The View

With Chinese-style capitalism in vogue, is democracy done as an economic model?

PUBLISHED : Monday, 27 July, 2015, 10:45am
UPDATED : Monday, 27 July, 2015, 12:01pm

There is an increasingly popular concept that a rising China offers an appealing alternative to the West’s messy, harsh and inequitable style of capitalism.

There are two strains to this argument. One is that democracy just doesn’t work for everyone. Look at India vs. China - which system pulled half a billion people out of dire poverty in the past two decades? And let’s not even get started on the Middle East.

An adjoining idea is that the West made a crucial mistake in overrating the efficiency of the private sector – the Russia vs. China equation, or the deregulation spurt that preceded the Global Financial Crisis.

In a much-shared opinion piece in this newspaper last week, Niv Horesh, a modern-China history professor at the University of Nottingham, upped the stakes in this debate: democracy is actually doomed.

The cause of its demise? Neo-liberalism.

If the West continues to press an agenda of individualism, government restraint and free markets - which Horesh blames for widening inequality and other economic injustices – then the world’s masses will clamour for…

…ISIS? No luckily it’s not that bad.

But Chinese-style authoritarian capitalism could win the day. “The West is losing the argument, while the China model … is gaining credibility,” writes Horesh, “The consequence of inaction threatens the future of democracy,” he continues, then closes his piece with a reminder that the ancient Greek democratic experiment lasted only 200 years.

On the face of it, this seems rather a joke. Do we really only get to choose between the Reaganites and the Chinese Communist Party? Can’t we go with the Swedes, or something?

On the other hand, perhaps there is a certain genius to this type of rhetoric, if one holds the view that free-market extremism is to blame for the widening wealth gap within the OECD.

After all, the greatest redistribution of wealth – the rise of the American middle classes - occurred during the Cold War, when J. Edgar Hoover was looking for a red under every bed. An argument can be made that capitalists are kinder and more paternalistic when competing against a powerful alternative economic paradigm.

It was only after Soviet-style communism began to wane that the West’s capitalists showed their true colours - cutting taxes on the rich, deregulating the corporate sector, booting the needy off welfare. So some contend, anyway.

Can China, as the new superpower on the block, play the role the Soviets once did in tempering capitalism’s cruel and greedy impulses?

Here’s one virtuous example: the country’s bankers certainly get paid a lot less than their peers in the West. At least those that didn’t make off across the border with half the balance sheet. Same with its oil and steel executives – basically, any big boss of a state-owned firm. This gives lie to the claim that leading industrialists will go on strike if not paid billions.

In some emerging markets, the rich are allowed to stash their wealth offshore, which starves their country of investment funds. China kept its capital account firmly shut, trapping savings in the country. Its Party-controlled banks then directed these funds to state firms that built everything from highways to bullet trains, transforming a backward nation into a modern one.

By this means – rather than strictly following the guidelines of the “Washington consensus” - China became rich and powerful. And many westerners were also enriched in the process. Bankers. Factory owners. Technology advisers. Gina Rinehart. In a word - capitalists.

Meanwhile, as China was rising, life was getting tougher for the OECD’s working and middle classes.

And a major contributing factor in this trend was the economic opening of China, which came as a global labour supply shock. Some economists like to say, with a seeming relish, that China’s opening “popped the global wage bubble.” For the owners of capital this mean good-bye unions, overtime pay and pensions; ni hao cheap labour, land and regulatory costs.

This is not to say Beijing had some evil plot to undermine the rich world’s middle classes; it was just using its comparative advantage – lots of land and lots of people - to accelerate its economic development.

In the process, China has not been an “antidote to neo-liberalism”, but rather one of its best partners.