Saving America and China

Frank Li, a Chinese American from Chicago, has written a very important book, entitled "Saving America, Chinese Style". It is a stimulating and fascinating read.

Frank Li, a Chinese American from Chicago, has written a very important book, entitled "Saving America, Chinese Style". It is a stimulating and fascinating read. Frank is also a regular contributor to the Global Economic Intersection blog.

Frank's argument is that America has two top problems, high unemployment and a huge national debt. And these problems have two root causes: the rise of the BRICS (Brazil, Russia, India, China and South Africa), led by China, as economic competitors of America; and the incompetence of America's political system, especially compared with China's.

He is right to identify the rise of the BRICS as a major new influence on the fate of America, even if most of them are now losing their pizzazz. But there are other fundamental forces affecting the American and global economy.

For example, rapid technological change, like information and communications technologies, biotechnology and nanotechnology, is reshaping the economy, society and politics. Second, demographic aging means that society must spend more resources on health care and retirement income -- while at the same time finding flexible ways for older workers to contribute to the economy and society. The youthful societies of the recent past decades gave us all a free ride, as we reaped a demographic dividend. A third force shaping the economy is "financialization", as the casino economies of Wall Street and the City of London play a growing role in the economy, exposing our economies to greater instability, without providing commensurate benefits.

Frank seems to exaggerate the challenges posed by the rise of China. True, the emergence of China as the factory of the world means that American lower skilled workers are now competing head-to-head with Chinese workers. But overall, America is benefiting greatly from the rise of China. The Chinese middle class is a new market for American companies. And Chinese investment, migrants and tourists are providing a new boost to the American economy. Even though China may be perceived by some as a competitor, the US economy is very open to China.

In reality, the Chinese economy and its companies are in no way real competitors of America. True, China has achieved an economic miracle these past few decades. But it has risen from being a very poor country to being just a poor country, with a very large population. Its technological level is a long way behind America's, as reflected in its widespread efforts to expropriate intellectual property. We hear very few claims of American companies seeking to steal Chinese technology.

Frank's claim that China is more capitalist than America is wrong. State-owned enterprises and banks, which benefit from immense state welfare, dominate China's economy. And protectionist barriers and regulations are rife in China. If China wants to become a real economic competitor of America, it needs to privatize the vast state-owned parts of the economy, and deregulate and liberalize the economy.

China's export prowess is also easily exaggerated. Over half of China's exports come from multinational enterprises, rather than Chinese ones. And much of these are "processing trade", with very little Chinese value added. China faces immense challenges in climbing the value chain.

One area that Frank does not explore is China's investment in its society, an area from which America could take inspiration. China's spanking brand new infrastructure is impressive. Its 15 year old students from Shanghai outperform American and other Western students in literacy, numeracy and scientific skills. More generally, Chinese students have a stronger international outlook than Americans, and have much better mastery of foreign languages. And lastly the Chinese government is now putting in place social safety nets.

Turning now to politics, Frank is concerned that American politicians' goal is only to be reelected, rather than serving the people or the country. This results in excessive spending. This is the fundamental weakness of democracy, and the cause of its eventual undoing. He would like to introduce strict single six-year terms for the American Presidency and Congress, and raise the statutory requirements for the American Presidency, with a minimum age of 55.

Frank believes that the Chinese political system is superior to America's. Climbing the Communist Party ladder results in more competent leaders. Overall, he believes that a country must be run like a business or a family. And that there is little pure democracy in a well-run business or family.

He is right to insist on the need for entitlement reform in America. But tax cheating, corporate corruption and regulatory non-compliance also need to be stopped. He is also right to highlight the capacity of the Chinese government to undertake longer term strategic planning, an area where America certainly needs to do better.

But Chinese leaders are also developing "entitlement programs", as they know that they must buy social stability and a more harmonious society for their own survival. And as the case of Foxconn shows, trade unions may be useful for reducing the widespread labor unrest. Overall, China's political system is similar to America's in that it has been paralyzed by political and business interest groups, who block necessary reforms.

This is why HU Jintao and WEN Jiabao wasted ten years of reform opportunities, and left the country with massive debt from their economic stimulus packages. XI Jinping now has an immense reform agenda, which he will have difficulty implementing. And China lacks one of the main benefits of democracy, namely that you can throw out bad leaders like George Bush. By contrast, the unseemly case of Bo Xilai has been a massive embarrassment to the Communist Party.

There is much that could be said about Chinese government, its immense corruption, its human rights' abuses, its continued restrictions on freedom of expression and information, and so on. But the most powerful criticism comes from the Communist Party itself, which is openly worried about impact of corruption and abuses of power on its own survival -- to the point of suffering from political paranoia. Its excessive preoccupation with domestic problems prevents China from becoming a meaningful international political power.

Despite Frank's great criticisms of democracy, Chinese citizens, especially of the upper classes, do enjoy one important voting right. They can vote with their feet. And increasing numbers are moving to America, Canada and Australia. Despite China's continuing need for investment, they are also investing in these and other countries. And capital flight from China represents a systemic threat to the nation and regime. If America is on the verge of bankruptcy, as Frank believes, why do our Chinese friends invest so much in the country?

In fact, many Chinese citizens simply want out. They can't stand the corruption, pollution, the food scandals and so on. They want a Western education for their children. Chinese students want to work in Western enterprises because of their democratic and meritocratic management style, which encourage contributions by all. And fundamentally, many Chinese are also worried about the survival of the Communist Party regime. Indeed, much of the country's very top leadership has parked their families and assets overseas.

But increasingly, Chinese emigrants are now choosing Canada and Australia as destinations over America. These former two countries may be less exciting, but they have much less extremism, violence, inequality and poverty. And they foster greater solidarity and opportunity through their health, education, and migration and settlement policies.

There was a time when Canada was a frequent butt of American humor, and that Canadians had a slight inferiority complex vis-a-vis their southern neighbors. But today, most Canadians are proud to members of an open, tolerant, safe and multicultural society. And while America tortures itself in political debates over immigration policy, Canadian public opinion is clearly in favor of immigration as force for economic strength and social diversity.

Rather than saving America "Chinese Style", it may be more relevant to try to save America (and also China) "Canadian Style" or even "Australian Style"!