• Consulting the People

    It cannot be said too often – democracy is about more than election day. Electing a government is only the beginning. What matters to a properly functioning democracy is whether the government, however decisive its election day mandate, continues to consult and reflect public opinion throughout its term and whether it exercises power in the interests of the whole country and not just a sectional interest. If it does not, we struggle with what Quintin Hogg once famously described as “an elective dictatorship.”

    We have had in the last few days a significant reminder of this principle. When the British Prime Minister wished to make the case for a strike on Syria, he did at least have the good sense to seek a mandate from Parliament. When the House of Commons declined to vote for military action, reflecting its sense of betrayal over what is now seen as Tony Blair’s false prospectus for the Iraq invasion, David Cameron had no option but to abandon his plans.

    This was a prime example of democracy in action – of the elected representatives of the people, mindful that they were accountable for their decisions to those who elected them, exercising their judgment in such a way as to represent the will of the people.

    The embarrassment caused to David Cameron was enough to give President Obama pause as well – and, though he is not constitutionally obliged to do so (under a different system of government), he too has decided that it would be prudent to seek the support of Congress before authorising an act of war.

    We need to look a little further afield for a significant instance of the difficulty caused when the forms of democracy are complied with but the substance is not. There has quite rightly been considerable anxiety in the West at the overthrow of President Morsi by the Egyptian army only a year after he had won what was by most accounts a reasonably fair election.

    No democrat can justify a military coup, particularly in a country which has suffered an army-backed dictatorship for so long and where hopes for democracy were so high; but the sad fact is that President Morsi came unstuck because he and his Muslim Brotherhood supporters believed that the whole meaning of democracy had been expressed on election day and that beyond that nothing could restrain them from imposing their will without regard for anyone else.

    The difficulty with this was that the Muslim Brotherhood’s will was to impose a religious state on the whole country. Not surprisingly, the large numbers who had voted in different directions and to whom a secular state was important were less than thrilled at this prospect. President Morsi may not, in other words, have been quite as democratic as he seemed.

    These varied instances from across the globe of how democracy should and should not work may seem to have little directly to do with us. We, after all, (along with the Scandinavian countries) consistently top international surveys of countries with the most effective democracy.

    We should not be so complacent. We now have several recent instances of our own government asserting that its mandate on election day means that it can now do what it pleases. John Key is keen to show that he is a “strong” leader who – having been elected with a (barely) working majority – is now not only entitled to do what he pleases, whatever the country thinks, but should be congratulated for doing so.

    It is not enough that opinion polls show, for example, that asset sales have been opposed since day one by a large majority of New Zealanders and that an impressive number have now succeeded in demanding a referendum on the issue. John Key has immediately made it clear that he will not act on any decision by the people that they want the asset sale programme halted. We are presumably meant to applaud this obstinacy and overlook the fact that we have a government that pays no regard to us.

    But there is an even more significant instance when the government is proceeding on an important issue without even bothering to let us into the secret of what it intends, let alone give us a voice in the outcome.

    The innocuous-sounding Trans Pacific Partnership may not be quite a matter of life and death, comparable to a decision to go to war; but its long-term consequences for this country could be almost as serious. The deal currently being negotiated in secret and scheduled to be finalised very soon will represent a hugely significant further step in the absorption of this country and its economy into a global economy dominated by big players.

    Overseas corporations will have, for example, greater legal rights against our government than does any New Zealand individual or company; and future New Zealand governments will not be able to change that position even if they are elected to do so.

    By the time this secret deal is done, it will be too late for us to have any say. Does that sound like democracy to you?

    Bryan Gould

    4 September 2013

    This article was published in the NZ Herald on 6 September.

  • Why Have Maori Leaders Got It Right?

    As a chastened Prime Minister looks back over the last six months and registers the decline in his own standing and that of his government, his record over that period leaves a number of unanswered but increasingly pressing questions.

    It is clear enough, of course, that the Epsom cup of tea last November seemed to usher in a series of errors and misjudgements, large and small, of the kind that can of course afflict any government from time to time. What is surprising, however, is the Prime Minister’s uncertain handling of some of those issues, so that the tribulations of ACC, for example, seem to have caused more damage to the government than should have been necessary.

    The John Key of the first term would have handled such problems with a smile and an easy charm that would have disarmed most critics. But the going in his second term has been much tougher; we have seen a much more petulant and irritable Prime Minister who has sometimes compounded difficulties rather than smoothing them away.

    The Prime Minister was nevertheless back to more familiar form in his reaction to the debacle over larger class sizes. He lost little time in recognising that the game was up, and he did not hesitate to show the steel behind the smile when he sacrificed his Education Minister to the public clamour.

    The Prime Minister may say that governments cannot govern effectively if they change course in response to every shift and eddy in public opinion. Like his predecessors, though, he has been good in the past at recognising the point when the political damage of proceeding with an unpopular policy outweighs any downside of changing course.

    Which all raises the intriguing question – if John Key is ready to bail out in the face of parental opposition to larger class sizes, why is he so determined not to budge on the question of the sale of public assets?

    Opposition to asset sales, after all, has been sustained over a long period and by a wide range of public opinion. All the polls show that this is the issue on which unhappiness with the government has been most clearly expressed. As the government’s popularity has begun to slip, surely this is the issue which has caused them most damage?

    Yet the Prime Minister has at times seemed almost to revel in defying public opinion over this issue. It has become, so it seems, the touchstone by which his government is to be judged. So, why is he willing to take such risks over asset sales when he has been prepared to ditch other policies so readily?

    The answer is instructive. Larger class sizes would have saved $43 million; selling off public assets, though, will raise – according to whichever of Bill English’s “guesses” is the current favourite – around $6 billion.

    Even if the “guess” proves – as is likely – to be a substantial over-estimate, a sum of anything like this magnitude cannot be passed up. It is essential to the whole of the government’s strategy. Without it, there would be a huge hole in the government’s finances, and any chance of eliminating the deficit by 2014-15 would have gone.

    Whatever other arguments are pressed into service, the truth is that the sales are needed if John Key’s strategy is to retain any credibility in financial terms. But credibility is exactly what the strategy is lacking.

    The government’s whole reputation for sound financial management rests on doing something that every ordinary householder will recognise as bad practice – selling off an income-producing asset in order to consume the proceeds. John Key is forced to nail his colours to this shaky mast because the failure of an economy still mired in recession to generate more buoyant tax revenues means that the government’s deficit has remained stubbornly high.

    The government’s commitment to public asset sales, in other words, is driven by the need to raise the money to offset the government’s failure to get the economy moving again. But there are also reasons other than the specifically financial for resisting the sale of our national assets to what will inevitably be overseas owners.

    Those reasons relate to the degree of control we exercise over our own destiny. We have already sold a greater proportion of our assets to overseas owners than any other advanced country; every time we sell another important national asset to overseas owners, we lose a little more control over our own future.

    And that gives rise to the second major question about asset sales. Iwi have been clear that, if the sales are to proceed, they will be keen to buy. But it is their stated reasons for doing so that deserve attention.

    Iwi leaders have made it clear that their intention to buy is so that they can hold the assets in trust for future generations of Maori. There can hardly be a starker contrast with the attitude of John Key’s government, who – it seems – could not care less about future generations.

