China’s planned economy, with heavy government interference in markets, could be a key model for the world
1949: Only socialism can save China
1979: Only capitalism can save China
1989: Only China can save socialism
2009: Only China can save capitalism
1 comment:
What ails free market economies?
China’s planned economy, with heavy government interference in markets, could be a key model for the world
By TAN CHIN HWEE
23 February 2009
1949: Only socialism can save China
1979: Only capitalism can save China
1989: Only China can save socialism
2009: Only China can save capitalism
It is interesting how the world has changed. A ‘communist’ country - China - essentially holds the key to at least partly determining how the Western capitalist powers will survive a depression-like crisis.
Critics blame the sub- prime and banking crisis on free market economies that have their intellectual origins in the University of Chicago’s economics department under Milton Friedman.
The Western economic model is one of laissez-faire capitalism with minimal government intervention. Market forces, it is said, should be allowed to determine the prices of goods and services.
Now, critics are arguing that the current capitalist system does not work and are clamouring for massive government intervention based on Keynesian economic principles.
A planned economy such as China, which relies on heavy government interference in the marketplace, seems to be the model that could save the world economy.
How ironic, given just a decade ago, the Asian Financial Crisis was blamed on our over-regulated markets and we were lectured that only free-market principles could save us?
Economic ‘models’ are, after all, mere ‘models’. At best they provide a snapshot of the real world we live in.
The conventional models assume that movements in financial markets are based on statistically ‘normal’ distribution and the underlying assumption is that the market is efficient and people are ‘rational’.
Almost every modern economist missed the current crisis by a mile - and none of them foresaw a total breakdown of the market exchange system.
One of the key reasons is over-confidence that free-market economic policies are the best system for solving the world’s problems. ‘Spread the truth - the laws of economics are like the laws of engineering. One set of laws works everywhere,’ said World Bank chief economist Lawrence Summers in 1991.
Economics today is viewed academically in top universities and think-tanks in a narrow sense. Relevant ideas from other schools of thought, such as psychology, sociology and philosophy, are not encouraged. Traditional, more broad-based ideas, proposed by ‘free-market’ economists such as Adam Smith and Friedrich Hayek would have been rejected today.
Inter-disciplinary studies such as behavioural finance are gaining increasing acceptance, but clearly these fields are relatively young and are still not considered mainstream.
This is different from the real world. Financial markets do not function in a vacuum. I won a postgraduate scholarship to read economics back in the late 1990s, giving me the chance to study at the best universities in the West.
I was intellectually intrigued, especially by the Austrian economic school of thought (which heavily influenced Friedman). But in the end, I chose to do a broader Master of Business Administration degree at an Ivy League school in the States.
My personal choice to take a more practical course of study boiled down to my unease that in academic field of economics, everything has to be expressed in mathematical equations so we can fit it into a ‘model’. I did double maths at junior college so maths itself was not the issue.
The issue was the intellectual arrogance in academic circles that there is only one true and narrow path to solving the world’s problems.
Maybe working part-time since the age of 14 and having been a professional financial markets practitioner have given me a more pragmatic view of the real world.
I am of the view that simplistic economic models certainly cannot be the only way to explain the world we live in - studies on behavioural finance are likely to be the winner.
On the other hand, is the Keynesian economic model the way forward? These days, US President Barack Obama sounds much like French President Nicolas Sarkozy.
‘Nor is the question before us whether the market is a force for good or ill,’ Mr. Obama said in his inaugural address in January. ‘Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control, and that a nation cannot prosper long when it favours only the prosperous.’
Calls for more government intervention appear to be the way to go. But as much as bankers were accused of mismanagement in Congressional hearings, a mirror needs to be put up, because regulators were culprits too - and not the saviours they proclaim themselves to be.
There were actually many regulations from the onset and more of the same thing will not solve the crisis - it will only make the recovery process longer. A loose monetary policy in US in 2003-04 encouraged sub-prime lending to uncreditworthy people. More importantly, these loans are subsidised and guaranteed by government-sponsored mortgage agencies, which effectively let loose the securitisation monster and allowed these tranche securities to be sold easily to global investors.
The problem was further compounded by the fact that a culture of imprudent risk-taking is actually encouraged by government policies. The US is probably one of the few countries in the world where you can simply walk away from your home and not pay mortgage due and not be personally liable. US tax codes provide massive incentives for over-consumption. For example, interest on mortgage is deductible in personal tax filings every year.
Not surprisingly, there have been increasing calls in the US and other countries to protect the jobs of citizens, partly as a way for government to show its care and concern for voters in tough times.
So what is the right economic model? What can Singapore do? The key lesson from Japan’s 1980s experience is that good monetary and fiscal policies are essential, but the key solution still has to include shutting down unhealthy banks. Nationalisation of banks may be the only way to go forward. But can you trust government officials to run a complex institution such as a bank?
Joseph Schumpeter’s brand of creative destruction is essential for economies to recover and to re-invent. Creative destruction can cause severe hardship in the short-run and for workers who are unable to gain relevant new skill sets. It could mean permanent displacement from the labour market.
Each country needs to consider social, political and cultural factors as part of the economic equation in solving the problems we have today.
For countries undergoing creative destruction, the government’s very important role is to mitigate the short-term pain and enable the transition process.
Academic debates and mathematical model building are relevant, but they have to be adjusted to practical realities on the ground. More regulation is essential, but it is not a long-term solution.
Singapore has successfully re-invented itself in the past and this time around is no different. I have full confidence Singapore will do it again. But just as in the last Asian Financial Crisis in 1998, the natural instinct is to protect jobs for Singaporeans first.
Sometimes this sentiment is valid and it is easy to get sucked into the emotional rhetoric. But at the same time, one should step back and ask: How did Singapore have the highest per capita GDP in Asia in 2008? How did all this happen?
Luck and good leadership certainly played an important part, but the basis of Singapore’s success is one key parameter - meritocracy. I myself am an example. I grew up in a two-room flat in Toa Payoh and won three scholarships that allowed me to rise above my family’s initial disadvantages.
Immigrants to Singapore today essentially play an important role as change catalysts. They put indirect and direct pressure on Singaporeans (who are generally a complacent bunch) to work hard and reach for the sky. For any country to progress economically, the key ingredients are productivity and population growth - and immigrants contribute to both inputs for the greater good.
As someone who has the authority to hire, I am all for it if I can hire a Singaporean who has the ability to do the same job as a ‘foreign talent’. But let us not forget how Singapore was built up by our forefathers who were mostly immigrants.
Deng Xiaoping’s aphorism ‘Black cat, white cat, who cares as long as it can catch mice’ is a timely reminder.
Tan Chin Hwee runs the Asia office of a global asset management company. He is Singaporean, and is a CFA and a CPA. His views does not reflect the view of the organisation he works for.
Post a Comment