have to be smart and structure your deals to give you a long term advantage, China won’t do that for you, but they are open to such deals and won’t sandbag you. To use modern bargaining speak win/win deals are available if you seek them. There are limits, of course, but those limits are far higher than they were and are under the old WTO/US system.

How The World & China Have Changed And How You Can Use Those Changes

China is now the largest trade nation in the world and caught up to the West or surpassing it in most, though not yet all, technologies.

Post-Ukraine war it has been structuring many non-dollar deals.

These deals settle outside of the banking system controlled by America and Europe and thus you are not forced into structures which automatically try to keep you from moving up the value chain without being a US satrapy (like South Korea and Japan and most of Europe) or seeking moderate economic independence. (See the original 7 Rules article for how the old system works.)

De-dollarization and a nascent non-Western banking system make it possible to break the stranglehold the old international trade and finance regime put on left wing governments.

To take advantage of this opportunity you need to understand China’s domestic issues:

  1. China has far more construction and development capacity than it needs. It has built most of the buildings, roads, ports, hospitals, schools, power plants and so on it requires. China could get rid of those jobs and cut the industry in half OR it could use it overseas and not throw a pile of people out of work and destroy half an industry. This means, among other things, that China is willing to put up infrastructure for very low prices in order to keep the people employed.
  2. China has a vast need for resources: food, fuel, minerals and so on. If you’ve got it, odds are they need it and they want long term secure deals.
  3. China is moving up the manufacturing value chain and moving into services. In many cases the Chinese government has forced industries to shut down low value manufacturing plants that are still profitable. They want the lower chain industry out of their country, and over time what counts as “lower” moves further up the chain.

What all this means is that China is willing to build your country what it wants for cheap in exchange for deals for your resources and, more importantly, to relocate industry to your country.

You have to take advantage of this in the right ways, or it is just another trap, but it’s still a big opportunity because the US offered this deal to only a few nations and required satrapy status in return. Think South Korea and Japan and Taiwan.

This isn’t to say that China doesn’t have some non-negotiable requirements if you want to be cut in on the good deals, however, they’re just less onerous than the old US and European deals were. Let’s discuss that next.

China’s Non Negotiable Requirements

These are simple. You will not recognize Taiwan and will stay out of the Taiwan/Mainland dispute. You will stay out of anything relating to Tibet and that will most likely include not hosting the Dalai Lama at the senior government level. If you are not in the South China Sea, you’ll stay out of that dispute.

These aren’t particularly onerous, though you may find they stick in the craw slightly. Still, it’s a lot less than what the US and Europe require.

What You’ll Lose By Aligning With China

Simply, good treatment from Europe and the US. That means reliable and fair access to the western financial system, the ability to buy Western military gear and expect to get parts and ammo when you actually need it, and to a lesser extent, access to western goods and services.

The financial aspect is the most important, but will become less and less important. The whole point is bilateral or multilateral deals outside of the Western financial system anyway, and it’s that financial system which has been primarily responsible for keeping the global South down for the last 70 years.

The military aspect is negligible at this point. It’s clear that the West’s military production system is sclerotic and can’t keep up with major demand spikes: we’ve seen that in the Ukraine where they can’t even keep Ukraine supplied with enough dumb artillery shells. You’re better off getting your military supplies from China, Russia and Iran. There isn’t even much of a quality gap and in some areas, like missiles, you’ll receive better.

As for goods and services, increasingly, outside of pharmaceuticals (which they’ll withhold from you in a crisis anyway, as Covid proved), China can supply what you need, including advanced telecom equipment and more of the production stack than the West can these days. You’re giving up very very little and in ten years it will be essentially nothing.

What Types Of Deals To Cut

There are three types of deals you want beyond the basic “we sell you stuff and then buy goods from you.” There’ll always be some of that, but the idea is to make your country more independent and more prosperous and your people better off over time. That will not happen if you just sell resources and then turn around and buy goods.

Bilateral up the chain deals.

This means “we give you resources or low chain goods and you help us move up the chain.” If you’re not already on the chain, that’ll mean starting with textiles, most likely, but you have to start somewhere.

Bilateral Cartel Deals

In these deals you agree that you’ll own a particular industry and the other country won’t compete with you. In exchange there’s an industry you won’t compete with them in and both of you will buy the others products. These deals take a lot of trust: both sides have to believe the other side won’t cut them off in the future. One “semiconductor ban” and the deal is shot, and most likely shot permanently.

China’s capable of taking over most industries if it really wants to, but there’s an opportunity cost to doing so, and they need and want good relations. In many cases these deals will be cut with a side “and if you let us keep or have this industry, and buy from us, we’ll keep selling you grain/oil/nickel/whatever.”

China wants secure deals. Give them that security and be rewarded in exchange.