    So, the crucial question is, why are Maori so much better served by their leaders in this matter than the rest of us are by our own government?

    Bryan Gould

    17 June 2012

    This article was published in the NZ Herald on 20 June.

  • The Chinese Challenge

    An Economic Miracle

    I first went to China in 1978 as a member of a British Parliamentary delegation. We were the first Western politicians to be invited into China following the fall of the Gang of Four.

    The trip was like visiting the moon. The country was unlike anything I had ever seen. Literally everyone wore drab-coloured Mao tunics. The only cars were heavy black Soviet-made limousines that ferried senior Party officials around Beijing; otherwise, everyone rode bicycles.

    There were no shops, apart from the handful of Friendship Stores that were open exclusively to foreign dignitaries and diplomats. Otherwise, the only signs of commerce were the mounds of cabbages and pumpkins piled up on street corners and brought to makeshift markets by peasants from the countryside.

    There was no colour anywhere, apart from huge red banners proclaiming the Five Modernisations. It was impossible to escape the blare of loudspeakers, broadcasting party propaganda, on trains, in streets and from poles in the fields. When we ventured out of our state-run hotel (also restricted to foreign visitors) in the evening, we would attract large crowds who had never before seen a white face.

    I returned to China in 1995 as the Vice-Chancellor of Waikato University and thereafter visited it once or twice a year for a period of eight or nine years. The transformation from 1978 was astonishing. Vast new infrastructure projects were being undertaken. Popular wisdom had it that 20% of the world’s cranes could be found in Shanghai over this period. Huge areas of traditional housing were swept away to make way for motorways and new industrial and commercial development. I recall travelling in to Wuhan from the airport along a newly opened, multi-lane motorway and my taxi having to avoid peasants walking towards us with donkey carts, so unfamiliar were they with what a motorway was.

    That transformation has continued apace. The rest of the world has been astonished by the speed with which China has taken its place as a major economic power. China has, at a time of recession for the rest of the world economy, maintained an annual growth rate over recent years averaging 10%.

    Just this year, with nominal GDP of US$5.8786 trillion, China has overtaken Japan as the world’s second largest economy, having overtaken Germany for third place four years ago; it is on track to overtake the United States by 2030. China will become the world’s largest producer of manufactured goods, surpassing the United States, this year. It is already by far the world’s largest car manufacturer, with a total production nearly twice that of Japan, and two and a half times that of the United States.

    China’s trade surplus in 2010 was US$185 billion but was as high as US$295 billion in 2008. In a decade, China’s share of world trade has grown from 4% to 10%. China became the world’s largest exporter, overtaking Germany, in 2009. China’s foreign exchange reserves now total US$2.454 trillion, nearly 50% of GDP, even after huge overseas investment over recent years. That means that the Chinese economy is now sitting on a massive war chest that allows it to buy up major assets, from mineral reserves to new technology to farming land, from around the world.

    It is not just on the production side that the Chinese economy has achieved a new dominance. China is now the world’s largest car market and the biggest energy consumer. Inward foreign direct investment totalled US$105 billion in 2010 and Chinese outward foreign direct investment now totals US$261.5 billion; both totals are growing fast.

    The scale and speed of Chinese economic development up till now is impressive enough. But future development may be even more significant. China accounts, of course, for a fifth of the world’s population, but Chinese GDP per capita is at present only about one fifth that of Japan, once purchasing power parities are taken into account. This gives some idea of the potential for future growth that Chinese leaders will now have in their sights.

    A New Solution To A Political Conundrum

    While the economic development is the most eye-catching aspect of the transformation, the student of politics will also find much to marvel at. China has succeeded where the Soviet Union failed, by finding a way to combine a centrally directed economy and a monolithic political structure with the innovation and enterprise that only a market economy can provide.

    Mao Tse Tung had recognised the Soviet failure – the extent to which the Soviet economy had succumbed to sclerosis, and Soviet society had become stultified. Mao’s solution to the problem of maintaining a rigid central political control while stimulating renewal and innovation was the Cultural Revolution – an attempt to ensure that the party organisation was never allowed to become a dead weight – but the cure proved to be worse than the disease.

    Following Mao’s death and the fall of the Gang of Four, however, Deng Xiaoping initiated a new approach, in which the Chinese Communist Party maintained its central political control, and set the broad framework of macro-economic policy, but – within that framework – allowed private enterprise to flourish. The consequence has been that a large element in China’s economic growth has been the prospect for many entrepreneurs of becoming very rich. China is now home to more billionaires than anywhere else. There are perhaps 120 million Chinese, living largely on the eastern seaboard, who enjoy living standards comparable to those of the prosperous Western middle class.

    It is, though, a version of private enterprise that we are unfamiliar with in the West. It is a private enterprise that is self-consciously an arm of government policy, but which – in return for complying faithfully with that policy – is free to pursue its own interests. The key is that the Chinese seem to have recognised that government and private enterprise can interact to their mutual advantage, each doing what it is best equipped to do, each contributing to the achievement of the goals of the other.

    Does The West Have All The Answers?

    In the West, of course, dominated as we are by an Anglo-American model of capitalism, a close and symbiotic relationship between government and the private sector such as the Chinese have achieved is regarded as anathema. The Western view has been that the best thing government can do for industry is to “get off our backs”. Government intervention is almost invariably seen as unhelpful; “second guessing” an infallible market will always produce worse results, it is said, than if it had been left to itself.

    Regulation of the market place is seen as unnecessary and sure to be self-defeating. And even those traditional spheres of governmental responsibility and activity – like infrastructure investment, or the provision of public services like education or prisons – are increasingly being colonised by private investors and providers. The role of government in providing and guaranteeing the essential building blocks of economic success –essential physical and technological infrastructure, a safe environment in which to do business, an educated and motivated workforce, a proper level of advanced research – is discounted.

    In the United Kingdom, for example, the proudly proclaimed goal of the newly elected coalition government is to “shrink the state”. In the United States, the Obama administration struggles to identify, let alone apply, the lessons from the global financial crisis. In a small economy like New Zealand, which has experimented for nearly three decades with an extreme free-market policy, there is no disposition to recognise its failures. Blind faith is still reposed in the magical ability of the “free market” to deliver salvation.

    New Zealand has, in fact, been one of the economies most driven by free-market ideology. Despite the overwhelming evidence of the New Zealand economy’s lack of competitiveness, as witness a trade deficit that – despite our small size – is the 13th biggest in the world and almost certainly the biggest per capita, and our sad record of having sold off a higher proportion of our national assets to overseas owners than any other comparable country, we are still ready to sign up to new free trade agreements which hand over major powers to foreign corporations and cede yet more control and loss of national wealth to foreign owners. And domestically, our government continues to cut back on public spending and to privatise anything that shows sign of life.

    Much of the ideology, of course, that dictates that governments must stay out of business is a sham. A close relationship between government and business is regarded as highly desirable – even in a country like the United States – provided that it is business that dictates to government rather than the other way round. The nexus between government and the US defence industry is a case in point.

