Western Vs. Authoritarian Capitalism

June 18, 2009

By John Lee

Finally, the weaknesses of the American democratic system, in particular, to repair the economy has been laid bare for all to see. Back in 2005, the prominent New York Times columnist Thomas Friedman admitted to ‘casting an envious eye to the Chinese political system’s ability to get things done’. The editor of Newsweek, Fareed Zakaria, previously lamented the seeming incapacity of insiders in Washington both to identify and respond to the problems facing America.

Many applauded as Beijing expedited without obvious delay a half a trillion dollar stimulus plan to deal with the crisis. In contrast, Congress in Washington argued and squabbled over details of the US$700 billion bailout package, requiring two sittings and a host of pork-barreling concessions before it was passed. As a former Chinese official mockingly exclaimed to me in referring to the messy decision-making structure within liberal democracies: ‘Now I know what it means to say, “Nero fiddled while Rome burnt”.’

America and Europe are suffering, but the global crisis has spared no-one. The weaknesses and flaws within the Chinese and Russian systems are also being ruthlessly exposed. For example, Russian stock markets have fallen around 75 per cent from their January 2008 highs. The growth in the Russian economy was largely fuelled by record oil and gas prices, which peaked in mid-2008. Since then, the price of oil has fallen by two-thirds. Oil wealth offered Russia an illusion of resilience. Russia grew richer without building strong and stable institutions normally required for wealth creation. Putin-led Russia experienced a boom without actually building a sound economy. Given Russia’s current convulsions, there is now severe doubt that Putin can find the money to fund the double-digit increases in military expenditure that he had planned previously.

A recent study by two Stanford University academics, Michael McFaul and Kathryn Stoner-Weiss, also shows that the common assumption that Putin rescued Russia’s economy is questionable. Russia’s growth rates under Putin are below the post-Soviet average. When Putin became the president in 2000, Russia was the second-fastest growing economy in the region behind Turkmenistan. By 2005, Russia had fallen to 13th and was outdoing only Ukraine and Kyrgyzstan, whose economies were disrupted by their respective ‘colour revolutions’. Revealingly, life expectantcy in Russia has actually declined under Putin.

China in trouble and facing bad debts

Even China’s ‘miracle economy’ is now in trouble. The Shanghai Exchange has seen its index decline by two-thirds. The Chinese export sector, responsible for 40 per cent of Chinese growth over the past decade, is tanking. Overall economic growth is likely to dip below the eight per cent mark – the point at which unemployment (and therefore unrest) begins to rise dramatically. This is despite the trillions of dollars – in addition to the half-trillion-dollar stimulus package – that its state-owned banks regularly but inefficiently pump into state-controlled businesses to maintain the growth levels it has enjoyed up to now.

Domestic investment (from bank loans) was responsible for around half of Chinese GDP growth. Even before the onset of the financial crisis, there was an estimated US$1 trillion worth of bad loans in the Chinese financial system as a result of this flawed investment strategy. A new and massive spate of bad loans is inevitably around the corner for Chinese banks.

Even before the global financial crisis, absolute poverty (those earning less than US$1 a day) doubled in China over the past decade. More than 400 million people had seen their net incomes decline over the same period despite record GDP growth. It is no wonder that domestic consumption growth has been slow and will not be able to take up the slack as the export sector suffers. Instead, China must rely on state-led fixed investment to keep growth at eight per cent, despite acknowledging that this strategy is becoming more inefficient, wasteful and, therefore, increasingly unsustainable. The general economic outlook is so dire that Chinese President Hu Jintao has increasingly issued warnings about the possibility of political and social collapse.

These examples suggest that the world’s booming autocracies were never in as good shape as many recently believed. China and Russia continue to depend on healthy American and European economies in order to thrive. Liberal democracies might be suffering, but these autocratic states are in a poorer position to take advantage of the crisis than many had anticipated.