One Time Infrastructure Deals

As discussed earlier, China’s the infrastructure King. If you needs roads or ports or hospitals or power plants or almost anything, they can build it fast and cheaper than anyone else and the quality is good. Maybe not Japan good, but good enough.

You’ve got to cut these deals, all of them, right, though, or you’ll wind up not receiving what you want, or in the case of infrastructure deals wind up with white elephants you can’t afford to maintain. So—

How To Structure Deals To Ensure You Benefit

The objective here is to gain local knowledge, skills and capacity. This means a few things.

No Branch Plants. You want partnership deals, 49% China, 51% you. The plants or whatever get set up in your country by their engineers and managers, in partnership with your managers and engineers. At first the foreigners take the lead, but over time they are largely phased out, the capacity becomes indigenous.

Move the parts and repairs. You don’t want to just be putting goods together from pieces made elsewhere. You want the parts moved to your country too. Lots of small companies usually support big companies. You want that network. Without that network in your country, you don’t actually have industry. With it you have the culture of industry which is required to start making your own advances, to create new products and types of work. You have the chance to get a dynamic economy which innovates.

Buy Infrastructure you can maintain. If you’re going to constantly need the Chinese to come back and fix your power infrastructure, or roads, or ports or anything else, or to constantly buy parts from them, then you haven’t really bought anything. All deals must include the necessary training for your locals to maintain the infrastructure and that most of what is needed for maintenance is made in your country.

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Be very careful about large asphalt and concrete deals. Concrete and asphalt does not last and needs constant and expensive maintenance cycles. The world which supports that is going to go away as climate change and environmental collapse do their damage. Find ways to increase the lifespan of infrastructure and make it easier to maintain, ideally with as unskilled labor as possible.

If you can’t maintain it, you don’t really own it and it won’t be there when you need it.

Educational Exchange

Let’s be clear here, sending students overseas to learn from more advanced societies isn’t all it’s cracked up to be. A lot of them stay, others become compromised with values which are inappropriate to your society and much of what they learn at university isn’t all that useful in industry, unless they’re in real engineering or science and even then, less than you’d think.

Still, do some of that.  It’s not a hard deal to cut, because it’s flattering to the Chinese and thanks to Chinese culture, you’ll see less of the students stay in China than used to stay in America. They’ll have to learn Mandarin, but that’s good. English will stay the lingua franca for a while, but the gravity is to Mandarin and if you’re following the advice herein, well, China’s your big trade partner.

The other exchange you want is to get your engineers and scientists and managers into partner companies in China so they can get real world experience with how industry and business works. Get them from the lowest levels where they see the factory floor to the highest levels. Have them make contacts, have them work on real products. Again, some are going to stay, but many will come home and you will benefit massively.

Most of the most important information about how products and businesses and societies work is never written down. You need your people to learn it.

So get those exchanges going. And if you need to flatter the Chinese a bit, swallow your pride and do it.

Concluding Remarks

China’s still on the rise. Countries on the rise are much more generous than countries in decline or even mature countries, economically speaking. There’s still tons of possibility and present and future surplus to share. The emphasis is on increasing the size of the pie and not fighting over a static or shrinking pie. On top of this China needs and wants friends and wants desperately to be admired. If someone wants admiration, it’s cheap and there is plenty that can be admired without hypocrisy.

Take advantage of this opportunity but remember, the goal is to increase your own country’s real prosperity by increasing your indigenous production ability and the skill and knowledge base of your own people. It is not to gain fleeting prosperity from selling resources or bottom tier products.

And remember also, this economic age, the age of heedless industry, is coming to an end. Build smart: lots of passive solar, for example. Trains and rapid transit, not expressways. Infrastructure that is easy to maintain. Goods that aren’t frequently replaced.

Learn from China but don’t be just like them, use them to create a non car-centric, non-disposable economy. If you do so, you’ll be one of the nations who prospers in the next age.

China is an opportunity to get on a ladder. Choose the right ladder.

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The Supreme Stupidity of the “End of History” And Its Consequences

I remember the first time I heard of Francis Fukuyama’s “The End of History”, and I remember thinking “no one can be stupid enough to believe that.”

But I knew I was wrong, because it kept popping up. The article became a book, even, and fools further down the intellectual stupidity chain made careers out of sub-theses, like Thomas Friedman’s “the world is flat”.

The thesis of the “End of History” was that the ideological wars were over: democratic market capitalism had won, everyone knew it, and history was in effect over because the great ideological war of the 20th century between capitalism/democracy, communism and fascism/democracy had ended. Everyone admitted that democratic capitalism had won and was the best system and now inevitably it would sweep the world and usher in an era of prosperity and relatively good government.

This is what elites wanted to hear after the fall of the USSR and Francis was the one to tell them. He was considered a great intellectual, made lots of money and elites proceeded to act as if he were right.