    The Role of Government – China Style

    There can hardly be a starker contrast than with the approach followed by the Chinese government. To explore that contrast, and to ask the obvious questions, is not to endorse or commend all or even any of what the Chinese have done and are doing. But it is surely prudent to recognise that the Chinese have achieved an economic performance that is already world-beating and that is likely to overwhelm us if – as is likely – it continues to develop, and that they have done so while pursuing a very different political and ideological approach from our own. No dispassionate observer, comparing our recent history and immediate prospects with those of China, could possibly say that we can have nothing to learn from the Chinese.

    So, how have the Chinese done it? In many respects, there is no mystery. A government that has virtually guaranteed stability and continuity is able to take a long strategic view. A government that sees little need to curry favour with voters or with particular interest groups has been free to pursue a single-minded objective – the economic development of the country. A government that can take decisions, irrespective of the civil or property rights of individual citizens, has been able to plan and decide solely in accordance with those economic goals

    They have used that freedom of decision and action to be quite ruthless and have accordingly attracted severe criticism from trade partners. A case in point has been their policy on the foreign exchange value of their currency. The Chinese renminbi is still not fully convertible and its value is accordingly established by the direction of the Chinese government. By pegging its value to the US dollar, they have been able to take advantage, in terms of the competitive pricing of their exports, of the fall in the dollar’s value.

    There can be little doubt that the renminbi is substantially undervalued and that that is a deliberate element in Chinese trade policy. The size and persistence of the Chinese trade surplus is incontrovertible evidence of that undervaluation. The situation is reminiscent of the German and Japanese trade surpluses before the Second World War which Keynes and others correctly characterised as a powerful and aggressive assault on the economic power of the United States and Great Britain. Keynes was clear that the creditor countries were as much to blame as debtor countries for the trade imbalances that threatened world peace.

    China was of course admitted to membership of the World Trade Organisation in 2001, and it might have been expected that we would see some moderation in the aggressive element in trade policy that the undervaluation of the currency represents. That does not seem to have materialised, and the Chinese have continued to strongly resist pressure from the United States in particular to revalue their currency.

    Manipulating the currency is just one example of government intervention in economic policy and in wider strategic matters. It is safe to say that, in marked contrast to the New Zealand government’s attitude that the national interest can safely be left to market forces, the Chinese government has a well-developed strategic view as to where the national economy can and should develop and literally every economic actor in China is required to comply with that strategy.

    So, the domestic programme of infrastructure development is highly planned. Transport, physical and electronic communications, energy supplies, scientific research, education across the board, are all integrated parts of a wider strategy. They are all publicly funded as part of a coherent programme of economic development. That programme is given practical effect as a matter of national priority; individual interests that might conflict with that priority are simply swept aside in a way that would be unacceptable in a Western democracy.

    The Chinese government takes full responsibility for macro-economic policy. It determines monetary policy (principally interest rates) and controls exchange rates and capital flows in and out of the country. It relies greatly on fiscal policy – principally public spending levels and taxation – to control inflation and to target sustainable growth rates. It exercises close control over the Chinese banking system. It pays particular attention to the competitiveness of Chinese production – the key to their export success and growth rates – which is, of course, where controlling the international value of the currency assumes great importance.

    This is all of course quite different from the attitude of Western governments. In line with the general antipathy to allowing or recognising either the actuality or possibility that governments might be able to help strategically in identifying what is needed for economic success, macro-economic policy is almost totally ignored in Western countries. What passes for macro-economic policy (and the term itself is almost regarded as a dirty word) is limited to delegating to unelected and therefore unaccountable bankers the responsibility for fixing interest rates as part of a narrowly focused emphasis on controlling inflation; everything else is left to the market.

    While New Zealand – against all the evidence and common sense – sees great advantage to opening up our small, vulnerable and uncompetitive economy to all-comers, while hardly bothering to secure any safeguards for domestic industry, the Chinese attitude to regulating trade relations is a further example of a quite different approach. The Chinese take a strictly self-interested approach in deciding what goods can be imported and on what terms. The export effort is carefully directed. The currency is not fully convertible and capital flows in and out of the country are closely regulated. It is no accident that the first Western country with which China concluded a free trade deal was New Zealand – a country which was too small to pose any threat and was seen as a useful test-bed on which to sort out the possible wrinkles that free trade might bring with it.

    The Chinese government intervenes as a matter of course in other areas as well. It has a clear industrial strategy; unlike the West, where “picking winners” is widely dismissed as futile and counter-productive, the Chinese have no doubt as to where those winners are needed. Huge public resources are put into developing leading-edge technology – and if they cannot wait to develop it themselves, they buy it or acquire it by less scrupulous means. So, the essential building blocks for future development are clearly identified and targeted, and are then either supported from the public purse or entrusted to private firms which are required to meet the goals set for them.

    The labour supply is a further element which is clearly recognised as a governing element in future economic development. Great attention is paid to the skills needed by the labour force in a modern economy – not only to the higher-level research and technological skills but also to the general level of education of the workforce as a whole. The Chinese government is well aware that it has so far brought into the sphere of a modern competitive economy only about 10% of its potential total workforce.

    The Chinese have in other words a virtually inexhaustible source of cheap labour waiting for the chance to become more productive. The Hong Kong economy of the last quarter of last century offers a telling example – on a much smaller scale – of how valuable the constant underpinning and renewing of a developing economy through a supply of cheap labour (in their case, by virtue of illegal immigration across the border with China) can be. Low wage rates and therefore price competitiveness can be maintained at the bottom end of the labour market, even while growing development and competitiveness are raising living standards and wage rates at the higher end. The Chinese government will be well aware of this trump card in their hand.

    In planning the future course of Chinese economic development, the Chinese government takes, in other words, a coherent long-term strategic view which is quite foreign (and almost repugnant) to Western governments and business leaders. They control and direct (to a degree that would be unacceptable in the West) a population that is well-educated and hard-working and that represents a fifth of the world’s population. They have an immense potential for further development, in terms of a huge supply of cheap but well-educated labour, unmatchable competitiveness, substantial natural resources, a well directed and financed research effort, and large and growing war chest of foreign exchange reserves. And they believe that developing a strategic approach to deploying these assets to the best advantage is a central responsibility of government.

    Planning for the Future

    It is a fair bet, however, that Chinese leaders do not take it for granted that these advantages will produce the outcomes they want. If the Chinese are to achieve the living standards they want for a fifth of the world’s population – standards comparable to those in the West – they are going to need access to a much larger share of the world’s resources than they currently command. And a greater share of the world’s resources for China means a smaller share for others.

    The resources they need now and will need even more in the future if they are to achieve their goals are in most cases finite – minerals and agricultural land to name but two examples. The Chinese leaders will calculate that it is not enough to sign trade deals or conclude contracts to buy the products they need. They do not wish to risk taking their chances in a competitive bidding war. If their future development is to be guaranteed, they need to do more than acquire access just to the products themselves; what is needed is control over and ownership of the means of production themselves. And the best time to achieve that access and guarantee it into the future is to buy it now, when assets in most western economies are relatively cheap and when China itself is cash-rich.

    To recognise this is not to criticise. China is entitled to compete and compete hard with western countries for what the Chinese will see as a fairer distribution of the world’s resources. But we should be under no illusion that that is the Chinese game plan.

    It should come as no surprise, therefore, to see a huge Chinese effort around the world to buy up not just outputs but the means of production of key strategic assets. The phenomenon has even attracted the attention of fiction writers. The Man From Beijing, a recent book by the Danish crime writer, Henning Mankell, takes as its theme a high-level Chinese attempt to buy, in effect, a poor African country.

