China and its Discontents

Archive for the ‘US debt crisis’ tag

Re: Central Moral Challenges

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He spoke for those who believe the country’s runaway debt is the central moral challenge of our time.

– David Brooks, on Mitch Daniels’ CPAC speech.

What?! Poverty, disease, and war are the central moral challenges of our time. What kind of world does David Brooks live in? Mitch Daniels is the dream candidate for pretty much one type of person: the pseudo-libertarian Washington media personality.

Written by Will

February 25th, 2011 at 8:14 am

Economic Populism Won’t Help Liu Xiaobo

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I was going to post this next week when it is in the Trinity Tripod, but it’s relevant right now.

UPDATE: It’s posted on the Trinity Tripod.

This month, the Nobel Committee awarded the Peace Prize to Liu Xiaobo, a Chinese democracy dissident and intellectual famous for negotiating the safe passage of the last few hundred students at Tiananmen Square on June 4th, 1989. He is currently in jail for drafting Charter 08, the most recent major call for democracy in China. The week before that in the U.S., the House of Representatives voted overwhelmingly to impose tariffs on China because the Chinese government is artificially suppressing a rise in the value of the RMB; although the bill is inflammatory, it is unlikely to pass the Senate. And across the country, midterm election advertisements have blamed China as the final link in a chain of economic misery, stealing jobs from hardworking Americans and destroying our way of life. How are these events connected? While we might want Chinese democracy activists to prevail and the Chinese economy to come into balance with the rest of the world, we are actually shooting ourselves in the foot by playing to election-cycle populism.

A common word you hear around foreign policy circles in the Obama administration and the Clinton State Department is engagement. It basically means that the U.S. has a duty to stick to its core values, but that we can advance those values not by lecturing from a bully pulpit, but practically through a combination of defending our interests and appealing to the interests of other countries. This does not mean what political opponents of this administration want you to think it means. It does not mean that we are abandoning our values. It does not mean that we can’t strongly condemn human rights violations. But it does mean that instead of cultivating our national pride and vanity in throwing bombast at China, we’re more interested in results. We should in every circumstance call China out on its politically repressive policies. But its economic policies are different.

We need to stop demonizing Chinese economic policy because it will only lead to more Chinese intransigence. No government wants to be perceived as if it is beholden to the demands of another. This is essentially the application of behavioral psychology to international relations: do we ever want to be perceived as weak and submissive, buckling to the demands of a competitor? No! Political leaders want to project independence, primarily because their constituents want to feel as if they are collectively independent. Government behavior mirrors individual behavior because governments, even non-democratic governments, are at some level accountable to the people. We can better influence Chinese policy by negotiating, and gently manipulating the tug and pull of international diplomacy.

We also need to rid ourselves of some populist notions that say that if only the value of the RMB would rise, a flood of manufacturing jobs would return to American shores and our economic misery would be healed. The artificially low value of the RMB is a problem, but inflating the RMB is not the panacea that election ads make it out to be. It will not directly result in new factories in the Rustbelt – making China wealthier will encourage more Chinese to buy more foreign products generally, not just American products, and there will always be another country to which we can outsource jobs. Even at a doubling of the value of the RMB, the average Chinese factory worker’s salary would be pitifully low, still ripe for outsourcing jobs. Raising the value of the RMB will, however, correct systemic imbalances in the global economy. In order to better understand these imbalances, we need to look at the situation on both sides of the Pacific for the past ten years.

We need to recognize that the U.S. in the last decade has complied with the policy of a cheap Chinese currency – even benefited. Although China’s economic ascent has been rapid, it has not been as rapid as it could have been. In addition to artificially lowering the value of the RMB, the Chinese government has artificially raised the national savings rate. When a Chinese factory produces goods that are shipped to the United States, that factory gets paid in dollars. The proprietors of that factory must then exchange those dollars into RMB at the local bank to pay their costs. If we were looking at the situation in foreign countries, that bank would then invest its dollar reserves in whatever it thought to be most profitable. But under Chinese law, the dollars can’t go to the Chinese bank that exchanged them, but to the central bank, the People’s Bank of China.

Billions of dollars end up in PBOC coffers every day, and every day the PBOC parks the vast majority of its holdings in Treasury bonds, and to a lesser extent, stocks and other investments. This has an affect of improving the American standard of living – our stocks rise in value, bank holdings rise, those banks lend to the average middle-class family using a credit card and sitting on a subprime-mortgaged house, and they purchase more Chinese goods – all in a virtuous circle of consumption. But this policy, which has been tacitly affirmed by both Chinese and American governments, also has a dark side. First, it allows the U.S. government to spend more than it could ever possibly spend without raising taxes; second, it suppresses the living standards of the average Chinese worker.