There were a lot of knock on consequences but there two were most important. The first was that without a competing model, western elites felt free to really rev up the immiseration train started by Reagan and Thacher. Post-war elites had been genuinely scared of Communism, in the “we could wind up dead” way and that had driven a lot of their acquiescence to cutting ordinary people a good deal. (A lot, not all. Much of it was just that the Great Depression cut their legs out from under them, and FDR then broke their kneecaps.)

The shipping of industry to allies and to the third world did not start at the end of the Cold War, but it did go into overdrive. The old police was to make sure that the countries it was sent to were not a real threat: either small to medium developing, or American allies. Now, however, the offshoring and outsourcing train traveled to China. Deng had opened up markets and privatized a large chunk of the economy, and Fukuyama had said that capitalism lead to democracy, so by shipping all that industry to China, well, the West would make them into a democracy.

The Chinese Communist party, in this storyline, were a bunch of suckers, who were inviting in the very forces which would overthrow them.

The line in poker is that if you don’t know who the sucker at the table is, it’s you, but the real danger is when you think someone else is the sucker, and they aren’t.

The CCP had understood Americans and the West very well. Ironically they were aided in this by Marxism and their belief that capitalists were blinded by greed. They offered Western elites cheap labor and high profits and dangled the dream of access to a market of a billion people.

There was a time when it was understood that what made countries mighty was industry, and that you kept the industry at home. In the post-war era that was relaxed: by you still didn’t send your industry to anyone who might well become an enemy.

But history was over and there were no enemies and the West, with its transnational elite largely shorn of patriotism figured they’d co-opt Chinese elites and make them no longer nationalist.

They didn’t understand that the CCP didn’t feel that way: they were proud of being Chinese and they also believed that if they lost power a lot of them would wind up dead. They obsessively studied the fall of the USSR (and its communist party) and were determined that wouldn’t happen to them. And they deeply resented the west, including America, for the “century of humiliation.”

Sure, they were willing to go to a mixed economy with a lot of capitalism, but they were determined to stay in charge and never become democratic capitalists, and they wanted to return China to its natural place as the richest and most important country in the world, a position it had occupied for most of the last 2,000 years (before that it was India, and before that it was Mesopotamia with Egyptian interregnums.)

So you had two bets. The West, led by America, bet that if they shipped industry to China, China would become just another country like them, happy to be part of an international community running on laws that had been created when China was at its weakest.

The Chinese Communist Party bet that they could let some capitalism in and catch up in technology, and even exceed the West in terms of industrial base.

We now know who was right, and it wasn’t the West. Our tech boycotts are a sign of weakness, not strength. We know we can’t stay ahead of them without restricting their access, but it’s very much a case of slamming the barn door after the horses have left. The tech lead moves to where the manufacturing floor is. Britain stayed in the lead technologically for about 20 years after the US became the manufacturing power, for example, but it was a lagging indicator, and ironically Britain had done the same thing America has done with China: it invested big time, built the factories and transferred a ton of tech.

Fukuyama was full of it. He sold a fairy tale to an elite desperate to believe they had won forever and he in selling it and they in believing it took the exact steps required to ensure it wasn’t true, by empowering the only nation in the world strong enough to challenge America. (India was never in the running due to severe corruption and governance issues.)

But the people who engaged in this foolishness (from the POV of the Americ and its allies) reaped their mortal reward: the elites became stinking rich, and Fukuyama become wealthy and was regarded as a genius for telling the story his audience wanted to hear, even if it was obviously wrong.

History never ends. There is no end-state ideology or system and when someone tells you the world is exactly as wonderful as you want it to be, run.


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The Essence of Capitalism

Eric Anderson wrote an excellent post on how late-stage capitalism engenders mental illness. I thought I’d follow it up with a simple post on capitalism.

As the name implies, capitalism is the accumulation of capital. This doesn’t mean money, primarily, that’s not what the early theorists meant by capital: they meant the means of production: land, workers, resources and capital goods: machinery in particular.

Capital is the ability to make and grow items. Because of economy of scale, if you concentrate capital it is easy to increase how much you make: Adam Smith’s famous pin factory.

But to concentrate capital you have to take it from a large number of people and put it in the hands of the few. This has been covered by a number of authors, and it involves taking away the commons rights of people in Europe (their right to use the land, which had existed for about a thousand years or so). We demonize serfs and peasants, and they had to engage in demeaning acts of servility, but they had strictly defined obligations to their lords for a certain amount of work, crops and animals and once that was taken care of they were able to spend their time as they pleased and they could grow crops on land they had right to; pasture their animals and so on.

Economists call the concentration of capital “primitive accumulation” but what it was was taking away property rights from people so they couldn’t support themselves. This forced them to go to cities and work in factories and so on, where they lived shorter lives, worked a hell of a lot harder (6 1/2 12 hour days were pretty common) and were sick a lot more often. The freedom of capitalism is the right to sell your labor, not the right to control how you spend your day. Unlike serfs and peasants, who were tied to the land, you could choose your master, but for most of the population, that’s what it was, a choice of masters, at least when there weren’t enough workers.