    Real life provides substance to underpin this fantasy. Chinese outward foreign direct investment is rising fast and will go on rising. Nearly 20% of the US$227 billion total Chinese outward foreign direct investment was made in 2009, all the more remarkable in view of the overall fall in global FDI in that year.

    That investment is clearly targeted at particular areas. One focus is industrial capacity – particularly high-tech capacity – in the United States. The investment effort involves government-owned Sovereign Wealth Funds and State Owned Enterprises, as well as private companies with undeclared links to government.

    It is even more obviously focused on mineral resources in Australia, where Chinese investment has increased dramatically. The Australians have become increasingly wary of such investment; a Chinese bid, for example, to gain control of the world’s largest deposit of rare earths was blocked in 2009 by the Australian Foreign Investment Review Board. China already controls 95% of the world’s rare earth reserves; rare earths are an essential element in much modern electronic communication technology.

    New Zealand on the Shopping List?

    The investment effort extends beyond Australia (where Chinese purchases of Australian farms have risen tenfold) even to a small economy like New Zealand, where Chinese interest in food production has risen significantly. Some Chinese efforts to buy up not just dairy products but dairy farms and production processes in New Zealand have attracted considerable attention. The high-profile bid for the Crafar farms (20 dairy farms that are now in receivership) by the Chinese company, Natural Dairy, is a case in point. Public anxiety, as well as the obvious deficiencies of the bidders in terms of simple business reliability, led to approval for this deal being refused by the Overseas Investment Office. Significantly, however, as soon as one Chinese bidder was sent packing, another immediately took its place; that second bid is now being considered.

    The Crafar farms are not the only instance of increased Chinese interest in New Zealand agricultural production capacity. New Zealand’s leading farming services company, PGG Wrightson, is currently in the process of deciding whether or not to accept a Chinese takeover bid. And there are other instances that, by flying under the radar, have been brought to a conclusion without controversy or even public awareness.

    How many people registered, for example, that Synlait Ltd, a significant New Zealand company with a $237 million turnover, employing 195 staff and manufacturing specialist milk powders, was the target last year of a successful $82 million bid for a 51% controlling shareholding from Bright Dairy and Food Company, China’s third largest dairy company?

    It might be argued that there is no reason to distinguish Chinese investment from other overseas interest in New Zealand assets. But that is not quite true. Chinese investment in major New Zealand industrial firms like Fisher and Paykel or Mainfreight may pass without comment but the Crafar farms again provide an instructive example of how some investments differ from others.

    What distinguished the failed Natural Dairy bid was the comprehensiveness of what was proposed. The purchase of the farms was just one element in a total process which would take dairy production off Chinese-owned farms to be processed in Chinese-owned factories in New Zealand and then transported directly to be marketed to Chinese consumers.

    The farms would remain physically in New Zealand, and some local labour would be employed; but, to all intents and purposes, that element of New Zealand’s dairy production would have been integrated into the Chinese economy. The farms might as well have been re-located in Zhejiang province. Ownership of the land and of its production, decisions as to what that production might be and where it might be sold, the wealth it produced for its owners, would all have passed into Chinese hands.

    The Crafar farms represent, of course, only a tiny proportion of New Zealand’s dairy industry. But the case throws up in stark fashion the kinds of issues that can and will arise if we ignore the true significance of what is happening.

    The Chinese Government’s Hidden Hand?

    Anxiety about the activities of Chinese firms in such instances is of course increased by the close but murky connections between the strategic goals of the Chinese government on the one hand and the purely commercial objectives of Chinese companies on the other hand. Such connections between government and commerce are not unknown in the West, but most international trade deals attempt to establish “level playing fields” and therefore outlaw supposedly commercial proposals which are in reality subsidised means of achieving governmental objectives.

    Yet, it is clear that much of what passes for commercial activity by Chinese firms is in fact part of a government-directed strategy. The huge increase for example, in the number of Chinese firms bidding successfully for major infrastructure projects around the world is certainly a function of the interest that the Chinese government takes in securing such contracts. The suspicion must be that some such firms are set up specifically to obtain overseas contracts as a means of extending Chinese influence, particularly in developing countries.

    Chinese firms are often able to offer favourable prices and financing arrangements because their commercial operations are in effect guaranteed by cheap funding guaranteed by a virtually inexhaustible government purse. Chinese firms are already by far the biggest infrastructure contractors, with strongly entrenched dominant positions throughout Africa and in Eastern Europe in particular.

    The Chinese government is able to combine these contractual arrangements with claiming a position as significant aid donors to poor countries. They see trade, aid and influence as complementary elements in a single integrated drive to ensure that China will have the access and control it needs to claim a much greater share of the world’s resources.

    We should make the necessary adjustment in our thinking, in other words, so that we understand that a bid for a strategic asset by a Chinese firm may not be just a matter of a private firm taking advantage of a commercial opportunity. It may be part of a much wider picture in which the firm and its bid are to be seen as elements in a government-directed strategy to secure national goals. One of those goals might well be to secure under Chinese control a significant food-producing capacity and expertise, of which New Zealand’s dairy industry might contribute a small but valuable part.

    Can the Dragon Be Domesticated?

    None of this means that we should regard Chinese development as unalloyed bad news. Our concern should be to understand the Chinese situation and the nature of their policy objectives so that we can make sensible and prudent responses in our own interests. We should focus on protecting and advancing those interests, and on encouraging the Chinese to develop in a direction which creates mutual benefit rather than conflict. A naïve faith that the market will protect us may not be enough.

    The signs in this regard are not entirely discouraging. By contrast with the experience of the Great Depression, when US protectionism helped to drive the world economy into reverse, the Chinese economy has remained – through the current recession – dynamic, open and increasingly market-driven. That continued buoyancy has done much to avoid a repetition of the 1930s experience.

    New Zealand, in particular, has good reason to be grateful that it shares the Asia-Pacific region with the world’s fastest-growing economy. Having lost guaranteed markets in the United Kingdom and Europe, and struggled to replace them elsewhere, we suddenly find – through no particular merits of our own – that we have a hugely buoyant market for our goods within our own region.

    We should, of course, resist the more outrageous claims made for the free trade agreement we recently concluded with China. The much-trumpeted increase in our exports to China (which enthusiasts attribute to the free trade agreement) was actually well under way before the agreement took effect and simply reflects the rapidly rising Chinese demand for our goods over the recent period; and it is in any case more than offset by the huge increase in our imports from China which produces a substantial and growing surplus in China’s favour – the undervalued renminbi is as potent for us as it is elsewhere.

    The trick for us is to encourage the development of the Chinese market for our goods, while at the same time being alert to the Chinese propensity to seek ownership and control of our productive capacity. The task for our policy-makers is to eschew the simple-minded notion that any business is good business, and to distinguish those arrangements that serve our interests from those that do not.

    That task may not be as difficult as it seems. The Chinese will be the first to expect and accept a hard-headed approach, and they may have their own reasons for changing course, at least to some extent. The Chinese economy is at present seriously unbalanced. Odd though it may seem to Westerners (and New Zealanders in particular) accustomed to concerns about a damaging emphasis on consumption rather than exports, the Chinese have the opposite problem.