We already know about the U.S. debt crisis. We’ve spent more and more on wars of folly, unpaid expansions of entitlements (in the form of Medicare Part D), and in addition to a sudden drop in tax revenue, a massive dose of counter-cyclical stimulus in response to the recession. This is compromising our ability to invest in the future and provide a stable platform for future economic growth. What we don’t know is that we’re also stymieing the average Chinese family’s advance in economic prosperity. Every day that the PBOC shuttles a billion dollars back into the U.S. economy is one more day that well-off Americans are borrowing a billion dollars from substantially poorer and worse-off Chinese. The money that has enabled an exploding deficit and a diseased consumer culture is also money that is not being spent in China on schools, infrastructure, and credit extended to Chinese families in the same way it has been extended to us. This is what the “trade imbalance” really means. The end of the imbalance won’t mean an instant economic stimulus in the U.S.; it will however make both countries substantially better off for the future. Why does all this matter for the Chinese democracy movement? China will be much more receptive to political reform when it is integrated into the world economy, not isolated; attuned to movements of global culture, not cut-off; and when individual citizens prosper, not mired in a low standard of living.

Fang Lizhi, a major Chinese democracy activist who fled to the U.S. after Tiananmen, recently wrote a New York Times op-ed claiming that Liu Xiaobo’s Peace Prize should disabuse us of the “dangerous notion” that “the autocratic rulers of China will alter their disregard of human rights just because the country is richer.” This, I believe, is not a fair representation of this view; subscribers to that view don’t believe that the Communist Party will change as a result of economic prosperity, but that individual Chinese will.

A higher standard of living for Chinese citizens will do several things: it will bring more Chinese out of poverty, and into education. This, in turn, will expose them to ideas not sanctioned by the government. Consider this: every major democracy movement in China has been instigated by Chinese students and intellectuals. The 1979 Democracy Wall movement was student-led; the 1989 Tiananmen protests were student-initiated, followed by the support of broad swaths of the Beijing population and people in cities across the country; Charter 08 was written and signed by intellectuals and prominent professionals. This pattern repeats itself over and again.

Rural farmers too, have engaged in protest, not generally for democracy, but against local corruption. When taxes in these rural areas are raised exorbitantly high (nearly wiping out their yearly income), farmers have organized opposition, and in some cases, made minimal reform. But this is not addressing the issue: an unaccountable bureaucracy and an illegitimate authoritarian government. At Tiananmen 21 years ago, the students found support in factory workers, doctors, teachers, and even employees of the Communist Party newspaper, but not rural farmers. Tiananmen was a minimal blip in the minds of most Chinese (if they knew about it at all). The voices for a democratic China must link arm in arm with the poor, rural farmers. Only when more farmers are lifted out of extreme poverty can they truly wipe out corruption. When this happens, the Communist Party will not be able to stop the transition to multi-party democracy.

The Communist Party no longer has a coherent value system upon which policy is based. When capitalism was slowly introduced in the 1980’s, the then party chairman Zhao Ziyang said that China was still in the first stage of socialism, and had to build up its productive forces for 100 years for socialism to be sustained. This was and is a façade. The party currently exists to preserve its own power.

Under Mao, China did have a value system, however violent and repressive. Because the Chinese people are now grasping for something to believe in, they ask – what does it mean to be Chinese? Is it just the pursuit of wealth and the technocratic application of utilitarian economic policy? Millions are turning to religion: Christianity, Buddhism, and traditional Confucian practices. But Chinese democracy activists have for thirty years offered something different. To be sure, the vast majority of Chinese know little of the movement and will have been blocked from hearing about Liu Xiaobo and the Nobel Peace Prize. But it is influential enough that the Communist Party feels threatened. As more and more Chinese rise out of poverty and into the halls of academia and professional life, more and more will desire a real, national set of values. The democracy movement must stand ready to offer that alternative to the newly well-off.

We’ve now come full-circle: we must stop demonizing Chinese economic policy because doing so will not change the situation, which will not solve our debt crisis nor raise the Chinese standard of living; the lack of such an increase in prosperity will ultimately further the repression of political reform in China and inhibit the advance of our interests and human rights globally. We can further our economic desires and the cause of democracy and human rights by taking a reasoned, practical course, and engaging with the Chinese, not cutting them off.