In the rest of the world European capitalism was about conquering land and into the 19th century, about taking slaves. The only thing better than workers who are desperate being workers who you didn’t even have to pay.

Capitalism, again, is about concentrating the means of production, capital, in the hands of the few. It is justified by the idea that concentrated capital is more effecient and therefore everyone has more. There’s a lot of arguments about whether that’s true and we now know, for example, that land clearances didn’t increase agricultural productivity much more than on communal lands, and in the case of some crops, communal lands were more efficient.

But it’s hard to make the case for the path not taken. Perhaps communal forms could have worked, I think they could have, and would have produced more prosperity in time, since they didn’t involve impoverishing people and two-thirds of the non-European globe, but… the water is passed and the argument is important not for what might have been, but for what might be in the future.

But all systems are made up of means and ends. Capitalism justifies removing the ability of most people to support themselves without working for others beyond what amounts to taxation by the violent authorities (that’s all governments. Don’t pay your taxes and eventually the big men with guns will show up, just like the knights did when a peasant didn’t meet his feudal contract.)

The means of capitalism in the modern world amount to “wage slavery,” something well  understood by they yeoman farmers who were being forced off their land in the 1800s, and who seem to have coined the phase. You will have a master and if you can’t find one, you will starve.

It’s important to separate “capitalism” and “industrialization”. Because we industrialized under capitalism we think of the two as the same thing, or perhaps as co-joined siamese twins, but it’s not hard to imagine industrializing, which is about machines and assembly lines, in different ways: perhaps with communal organizations co-owning the means of production. This is distinct from Soviet communism, in which the government effectively owned everything, leading to the normal problems of totalitarian organization. Plurality and capitalism and synonyms.

This is something you need to think through; to imagine, for yourself. Try and come up with different ways industrialization and technology could have advanced, and don’t be caught up in historical inevitability. If you think that the past could not have been any different, then you effectively believe the future is determined.

This is one of the issues of Marxism: historical determinism. When it turned out (at least so far) that the historical dialectic didn’t work out how Marx and Engels envisaged, well, the house of cards collapsed. You have to give up inevitability to have choice and the ability to adapt.

We have plenty of options for the future and do not have to make the mistakes of the past. The first principle is that if your means are bad, no matter how good your ends, your society is going to have huge problems. You can’t routinely do evil, day in and day out, and expect the some invisible hand to lead to a good world for all.


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Losing the Power of the Printing Press

If you look up whether governments can “just print more money,” what you’ll find at most sites is the answer, “No, because it only increases the amount of money, not the amount of economic activity.”

This is not true, and it’s not true in a number of ways.

If there is under-utilization of capacity, you can print. Here’s US capacity:

The US has been running substantially under capacity for a long time.

But, you say, there was a lot of money printing (private and public, most money is created by banks, brokerages, and so on), and capacity utilization didn’t go up. In fact, it went down.

Well, yes, because the money went to other countries like China, where it increased capacity vastly, or it went into assets (the housing bubble, stock bubbles, and so on), or it bought private jets and yachts and so on.

Which is to say, it’s not just about money creation; it’s about who gets the money. Since virtually all the money creation of the past 40+ years has gone to rich people, capacity has been created for what they want. And because it was cheaper and more profitable to build capacity overseas, that’s where the money created went.

In addition, there’s the fact that the US dollar is used to buy oil and is the general medium of exchange in most foreign trade. It’s also the “gold” currency, in that during crises it tends to go up, so people want to hold a store of it against bad times.

All of these factors are contingent. If oil was not sold primarily in dollars, or trade settled in dollars, for example, there’d be a lot less demand for dollars. If the trade regime didn’t allow for vast imports and exports, but the world was more autarchic, then building new industry overseas wouldn’t make any sense, and so on.

This is to say, nothing is eternal. The dollar’s position is a historical artifact, based on specific circumstances which did not, and will not, always exist.

Remember, there was a time when the center of the world economy was Britain (chart from Mike Todd).

What you see in that chart (and it’s going to keep getting worse) is the switch from London to New York; from the pound to the dollar, because the pound wasn’t the primary international currency any more AND (and this is important) the UK kept de-industrializing so there was less and less relative demand for its products, though the City of London retained an important financial role, which kept the pound higher than the economic situation of Britain would otherwise have allowed.

Developing countries, as a rule, cannot run the printing the press because people only want enough of their currency to buy whatever goods and services they produce. In addition, because most Third World countries have vast import requirements (more so as time has gone on), and their agricultural bases have been destroyed, printing money causes inflation very fast. It’s not just an internal matter, more money chasing goods, it’s that people try and use the new money to buy goods produced externally, and their exchange rate collapses.