    A Chinese refusal to allow an appreciation of their currency so that their extreme and unfair competitiveness is reduced is likely to present them with an inflationary problem which will do the job for them. One way or another, we are likely to see a re-balancing of the Chinese economy, towards domestic consumption and away from exporting, over the coming years.

    A clue as to this kind of development in the future may be seen in the fact that China’s trade surplus dropped in January of this year to US$6.5 billion, the lowest in nine months. Imports leapt 51% in January, while exports grew 38%. This suggests that China, with rising living standards and an increased propensity to import, may be in the course of moving to a new phase, in which its hugely increased purchasing power is used to become an even more powerful magnet for key goods and services than it is at present.

    Nor should we forget either the example of Japan. I recall spending time in Japan in 1980, at a time when the Japanese economy looked very much like today’s Chinese economy, albeit on a smaller scale. The air was thick with predictions that Japan would overtake the United States as the world’s largest economy by the turn of the century. We now know that those predictions came to nought – and it may be that China, as it emerges from the rapid growth of its initial development phase, will also find the going increasingly tough.

    This suggests that we should concentrate on trying to ensure that China is increasingly drawn into global efforts to regulate the world economy. They have as much to gain in the l.ong term as we do from reforming the international monetary system and dealing with imbalances in particular, and from achieving environmentally sustainable development. Chinese keenness to join the WTO may be a useful pointer to the possibility of such future cooperation.

    Most importantly, we need to make sure that competition for the world’s scarce natural resources is conducted with as little conflict and misunderstanding as possible. The Chinese should be brought to see that launching a none-too-subtle direct grab for the natural and technological assets of other countries is likely to provoke a damaging backlash. The responsibility is ours, as well as China’s. It is for us to strike a proper balance between accepting China’s legitimate claim to a fair share, and our own right to continue to own our own assets and manage our own affairs. It is in everyone’s interests that we should be crystal clear on that fundamental issue.

    Bryan Gould

    28 February 2011

    This article was piublished on the NewNations website on 13 April

  • The Chinese Challenge

    An Economic Miracle

    I first went to China in 1978 as a member of a British Parliamentary delegation. We were the first Western politicians to be invited into China following the fall of the Gang of Four.

    The trip was like visiting the moon. The country was unlike anything I had ever seen. Literally everyone wore drab-coloured Mao tunics. The only cars were heavy black Soviet-made limousines that ferried senior Party officials around Beijing; otherwise, everyone rode bicycles.

    There were no shops, apart from the handful of Friendship Stores that were open exclusively to foreign dignitaries and diplomats. Otherwise, the only signs of commerce were the mounds of cabbages and pumpkins piled up on street corners and brought to makeshift markets by peasants from the countryside.

    There was no colour anywhere, apart from huge red banners proclaiming the Five Modernisations. It was impossible to escape the blare of loudspeakers, broadcasting party propaganda, on trains, in streets and from poles in the fields. When we ventured out of our state-run hotel (also restricted to foreign visitors) in the evening, we would attract large crowds who had never before seen a white face.

    I returned to China in 1995 as the Vice-Chancellor of Waikato University and thereafter visited it once or twice a year for a period of eight or nine years. The transformation from 1978 was astonishing. Vast new infrastructure projects were being undertaken. Popular wisdom had it that 20% of the world’s cranes could be found in Shanghai over this period. Huge areas of traditional housing were swept away to make way for motorways and new industrial and commercial development. I recall travelling in to Wuhan from the airport along a newly opened, multi-lane motorway and my taxi having to avoid peasants walking towards us with donkey carts, so unfamiliar were they with what a motorway was.

    That transformation has continued apace. The rest of the world has been astonished by the speed with which China has taken its place as a major economic power. China has, at a time of recession for the rest of the world economy, maintained an annual growth rate over recent years averaging 10%.

    Just this year, with nominal GDP of US$5.8786 trillion, China has overtaken Japan as the world’s second largest economy, having overtaken Germany for third place four years ago; it is on track to overtake the United States by 2030. China will become the world’s largest producer of manufactured goods, surpassing the United States, this year. It is already by far the world’s largest car manufacturer, with a total production nearly twice that of Japan, and two and a half times that of the United States.

    China’s trade surplus in 2010 was US$185 billion but was as high as US$295 billion in 2008. In a decade, China’s share of world trade has grown from 4% to 10%. China became the world’s largest exporter, overtaking Germany, in 2009. China’s foreign exchange reserves now total US$2.454 trillion, nearly 50% of GDP, even after huge overseas investment over recent years. That means that the Chinese economy is now sitting on a massive war chest that allows it to buy up major assets, from mineral reserves to new technology to farming land, from around the world.

    It is not just on the production side that the Chinese economy has achieved a new dominance. China is now the world’s largest car market and the biggest energy consumer. Inward foreign direct investment totalled US$105 billion in 2010 and Chinese outward foreign direct investment now totals US$261.5 billion; both totals are growing fast.

    The scale and speed of Chinese economic development up till now is impressive enough. But future development may be even more significant. China accounts, of course, for a fifth of the world’s population, but Chinese GDP per capita is at present only about one fifth that of Japan, once purchasing power parities are taken into account. This gives some idea of the potential for future growth that Chinese leaders will now have in their sights.

    A New Solution To A Political Conundrum

    While the economic development is the most eye-catching aspect of the transformation, the student of politics will also find much to marvel at. China has succeeded where the Soviet Union failed, by finding a way to combine a centrally directed economy and a monolithic political structure with the innovation and enterprise that only a market economy can provide.

    Mao Tse Tung had recognised the Soviet failure – the extent to which the Soviet economy had succumbed to sclerosis, and Soviet society had become stultified. Mao’s solution to the problem of maintaining a rigid central political control while stimulating renewal and innovation was the Cultural Revolution – an attempt to ensure that the party organisation was never allowed to become a dead weight – but the cure proved to be worse than the disease.

    Following Mao’s death and the fall of the Gang of Four, however, Deng Xiaoping initiated a new approach, in which the Chinese Communist Party maintained its central political control, and set the broad framework of macro-economic policy, but – within that framework – allowed private enterprise to flourish. The consequence has been that a large element in China’s economic growth has been the prospect for many entrepreneurs of becoming very rich. China is now home to more billionaires than anywhere else. There are perhaps 120 million Chinese, living largely on the eastern seaboard, who enjoy living standards comparable to those of the prosperous Western middle class.

    It is, though, a version of private enterprise that we are unfamiliar with in the West. It is a private enterprise that is self-consciously an arm of government policy, but which – in return for complying faithfully with that policy – is free to pursue its own interests. The key is that the Chinese seem to have recognised that government and private enterprise can interact to their mutual advantage, each doing what it is best equipped to do, each contributing to the achievement of the goals of the other.

    Does The West Have All The Answers?

    In the West, of course, dominated as we are by an Anglo-American model of capitalism, a close and symbiotic relationship between government and the private sector such as the Chinese have achieved is regarded as anathema. The Western view has been that the best thing government can do for industry is to “get off our backs”. Government intervention is almost invariably seen as unhelpful; “second guessing” an infallible market will always produce worse results, it is said, than if it had been left to itself.

