Economics

A Clash of Capitalism

In many ways, that excerpt rings just as true today in the market arena as it once did between cultures and armies, though the metaphors have changed from the cultural-military ones to one of economic approaches and styles.  In effect, western capitalism is caught in such an impasse, with unbearable abuses of individual greed made possible by the free-market paradigm, and many are looking for ways to improve a flawed system.  Eastern state-run capitalism has a different character, along with its own problems.

Consider, for a moment, what we refer to as Asian values, which reflects a more collectivist approach.  Lee Kuan-Few, a former senior minister in the Singaporean government, boasted that such values made Singapore’s capitalism distinctively different from the capitalism of the West. There is no question about eastern, state-run capitalism’s economic success. The prominence of sovereign wealth funds, with headquarters in the Far East, ought to cause some discomfort for those of us quite comfortable with the individualistic, western style of capitalism that the senior minister stigmatizes.

When we take a hard look at dollar figures, we can’t help but note that there has been an increasing prominence in the financial world of quasi-public investment funds established by other nations with revenues that exceed their operational needs. These are sovereign wealth funds (SWFs). Although some of the largest are associated with the petroleum-rich Persian Gulf nations, many of the most impressive are in East Asia.  

A country is not confined to one SWF. The People’s Republic of China (PRC), for example, has its own investment company, the State Administration of Foreign Exchange (SAFE), with $347 billion in assets under management (AUM), as well as its China Investment Corp., with $332.4 billion, and the National Social Security Fund, for domestic investment, with $146.5 billion. The combined figure, nearly $826 billion, makes the PRC easily the world’s SWF champion. Unless you include the US social security fund, which is currently $2.5 trillion.  Of course, the US is saddled by debt.

Despite the formal unification of Hong Kong and the PRC in 1997, the two countries’ economies remain distinct. Hong Kong’s Monetary Authority’s SWF holds $259.3 billion AUM. This is far less than the PRC total but greater than that of Kuwait or any other Persian Gulf nation. Added to this overview is the venerable Temasek Holdings of Singapore, with $133 billion AUM at present.

Within this construct, we should keep in mind the other Asian giant, India, which only recently (2006) established the India Infrastructure Finance Company Ltd (IIFC). While the IIFC is small in comparison with the other funds mentioned, it’s designed exclusively for domestic projects, though mounting political pressure in India is now calling for a more active role on the international financial scene.

In East Asia, much of the current dialogue concerns the creation of new trading blocs. Japan, for example, vowed to press for such a bloc, in a statement released this past November 10. Projected as a free trade agreement between East Asian nations (EAFTA), it may also serve as the basis for the Japanese initiative towards a Comprehensive Economic Partnership for East Asia (CEPEA) that would also manifest as a working bloc. Although free trade within the bloc would surely be a part of the arrangement, coordinated central planning would be the plus for establishing a CEPEA.

Many of the elites in the emerging East Asian nations already have a shared ideology based on the principles of thrift, hard work, a rejection of individualism, a love of the extended family, and a respect for elders – all of which are characteristics of East Asian cultures. Being guided by such principles implies a form of capitalism without the extreme features of individual hoarding and avarice but with a more collective pulse that limits or represses individualist motifs(motivations).

The first two items on that list, thrift and hard work, might have come from Poor Richard’s Almanac, or many other occidental sources. The latter three, however, strongly hint at a government that fosters the presence of a benignly good father, with the ultimate model of Confucius philosophy (i.e., a patriarchal/mercantilist perspective) at work.
That is a sharp contrast to the ideology of the west. In the English-speaking world, finance involves highly liquid exchanges, less emphasis on thrift and security, with a focus on securitization regarding both risk management and speculation as guiding principles. Relationships are, to a greater extent, more impersonal, thus buttressing individualism. A corporation issues stock, for example, to a general market, almost as if to an abstraction, a true “market” perspective.

Conversely, a state-run economy, such as that of China, would be more prioritized by relationships as opposed to by simply amassing private property. But what about the lack of individual freedoms in such a state where the Confucian benevolent patriarch has been replaced by a huge bureaucracy – and, in the decades since the fall of the “Gang of Four,” the PRC has kept only the trappings of economic communism. The posters vivifying the iconic Confucius still exist, but the new kid on the block is, in fact, McDonald’s.

Beginning with Deng Xia Ping’s initiated “Capitalism with Chinese characteristics,” the emphasis was placed on central planning in combination with a market economy. Since then, the growth of the Chinese economy has been phenomenal. In the near future, China and India will be spearheading world consumerism.

Thus far, early 21st century Western Capitalism (as evidenced in both the U.S. and the U.K.) is immersed in a regulatory war amid a lot of taxation and subsidization by the various levels of government.  There are crippling entitlement programs. The U.S. can no longer impose its will, militarily or economically, on the rest of the world. And now our political structure puts legislators and regulators on the defensive, having to overcome the resistance which capitalists have to regulation. The capitalists finance their campaigns to a large degree, while a media-influenced public seems quicker to blame the government rather than the financiers. In the end, according to international outsiders, American free-market capitalism seems to be represented, at both ends of the spectrum, by both a gridlock in Washington on the one hand, and creativity and productivity in Silicon Valley on the other. This free-market capitalist dilemma has thus been marked by greed on the part of financiers and a reluctance to regulate.

Meanwhile, two other state-run economies, those of Brazil and Russia, are garnering a larger supply of the world’s oil, natural gas and other resources. Many of our pundits now use the acronym BRIC (Brazil, Russia, India, China) as today’s world economic reference point. Interestingly enough, Brazil and Russia are not truly ideologically divided from the west over individualism versus collectivism.

Maria Bartiromo recently interviewed George Osborne, Chancellor for the Exchequer in Great Britain, on CNBC. Osborne, referring to the rise of the East, said, “I think a particular challenge for the West is to resist the forces of protectionism which… say, ‘Well, we’ve got to shut our doors to that.’ You know, that would be a fatal mistake” (http://www.cnbc.com/id/40455633).

Openness is part of the constellation of attractive ideas that western individualism offers. It would be unwise, though, for westerners to shut their eyes to the possible development of a powerful trading block that mobilizes itself against their free-market economies and that creates a potential perfect storm – to wit, the emergence of effective Eastern Economic Partnerships along with an extraordinary liquidity of the existing state-supported institutions of the entire eastern region while a deep and disabling indebtedness on the part of the U.S. (currently at $13.9 trillion dollars) continues unabated. Perhaps, it’s time that West and East actually sit and meet.

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