When the US prints money, a lot of it goes into other countries reserves and the reserves of people and companies. It pools, as it were, uselessly, and to the extent that it is “more money chasing the same goods,” its effect is spread over most of the world and not just internally.

Once this was true of the British pound.

The original conception of comparative advantage was based on the assumption (true at the time) that money mostly pooled inside countries and could not be used to create production in other countries. If Britain produced less widgets because French widgets were cheaper, the money freed up in Britain would go to produce something in which they had a comparative advantage, say woolens, instead of fleeing overseas. (See Ricardo’s Caveat for the long form of why comparative advantage doesn’t work with free capital flows.)

Now, you can also print money if you give it to the useless classes, i.e., the rich. In that case, it drives bubbles (see the SPX chart above or art prices) or creates niche markets, like yachts and private jets. It doesn’t drive general inflation, it only drives inflation for what useless people want.

Unfortunately, that inflation does eventually cause various crises, but for a time, it seems “free” — you make the rich much richer without causing widespread inflation.

What matters, then, is who you give the money to, and what they spend it on. Volcker crushed wages because, in addition to wanting to make useless people richer, he didn’t want ordinary people to have more money because they would spend it on things which lead to buying more oil, and given oil prices at the time, that would lead to more inflation. He needed to smash oil prices, and he did so by smashing wages to smash oil demand.

If you print money and give it to ordinary people, and it just leads to them buying more stuff from overseas, it won’t move that capacity utilization number you see in the chart at the top very much.

But this isn’t to say that printing money doesn’t “work.” It does work. It always does something. Someone benefits. If you print a bunch of money, and make sure it goes to ordinary people in your country, and that your country increases utilization and/or increases how much it produces, then it can produce a general wave of prosperity. After all, when wages rise higher than the cost of goods and services, that’s prosperity, but companies don’t like that unless they’re still making more money because they’re selling more overall.

(That last sentence, by the way, is the secret of the post-war good era. Meditate upon it.)

You lose the power of the printing press when no one wants your currency because you can’t produce enough, or increase production, AND it isn’t necessary for other things (like international trade).

This goes in stages. Britain, outside of the EU and with less and less industry, and with less reason to send money to the City of London, is in danger of losing the power of the printing press in the way Third World countries do. “There’s no reason to buy any more of this than however much you need to buy their goods.”

At that point, you need to figure out how to re-industrialize and under a free trade order like the neoliberal one, that’s hard. Every time you try, money floods out of your country instead of increasing activity inside of it.

As for the US, it’s in an extraordinarily privileged position, but as China and the BRICS move to conduct more and more trade without dollars, and as trust in the US to run the international monetary system drops and drops due to repeated sanctions and thefts of reserves, that privilege will decline, and the US will find more and more that if it wants goods from another country, it will need to provide not dollars (though they may still be exchanged), but actual goods and services itself.

If you can’t pay with goods and services, you pay by selling your patrimony — companies, land, resources, etc.

The power of the printing press is great, but it can be used for ill and good. It can create real economic growth and widespread prosperity under the right conditions, conditions which are partially under a country’s control. But if you become too weak or poor, you can lose even the theoretical ability to create those conditions. There is essentially nothing most African countries can do to restore enough sovereignty to allow them to use the printing press for good, and if you’re a relatively rich country which does still have the freedom of the printing press, there is always the temptation to use it foolishly or venally, as the US mostly has in recent generations.

Money is a social creation. So is how we run the economy. It can be made to work for everyone, for a few people, or as a machine of impoverishment. The choice, on aggregate, is ours.

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The Great Favor the West Is Doing China by Banning Equipment Needed to Make Chips

We really are run by fools.

“If you shut out [China] with export control, [they’ll] strive toward tech sovereignty… [Then] they’ll be able to do it all by themselves and the market [for European suppliers] will be gone.”

The great problem in the neoliberal era is that the usual road for tech and industrial catch-up, protectionist tariffs is mostly closed. (This is how Britain, the US, and almost everyone created their industrial base and caught up in tech.)

Despite what a lot of people seem to think, China isn’t a command economy. It’s a capitalist one, albeit with a large state company sector. Letting markets in is explicitly how Deng created the Chinese economic miracle.

So China buys a lot from other countries. It is a trading state, and that makes it more difficult to catch up in some techs.

Now, if this was done to, say, Bangladesh, or probably even India, those countries would be screwed — they don’t have the industrial and knowledge base. But China has these things; sure, it wasn’t cost-effective to do all the research necessary to learn how to make this equipment when they could just buy it, and after all, they need to buy some things from their customers.

But if they can’t buy it, they can learn how to make it themselves. Sure, it’ll cost them two or three years. It’ll hurt. But they’ll get over it, and then they can make it for themselves.