    Regulation of the market place is seen as unnecessary and sure to be self-defeating. And even those traditional spheres of governmental responsibility and activity – like infrastructure investment, or the provision of public services like education or prisons – are increasingly being colonised by private investors and providers. The role of government in providing and guaranteeing the essential building blocks of economic success –essential physical and technological infrastructure, a safe environment in which to do business, an educated and motivated workforce, a proper level of advanced research – is discounted.

    In the United Kingdom, for example, the proudly proclaimed goal of the newly elected coalition government is to “shrink the state”. In the United States, the Obama administration struggles to identify, let alone apply, the lessons from the global financial crisis. In a small economy like New Zealand, which has experimented for nearly three decades with an extreme free-market policy, there is no disposition to recognise its failures. Blind faith is still reposed in the magical ability of the “free market” to deliver salvation.

    New Zealand has, in fact, been one of the economies most driven by free-market ideology. Despite the overwhelming evidence of the New Zealand economy’s lack of competitiveness, as witness a trade deficit that – despite our small size – is the 13th biggest in the world and almost certainly the biggest per capita, and our sad record of having sold off a higher proportion of our national assets to overseas owners than any other comparable country, we are still ready to sign up to new free trade agreements which hand over major powers to foreign corporations and cede yet more control and loss of national wealth to foreign owners. And domestically, our government continues to cut back on public spending and to privatise anything that shows sign of life.

    Much of the ideology, of course, that dictates that governments must stay out of business is a sham. A close relationship between government and business is regarded as highly desirable – even in a country like the United States – provided that it is business that dictates to government rather than the other way round. The nexus between government and the US defence industry is a case in point.

    The Role of Government – China Style

    There can hardly be a starker contrast than with the approach followed by the Chinese government. To explore that contrast, and to ask the obvious questions, is not to endorse or commend all or even any of what the Chinese have done and are doing. But it is surely prudent to recognise that the Chinese have achieved an economic performance that is already world-beating and that is likely to overwhelm us if – as is likely – it continues to develop, and that they have done so while pursuing a very different political and ideological approach from our own. No dispassionate observer, comparing our recent history and immediate prospects with those of China, could possibly say that we can have nothing to learn from the Chinese.

    So, how have the Chinese done it? In many respects, there is no mystery. A government that has virtually guaranteed stability and continuity is able to take a long strategic view. A government that sees little need to curry favour with voters or with particular interest groups has been free to pursue a single-minded objective – the economic development of the country. A government that can take decisions, irrespective of the civil or property rights of individual citizens, has been able to plan and decide solely in accordance with those economic goals

    They have used that freedom of decision and action to be quite ruthless and have accordingly attracted severe criticism from trade partners. A case in point has been their policy on the foreign exchange value of their currency. The Chinese renminbi is still not fully convertible and its value is accordingly established by the direction of the Chinese government. By pegging its value to the US dollar, they have been able to take advantage, in terms of the competitive pricing of their exports, of the fall in the dollar’s value.

    There can be little doubt that the renminbi is substantially undervalued and that that is a deliberate element in Chinese trade policy. The size and persistence of the Chinese trade surplus is incontrovertible evidence of that undervaluation. The situation is reminiscent of the German and Japanese trade surpluses before the Second World War which Keynes and others correctly characterised as a powerful and aggressive assault on the economic power of the United States and Great Britain. Keynes was clear that the creditor countries were as much to blame as debtor countries for the trade imbalances that threatened world peace.

    China was of course admitted to membership of the World Trade Organisation in 2001, and it might have been expected that we would see some moderation in the aggressive element in trade policy that the undervaluation of the currency represents. That does not seem to have materialised, and the Chinese have continued to strongly resist pressure from the United States in particular to revalue their currency.

    Manipulating the currency is just one example of government intervention in economic policy and in wider strategic matters. It is safe to say that, in marked contrast to the New Zealand government’s attitude that the national interest can safely be left to market forces, the Chinese government has a well-developed strategic view as to where the national economy can and should develop and literally every economic actor in China is required to comply with that strategy.

    So, the domestic programme of infrastructure development is highly planned. Transport, physical and electronic communications, energy supplies, scientific research, education across the board, are all integrated parts of a wider strategy. They are all publicly funded as part of a coherent programme of economic development. That programme is given practical effect as a matter of national priority; individual interests that might conflict with that priority are simply swept aside in a way that would be unacceptable in a Western democracy.

    The Chinese government takes full responsibility for macro-economic policy. It determines monetary policy (principally interest rates) and controls exchange rates and capital flows in and out of the country. It relies greatly on fiscal policy – principally public spending levels and taxation – to control inflation and to target sustainable growth rates. It exercises close control over the Chinese banking system. It pays particular attention to the competitiveness of Chinese production – the key to their export success and growth rates – which is, of course, where controlling the international value of the currency assumes great importance.

    This is all of course quite different from the attitude of Western governments. In line with the general antipathy to allowing or recognising either the actuality or possibility that governments might be able to help strategically in identifying what is needed for economic success, macro-economic policy is almost totally ignored in Western countries. What passes for macro-economic policy (and the term itself is almost regarded as a dirty word) is limited to delegating to unelected and therefore unaccountable bankers the responsibility for fixing interest rates as part of a narrowly focused emphasis on controlling inflation; everything else is left to the market.

    While New Zealand – against all the evidence and common sense – sees great advantage to opening up our small, vulnerable and uncompetitive economy to all-comers, while hardly bothering to secure any safeguards for domestic industry, the Chinese attitude to regulating trade relations is a further example of a quite different approach. The Chinese take a strictly self-interested approach in deciding what goods can be imported and on what terms. The export effort is carefully directed. The currency is not fully convertible and capital flows in and out of the country are closely regulated. It is no accident that the first Western country with which China concluded a free trade deal was New Zealand – a country which was too small to pose any threat and was seen as a useful test-bed on which to sort out the possible wrinkles that free trade might bring with it.

    The Chinese government intervenes as a matter of course in other areas as well. It has a clear industrial strategy; unlike the West, where “picking winners” is widely dismissed as futile and counter-productive, the Chinese have no doubt as to where those winners are needed. Huge public resources are put into developing leading-edge technology – and if they cannot wait to develop it themselves, they buy it or acquire it by less scrupulous means. So, the essential building blocks for future development are clearly identified and targeted, and are then either supported from the public purse or entrusted to private firms which are required to meet the goals set for them.

    The labour supply is a further element which is clearly recognised as a governing element in future economic development. Great attention is paid to the skills needed by the labour force in a modern economy – not only to the higher-level research and technological skills but also to the general level of education of the workforce as a whole. The Chinese government is well aware that it has so far brought into the sphere of a modern competitive economy only about 10% of its potential total workforce.

    The Chinese have in other words a virtually inexhaustible source of cheap labour waiting for the chance to become more productive. The Hong Kong economy of the last quarter of last century offers a telling example – on a much smaller scale – of how valuable the constant underpinning and renewing of a developing economy through a supply of cheap labour (in their case, by virtue of illegal immigration across the border with China) can be. Low wage rates and therefore price competitiveness can be maintained at the bottom end of the labour market, even while growing development and competitiveness are raising living standards and wage rates at the higher end. The Chinese government will be well aware of this trump card in their hand.

    In planning the future course of Chinese economic development, the Chinese government takes, in other words, a coherent long-term strategic view which is quite foreign (and almost repugnant) to Western governments and business leaders. They control and direct (to a degree that would be unacceptable in the West) a population that is well-educated and hard-working and that represents a fifth of the world’s population. They have an immense potential for further development, in terms of a huge supply of cheap but well-educated labour, unmatchable competitiveness, substantial natural resources, a well directed and financed research effort, and large and growing war chest of foreign exchange reserves. And they believe that developing a strategic approach to deploying these assets to the best advantage is a central responsibility of government.

    Planning for the Future

    It is a fair bet, however, that Chinese leaders do not take it for granted that these advantages will produce the outcomes they want. If the Chinese are to achieve the living standards they want for a fifth of the world’s population – standards comparable to those in the West – they are going to need access to a much larger share of the world’s resources than they currently command. And a greater share of the world’s resources for China means a smaller share for others.

    The resources they need now and will need even more in the future if they are to achieve their goals are in most cases finite – minerals and agricultural land to name but two examples. The Chinese leaders will calculate that it is not enough to sign trade deals or conclude contracts to buy the products they need. They do not wish to risk taking their chances in a competitive bidding war. If their future development is to be guaranteed, they need to do more than acquire access just to the products themselves; what is needed is control over and ownership of the means of production themselves. And the best time to achieve that access and guarantee it into the future is to buy it now, when assets in most western economies are relatively cheap and when China itself is cash-rich.

    To recognise this is not to criticise. China is entitled to compete and compete hard with western countries for what the Chinese will see as a fairer distribution of the world’s resources. But we should be under no illusion that that is the Chinese game plan.

    It should come as no surprise, therefore, to see a huge Chinese effort around the world to buy up not just outputs but the means of production of key strategic assets. The phenomenon has even attracted the attention of fiction writers. The Man From Beijing, a recent book by the Danish crime writer, Henning Mankell, takes as its theme a high-level Chinese attempt to buy, in effect, a poor African country.

    Real life provides substance to underpin this fantasy. Chinese outward foreign direct investment is rising fast and will go on rising. Nearly 20% of the US$227 billion total Chinese outward foreign direct investment was made in 2009, all the more remarkable in view of the overall fall in global FDI in that year.

    That investment is clearly targeted at particular areas. One focus is industrial capacity – particularly high-tech capacity – in the United States. The investment effort involves government-owned Sovereign Wealth Funds and State Owned Enterprises, as well as private companies with undeclared links to government.

    It is even more obviously focused on mineral resources in Australia, where Chinese investment has increased dramatically. The Australians have become increasingly wary of such investment; a Chinese bid, for example, to gain control of the world’s largest deposit of rare earths was blocked in 2009 by the Australian Foreign Investment Review Board. China already controls 95% of the world’s rare earth reserves; rare earths are an essential element in much modern electronic communication technology.

    New Zealand on the Shopping List?

    The investment effort extends beyond Australia (where Chinese purchases of Australian farms have risen tenfold) even to a small economy like New Zealand, where Chinese interest in food production has risen significantly. Some Chinese efforts to buy up not just dairy products but dairy farms and production processes in New Zealand have attracted considerable attention. The high-profile bid for the Crafar farms (20 dairy farms that are now in receivership) by the Chinese company, Natural Dairy, is a case in point. Public anxiety, as well as the obvious deficiencies of the bidders in terms of simple business reliability, led to approval for this deal being refused by the Overseas Investment Office. Significantly, however, as soon as one Chinese bidder was sent packing, another immediately took its place; that second bid is now being considered.

    The Crafar farms are not the only instance of increased Chinese interest in New Zealand agricultural production capacity. New Zealand’s leading farming services company, PGG Wrightson, is currently in the process of deciding whether or not to accept a Chinese takeover bid. And there are other instances that, by flying under the radar, have been brought to a conclusion without controversy or even public awareness.

    How many people registered, for example, that Synlait Ltd, a significant New Zealand company with a $237 million turnover, employing 195 staff and manufacturing specialist milk powders, was the target last year of a successful $82 million bid for a 51% controlling shareholding from Bright Dairy and Food Company, China’s third largest dairy company?

    It might be argued that there is no reason to distinguish Chinese investment from other overseas interest in New Zealand assets. But that is not quite true. Chinese investment in major New Zealand industrial firms like Fisher and Paykel or Mainfreight may pass without comment but the Crafar farms again provide an instructive example of how some investments differ from others.

    What distinguished the failed Natural Dairy bid was the comprehensiveness of what was proposed. The purchase of the farms was just one element in a total process which would take dairy production off Chinese-owned farms to be processed in Chinese-owned factories in New Zealand and then transported directly to be marketed to Chinese consumers.

    The farms would remain physically in New Zealand, and some local labour would be employed; but, to all intents and purposes, that element of New Zealand’s dairy production would have been integrated into the Chinese economy. The farms might as well have been re-located in Zhejiang province. Ownership of the land and of its production, decisions as to what that production might be and where it might be sold, the wealth it produced for its owners, would all have passed into Chinese hands.

    The Crafar farms represent, of course, only a tiny proportion of New Zealand’s dairy industry. But the case throws up in stark fashion the kinds of issues that can and will arise if we ignore the true significance of what is happening.

    The Chinese Government’s Hidden Hand?

    Anxiety about the activities of Chinese firms in such instances is of course increased by the close but murky connections between the strategic goals of the Chinese government on the one hand and the purely commercial objectives of Chinese companies on the other hand. Such connections between government and commerce are not unknown in the West, but most international trade deals attempt to establish “level playing fields” and therefore outlaw supposedly commercial proposals which are in reality subsidised means of achieving governmental objectives.

    Yet, it is clear that much of what passes for commercial activity by Chinese firms is in fact part of a government-directed strategy. The huge increase for example, in the number of Chinese firms bidding successfully for major infrastructure projects around the world is certainly a function of the interest that the Chinese government takes in securing such contracts. The suspicion must be that some such firms are set up specifically to obtain overseas contracts as a means of extending Chinese influence, particularly in developing countries.

    Chinese firms are often able to offer favourable prices and financing arrangements because their commercial operations are in effect guaranteed by cheap funding guaranteed by a virtually inexhaustible government purse. Chinese firms are already by far the biggest infrastructure contractors, with strongly entrenched dominant positions throughout Africa and in Eastern Europe in particular.

    The Chinese government is able to combine these contractual arrangements with claiming a position as significant aid donors to poor countries. They see trade, aid and influence as complementary elements in a single integrated drive to ensure that China will have the access and control it needs to claim a much greater share of the world’s resources.

    We should make the necessary adjustment in our thinking, in other words, so that we understand that a bid for a strategic asset by a Chinese firm may not be just a matter of a private firm taking advantage of a commercial opportunity. It may be part of a much wider picture in which the firm and its bid are to be seen as elements in a government-directed strategy to secure national goals. One of those goals might well be to secure under Chinese control a significant food-producing capacity and expertise, of which New Zealand’s dairy industry might contribute a small but valuable part.

    Can the Dragon Be Domesticated?

    None of this means that we should regard Chinese development as unalloyed bad news. Our concern should be to understand the Chinese situation and the nature of their policy objectives so that we can make sensible and prudent responses in our own interests. We should focus on protecting and advancing those interests, and on encouraging the Chinese to develop in a direction which creates mutual benefit rather than conflict. A naïve faith that the market will protect us may not be enough.