The knock-on effect is fun, though: Once China can make this equipment, they can sell it to other countries, which means those countries (Brazil, Iran, India, etc.) don’t need to get it from the West, and sanctions become much less effective because there’s another option on the table.

So by sanctioning China, the West will soon lose its ability to sanction not just China but pretty much the rest of the world.

Fun!

This is also true of the sanctions on aircraft equipment, by the way. China, which has a rather advanced space industry, will learn how to make its own civilian aircraft, and then, instead of everyone having to get aircraft from Europe (Airbus) or the US (Boeing, though Boeing is losing the ability make aircraft), they’ll be able to get it from China (and possibly Russia as well).

Now sanctions like these have their place: You do them just before you’re about to declare war. But if we aren’t going to do that (and there are certainly factions in Washington who do want a war with China soon), then it’s just foolishness.

Let’s hope it’s just foolishness.

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Growth Through Real Estate Bubbles v.s. Sustainable High Income Growth (China)

All right. Let’s talk some basic development stuff, primarily in the neoliberal era.

Because industrial policy was disallowed with a few marginal exceptions due to the “rule based order” enforced by a variety of trade agreements and organizations, the traditional route of protecting domestic industries and growing behind tariffs became very difficult to do.

Various countries used different dodges. Russia, to get out of the Yeltsin era collapse, went whole hog into resources: advanced nations had to have oil and natural gas and minerals, and bribed key financial regions like London’s city with huge influxes of resource-money.

China did something different. They opened up partially and let foreign companies in, but they used bureaucracy to keep them under control (as had Japan, in part) and offered foreign elites huge labor arbitrage profits. They bribed the West’s elites with personal wealth, in effect. In exchange they insisted on, generally very strictly, in real technology transfer. Meanwhile, they created a protectionist bubble thru monetary policy, keeping the exchange rate in their favor.

But the other thing they did is what Turkey tried. They created a self-reinforcing property bubble. Municipalities and states built tons of new homes, people flooded in from the countryside to get the new factory jobs and the service and government and construction jobs which supported industry. Prices went up, municipal and state budgets went way up and a virtuous cycle was created, for a time.

Turkey did the same thing, but the problem is Turkey didn’t have an expanding industrial base, and that’s why Turkey imploded sooner.

All bubbles, including property bubbles are time limited. The more of a real economy you have, the longer they can run, but eventually inflation in property becomes too high, and most citizens can’t afford the housing. Meanwhile, inflationary increases in living costs make workers too pricey, and the industrial base begins to suffer.

You can start from three positions.

  1. Like the US or UK or much of the EU you can start with an industrial base and cannibalize it, or..
  2. Like Turkey you can start with a poor but big country and cannibalize an increasing part of your population, plus what little industry and agriculture you have (India is similar, but much larger and managed to get some industrialization out of this strategy), or..
  3. Like China you can build your industrial base at the same time.

Whatever you do, this strategy eventually runs into the roadblock of a cost structure which becomes too high to allow actual productive industries.

At that point, you have to tame the housing market and other out of control costs (medical, food, whatever). If  you don’t, you’re pushed back from 3 to 1, or if you did 2, the artificial prosperity begins to collapse. (India’s calories per capita have spent decades decreasing and someone who spent time there in the 80s, I can tell you Indians weren’t overfed to start with.)

So China’s now in a position where rather than bubbles, especially the housing bubble, being synergistic with industry and improvements in technology, they’re starting to strangle growth.

The route out (minus mercantalist imperialism, which is long run a loser too) requires you to stop relying on property bubbles, and start strangling your cost structure. The “free” money from asset bubbles has to go away, and you have to create a consumer society: not one like we have now, but one like we had in the post-war liberal era. Housing costs have to be kept at a level where people can buy or rent homes fairly easily: 30% of wages for rent or so, and at most about 5 years wages to buy a small home or condo.

Since the free profits of bubbles and speculation have to go away, companies have to make real money by providing real services and not just count on “real estate always goes up” or (America) “people have to have health care, so we’ll increase prices thru the roof.”

This is the task that China now has. It’s a hard task, akin to getting of hard drugs like heroin or SSRIs or Xanax. It hurts, because the financial pipes are reliant on what amounts to free or easy money.

During this transition, headline GDP and so on will suffer, there is no way around it minus looting expeditions, especially since simply running the printing press (something we’ll talk about in another article) defeats the point, which is making companies earn their money by providing goods and services for small markups at scale. (The post war liberal era worked on 3-4% markups for most mass goods.)

This is where China is. Where America and most of the West is similar: except it’s after destroying much of the industrial base and real consumer economy that doesn’t rely on massive price gouging on items people must have. There is no way to bring the good jobs back for most of the population in the US or UK or Canada or Australia without crushing the cost structure, strangling property speculation and prices and in the US tackling the medical and drug cartels.

China’s making the attempt. A lot of what they’re doing is clumsy and crude (but then, so was the one child law, but it worked even if it caused future problems.) So far the UK and Canada and the US and most of the West are not even trying, which is why you hear more about friend-shoring (aka to cheap places that are Western allies) rather than re-shoring, which can only be done for the goods that are either very high margin or which elites have realized are too militarily strategic to do in other countries.

This is why, as far as I’m concerned, the smart money is still on China, and if it wasn’t for climate change and ecological collapse, I’d consider it a done deal even if it took a couple more decades and a lot of screaming and shooting.

As it is, we’ll see. But China’s at least trying to do the right thing.

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The Debt Trap That Helped Take Down Sri Lanka Was Not Chinese

Let’s put an end to this nonsense:

The Asian Development Banks is essentially a US proxy and the World Bank is mostly controlled by the US. Market borrowings are almost entirely from Western sources.

The article goes into more detail:

Sri Lankan President Gotabaya Rajapaksa, who spent a significant part of his life working in the United States, entered office in 2019 and immediately imposed a series of neoliberal economic policies, which included cutting taxes on corporations.

These neoliberal policies decreased government revenue. And the precarious economic situation was only exacerbated by the impact of the Covid-19 pandemic.

Facing an out-of-control 39.1% inflation rate in May, the Sri Lankan government did a 180 and suddenly raised taxes again, further contributing to popular discontent, which broke out in a social explosion in July.

Seems that cutting revenues makes you more likely to default on your debts and does not magically improve the economy. And when you do it just before a pandemic, well maybe it doesn’t work out well.

From Reuters, about that tax increase too late.

An increase in Value Added Tax (VAT) to 12% from 8% with immediate effect is among the key tax increases announced on Tuesday, which is expected to boost government revenues by 65 billion Sri Lankan rupees ($180.56 million).

Other measures, including increasing corporate income tax to 30% from 24% from October, will earn an additional 52 billion rupees for the exchequer.

Withholding tax on employment income has been made mandatory and exemptions for individual taxpayers have been reduced, the statement said.

So, the biggest chunk of it was a regressive VAT tax increase.

I’m not an expert on Sri Lanka, but the third world debt trap, which started primarily in the 1970s was based on the idea that you could borrow money and use that money to buy development. The play was to spend the money to turn to exports the West wanted (cash crops, minerals, etc…), which you had a “comparative advantage” in. Problem is that everyone was getting the same advice, so the supply of cash crops and minerals increased in multiple countries and the price crashed. Worse, to grow cash crops you had to get your subsistence farmers off the land. They went into slums, and you now had to feed them, which meant you had to import food.

In Sri Lanka’s case tea, spices and coconuts are key exports. You can only eat one of those three. When Covid happened the market collapsed, incomes were already down, debt load was high and … BOOM. According to the figures Sri Lanka is a net “agri” exporter, but it exports mostly non food agri items and can’t feed its own population.

(Rule : if your country can’t feed its own population, you are always vulnerable to outside forces.)

So, anyway, Sri Lanka spent generations servicing debt by selling the developed world luxury agri-goods, but the prices of those weren’t that high, and they didn’t get a developed economy out of their loans, but still had to pay the loans while unable to feed their own population. Pretty normal story, sadly. (Egypt is the saddest, from the cornucopia of the world to a food importer. The Aswan dam should never have been built, losing the Nile’s annual flood was too high a price to pay for its electricity.)

Now, the media is constantly full of stories about the Chinese Debt Trap. They’re bullshit.

African countries owe three times more debt to Western banks, asset managers and oil traders than to China, and are charged double the interest, according to a study released on Monday by British campaign charity Debt Justice.

This is entirely consistent with what I have discovered every time I’ve looked into the issue. It is not that there have never been corrupt high interest Chinese loans, but generally speaking, Chinese terms are far better than Western ones.

The reasons are twofold:

  1. China wants resources. In exchange they are willing to build infrastructure for cheap in countries who will sell them those resources. If you want hospitals and schools or even an entire city as well, they’re happy to build that for you too.  This seem similar to Western policies from the 70s but is different in important respects: the West wanted the resources and they wanted to make lots of money off the loans and they wanted to gain control of economic policy in developing countries so they could institute neoliberal policies like getting rid of food subsidies.
  2. China has just spent decades developing its own country. While the job isn’t done, it has slowed down and China found itself with a lot of extra development ability: companies and workers specialized in building infrastructure: from ports and airports and railways, to everything a city needs, including sewage and power. They want to keep that industry running, and not have to get rid of millions of employees and have firms downsize and go bankrupt. So those firms, and often workers now develop countries all around the world. As long as they make some profit, that’s good enough for China. It doesn’t have to be high, especially, again, as they’re getting resources in exchange.