    The signs in this regard are not entirely discouraging. By contrast with the experience of the Great Depression, when US protectionism helped to drive the world economy into reverse, the Chinese economy has remained – through the current recession – dynamic, open and increasingly market-driven. That continued buoyancy has done much to avoid a repetition of the 1930s experience.

    New Zealand, in particular, has good reason to be grateful that it shares the Asia-Pacific region with the world’s fastest-growing economy. Having lost guaranteed markets in the United Kingdom and Europe, and struggled to replace them elsewhere, we suddenly find – through no particular merits of our own – that we have a hugely buoyant market for our goods within our own region.

    We should, of course, resist the more outrageous claims made for the free trade agreement we recently concluded with China. The much-trumpeted increase in our exports to China (which enthusiasts attribute to the free trade agreement) was actually well under way before the agreement took effect and simply reflects the rapidly rising Chinese demand for our goods over the recent period; and it is in any case more than offset by the huge increase in our imports from China which produces a substantial and growing surplus in China’s favour – the undervalued renminbi is as potent for us as it is elsewhere.

    The trick for us is to encourage the development of the Chinese market for our goods, while at the same time being alert to the Chinese propensity to seek ownership and control of our productive capacity. The task for our policy-makers is to eschew the simple-minded notion that any business is good business, and to distinguish those arrangements that serve our interests from those that do not.

    That task may not be as difficult as it seems. The Chinese will be the first to expect and accept a hard-headed approach, and they may have their own reasons for changing course, at least to some extent. The Chinese economy is at present seriously unbalanced. Odd though it may seem to Westerners (and New Zealanders in particular) accustomed to concerns about a damaging emphasis on consumption rather than exports, the Chinese have the opposite problem.

    A Chinese refusal to allow an appreciation of their currency so that their extreme and unfair competitiveness is reduced is likely to present them with an inflationary problem which will do the job for them. One way or another, we are likely to see a re-balancing of the Chinese economy, towards domestic consumption and away from exporting, over the coming years.

    A clue as to this kind of development in the future may be seen in the fact that China’s trade surplus dropped in January of this year to US$6.5 billion, the lowest in nine months. Imports leapt 51% in January, while exports grew 38%. This suggests that China, with rising living standards and an increased propensity to import, may be in the course of moving to a new phase, in which its hugely increased purchasing power is used to become an even more powerful magnet for key goods and services than it is at present.

    Nor should we forget either the example of Japan. I recall spending time in Japan in 1980, at a time when the Japanese economy looked very much like today’s Chinese economy, albeit on a smaller scale. The air was thick with predictions that Japan would overtake the United States as the world’s largest economy by the turn of the century. We now know that those predictions came to nought – and it may be that China, as it emerges from the rapid growth of its initial development phase, will also find the going increasingly tough.

    This suggests that we should concentrate on trying to ensure that China is increasingly drawn into global efforts to regulate the world economy. They have as much to gain in the l.ong term as we do from reforming the international monetary system and dealing with imbalances in particular, and from achieving environmentally sustainable development. Chinese keenness to join the WTO may be a useful pointer to the possibility of such future cooperation.

    Most importantly, we need to make sure that competition for the world’s scarce natural resources is conducted with as little conflict and misunderstanding as possible. The Chinese should be brought to see that launching a none-too-subtle direct grab for the natural and technological assets of other countries is likely to provoke a damaging backlash. The responsibility is ours, as well as China’s. It is for us to strike a proper balance between accepting China’s legitimate claim to a fair share, and our own right to continue to own our own assets and manage our own affairs. It is in everyone’s interests that we should be crystal clear on that fundamental issue.

    Bryan Gould

    28 February 2011

    This article was piublished on the NewNations website on 13 April

  • Good Government Matters

    Government over recent times has got itself a bad name. Politicians are of course always regarded as fair game, particularly by media whose proprietors often see themselves as competitors for power, but the critics’ task was of course made immeasurably easier by the expenses scandal. The damage suffered as a consequence of that self-inflicted wound has cleared the way for a renewed assault – by right-wing politicians and media alike – on the whole concept of government.

    The notion that government is the problem, not the solution, is of course not new, and was famously and explicitly asserted by Ronald Reagan. It has never been strictly true of course that the right have disowned government as such; what they have wanted is government that serves the narrow interests of a privileged minority rather than a wider society. So, right-wing governments (including New Labour) have generally overseen an expansion of government in areas like security, law and order, defence, and – in economic policy – maintaining the value of assets and preserving the privileges of the wealthy.

    It is nevertheless a surprise that the new coalition government should feel so clearly mandated by what was at best a confused election result to commit to smaller government as the central element in its programme. The major task faced by the coalition after all is to lead the country out of a financial crisis that, having been created by the failures of the private sector, was only just averted by the government doing what only government could do – using its authority and legitimacy to underpin the banking system and guarantee the value of the currency.

    It is surely one of the miracles of the modern world that a private sector meltdown whose malign consequences are still with us, and against which the only defence proved to be the power of government, should have led to savage cuts in the role of government.

    It is to be expected of course that – in tough times – the powerful should try to shift the burden on to the less powerful whose diminished voice means that they are less able to complain. The speed with which the lessons of the crisis have been re-interpreted in favour of less government rather than more is testament to the ability of the powerful to defend their interests. What is a surprise, however, is the readiness of other elements – including the junior partners in the new coalition government – to abandon government as the major means of achieving economic recovery and re-asserting the need for social justice.

    A loss of faith in government seems now to have infected opinion across most parts of the political spectrum. Even on the left, there is a marked tendency to look for salvation anywhere but government. It is almost as though the left has concluded that – so disappointing was the experience of being in government – there is nothing more to be gained from that quarter. Nothing more clearly demonstrates how thoroughly New Labour let down its supporters.

    Much political activism on the left now takes the form of community-based initiatives of one kind or another – whether it is support for a local currency or various forms of collective self-help or the development of local power schemes. The common factor in all of these small-scale projects is their conviction that ordinary people should take responsibility for changing society, or at least their bit of it, and that government is just another part of the conventional power structure – along with the bastions of capitalism – that has to be overturned.

    There is much talk of the need to engage “civil society” as the essential element in changing society. Government, it seems, is to be by-passed as a snare and a delusion. There is an almost romantic sense that ordinary people possess an innate wisdom and goodness that are somehow sullied and rendered ineffectual by the formal and structured processes of democratic government.

    No one, of course, who wants to see a better and fairer society could object to the impulses that drive these initiatives. But it is distressing to see the efforts of earlier generations to achieve universal suffrage and democratic government so casually set aside. Our forebears saw the power and legitimacy of representative and elected government as the essential safeguard against the overwhelming power of the capitalist and boss, the one guarantor that the interests of everyone and not just the powerful would be properly protected and advanced.

    Community-based initiatives have their value but, as a means of changing society, they are too small-scale, fragmented and dispersed to make much impact. Nothing will better serve the status quo than the concession that government should be limited to protecting the interests of the powerful and that proponents of change should look elsewhere. A new Labour opposition leader can best confront the coalition and restore the faith of Labour supporters by re-asserting that good government matters.

    Bryan Gould

    22 August 2010