The “developing” world is a mess because of the West, not China. It is our policies which made it nearly impossible for most nations to develop. Those policies were designed to make our coporations and banks rich and to weaken the ability of poorer countries to resist us. They were exactly the opposite of what is required to develop a country, which is almost always done behind trade barriers and by moving UP the value added chain, not by selling raw materials and crops. This is how the US did it, Britain did it and almost every country in Europe did it. It is how Japan and Taiwan and Korea did it.

We sold countries like Sri Lanka advice that was bad for them and good for us, and which put them into a debt trap we refused to let them get out of by pretending that debt default was unthinkable and debts sacrosanct and by hurting any country which tried to default brutally.

This isn’t the historical norm. Previously third world countries defaulted all the time, and they soon floated new debt and yes, investors loaned to them anyway.

People who loan money should not be protected that much from default. Some protection is reasonable, but when a person or country is bankrupt, they should be able to default. Doing so keeps lenders honest: they either don’t lend, or they accept the risks, and they have incentives to keep debt reasonable, since if they don’t, they will be hurt.

When we made it so that default was virtually unthinkable, we changed the incentives (so beloved by economism believer) in ways that made it make sense for investors to lend money which was to be used in ways which crippled entire countries, indeed continents and made it impossible for countries to change course and pursue strategies which would actually allow them to develop.

That’s the story of most of the developing world.

And if you need to borrow money as a third world nation? Borrow it from China, not the West, if they’ll lend to you. As for the IMF, their job is to keep the payments going and keep countries in the debt trap so they can never develop and never have policies independent of the US and the West.

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India Is Not The Next China

One of the main reasons I took some time to read the smarter members of our international elite was to learn what their assumptions are. The smart ones disagree on the consensus in some places, but what is most interesting to me is where they don’t.

India is one of those places: almost all assume that since China modernized, India’s modernization is inevitable and it will be the next great power.

I don’t see it. India still doesn’t have the necessary government capacity to run the country. Despite the attempt to clean up corruption with demonitization, the civil service is still immensely corrupt, but it is also incompetent. Whatever one thinks of the CCP, they had state capacity; they could make things happen and discipline local elites. The central government in Delhi still mostly lacks the ability to carry out complicated actions in the regions; heck, often enough they can’t even manage the capital region well.

Next, the Indians haven’t taken the right lessons from China. They see that China was involved in global value chains, but they haven’t understood how China used dual currencies and currency restrictions, along with currency purchases to control subsidize exports. They don’t understand, that is, that China’s rise was Mercantalist and not Neo-liberal. Certainly China liberalized certain sectors, but they didn’t neo-liberalize monetary policy and they kept government firms in charge of large amounts of the economy, including much of the banking sector, which they used to direct loans where they wanted. Despite criticisms and problems, this worked.

Chinese liberalization was always within the context of a centrally controlled monetary and fiscal policy, ntended to create the necessary conditions for international competitiveness and to direct capital towards sector the government prioritized. Regional governments were allowed vast latitude to purse centrally chosen goals, but the center did determine the goals and keep an eye on what regional officials were doing.

Third, even if India modernizes faster than I expect, they aren’t beating climate change. India is one of the major countries which will be hit hardest. Crude effects like pure heat increases, potential problems with rainfall, increased extreme weather events, and loss of water from the Himalayas can all be expected to harm India. Since the Indians have also vastly overused their groundwater, they will be hit by serious water issues very early compared to much of the rest of the world.

Then there is Bangladesh, one of the lowest lying countries in the world: it will be one of the first nations to collapse under climate change, and it will send literally tens of millions of mostly Muslim refugees into India.

India isn’t making it. They still only have a small middle class, they regularly have food problems, their government is corrupt and incompetent and they don’t understand how modernization actually happens so they aren’t pursuing the right policies. Ironically they really should sit down with the Chinese and cut a deal through the Belt and Road initiative to be the nation which primarily receives industry China is offshoring but is suitable for India’s stage of development, but tense Chinese/Indian relationships are preventing making an arrangement which would benefit them.

(The Chinese cut deals with America, who they have many historical grievances with, and overlooked America’s primary support for Taiwan, when they needed what America offered. They weren’t over-proud, they did what they had to to get strong first.)

Unless climate change effects happen far slower than I expect (and so far my predictions have been far closer to what’s happening than consensus forecasts, but still slightly optimistic) and the Indian government gets a clue about how the world actually works and manages to actually fix their civil service, there’s no way India makes it before global value chains start collapsing under climate change and having to be re-engineered. At that point India will have so many problems that industrialization will be off the board, and only an extraordinary government and leadership would be able to take advantage of changed circumstances to build up India. Much more likely is government collapse and loss of effective control of huge swathes of the subcontinent as mass famines killing at least 10s of millions of people (and quite possible hundreds of millions) and mass migrations occur.

I wish my analysis indicated otherwise. I’ve spent time in India, I have family who stayed after independence, and I like the Indian people.

But I’m just not seeing it.

 


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