Statist Strongmen Putin-Xi See History Alive in Capitalism Clash

[Aepsilons]

The Laws of Economics, dear boy. Do read about it.

 

[ChineseTiger1986]

Thanks to the State Capitalism, the US has managed to wiped out the mess left by the Free Market Capitalism in 1929.

They easily recovered from the great depression and beaten the Imperial Japan with ease.

Now just stop this Boogeymen mentality of "the Free Market can solve everything", the highly regulated State Capitalism is by far superior and more socially responsible. And when you switched back to that irregulated crony Capitalism AKA the Free Market Capitalism, just like you have re-activated the self-destruction mode again.

The Laws of Economcs, dear boy. Do read about it.

LMAO, you guys are some of biggest closet State Capitalism followers, so don't be hypocrite here.

You don't follow the Free Market ideology at all, just look how your domestic market is being protected against the foreign products.

 

[Aepsilons]

Thanks to the State Capitalism, the US has managed to wiped out the mess left by the Free Market Capitalism in 1929.

They easily recovered from the great depression and beaten the Imperial Japan with ease.

Now just stop this Boogeymen mentality of "the Free Market can solve everything", the highly regulated State Capitalism is by far superior and more socially responsible. And when you switched back to that irregulated crony Capitalism AKA the Free Market Capitalism, just like you have re-activated the self-destruction mode again.



LMAO, you guys are some of biggest closet State Capitalism followers, so don't be hypocrite here.

You don't follow the Free Market ideology at all, just look how your domestic market is being protected against the foreign products.

Did I in any of my posts say that the Japanese Government was immune from state intervention ? Did I say Japanese Government adopted a purely free market capitalism doctrine? If you read, you would see my example of the Plaza Accord as one example of the failure of our government -- by intervening in free market. Japanese have applied protectionist policies , while at the same time emphasized an export-oriented economy. One of the best things to do would be for Japan to approve the TPP and abolish our stringent tariff systems, but if you've followed Japan economic news, you will see that we've started to eradicate these tariffs.

It seems to me that China has begun an interventionist policy, and have failed to learn from our past foibles. This will, ultimately, hurt China's export-driven economy, and dissuade further FDI into the country, which has been the backbone and fuel to China's economic miracle.

I am interested to see the effects of the CCP's policies in the coming future.

Thanks to the State Capitalism, the US has managed to wiped out the mess left by the Free Market Capitalism in 1929.

On the contrary, the New Deal was the very policy that introduced Welfare System, Medicaid, Medicare, which has -- been the greatest economic headache for the Untied States. The United States spends over 900 Billion a year on health care, due in part to the unsustainability of Medicaid and Medicare. The implementation of the 2010 Affordable Care Act (Obamacare) was set to address the medicaid issue, but you will see that this new law -- in itself -- is as unsustainable as medicaid or medicare.

It was also State Capitalism , under Obama's wisdom, to bailout GM, Bank of America and other key businesses in 2008. Billions have been lost and GM continues to be on a loosing streak, so bad that The Untied States sold its majority holdings on GM. No, Obama has demonstrated to us of the failures of state capitalism.

It interferes with the natural flow and self-correcting nature of market capitalism.

 

[vostok]

Here we go, Free Market Capitalism vs State Capitalism.

@senheiser @vostok please elaborate your opinions and tell them why our State Capitalism will prevail at the end.

Capitalism in its purest form - a theoretical concept, fairy tale for the African natives. In fact, in the West there are state regulators. The price of oil, gold, platinum - it is set artificially, in the interests of the Western states, and not because of the mythical "hand of the market".
I in general despise capitalism, because it is an anachronism, a barrier to the further development of mankind.

 

[Aepsilons]

@LeveragedBuyout , may I hear your take on this ? Thanks, good Sir.

May we also hear the points of views of our other distinguished American colleagues,

@TruthSeeker , @gambit , @Peter C , @F-22Raptor , @VCheng , @MastanKhan

 

[LeveragedBuyout]

@madokafc @Edison Chen @Nihonjin1051 @Chinese-Dragon

Mercifully, all of you have already made most of the points that I would have made, and I agree with everything you said (and where in conflict, I take the position of less intervention). A couple points, then moving on to the question of market capitalism vs. state capitalism. This is going to be long, because I can't help myself once I start typing.

1) Crony capitalism can only exist where the government is involved. Laws and regulations are used as barriers to entry by established players to keep out smaller, innovative players, and to maintain these barriers to entry, the established players bribe/lobby the government to maintain and expand the protective legal system. Government itself is the corrupting factor that enables crony capitalism.

2) As @Chinese-Dragon might say, ideology is less important than pragmatism. Both Keynes and Hayek were wrong in that pure extremes are never the answer. Government control through massive spending as automatic stabilizers only serves to waste money (there were literally programs that paid unemployed workers to dig holes and then fill the holes--for pity's sake, cut taxes instead!). On the other side of the spectrum, the dreams of the anarchists, mini-archists, and libertarians is unrealistic because modern behavioral economics, as proven by Kahneman, shows that humans are not rational, cannot properly interpret market signals, and don't even have all the necessary information to make rational decisions, let alone the capacity for consistent rational thought. The government needs some minimal role to protect people from theft, fraud, and yes, even to protect consumers from their own stupidity in some cases. Moderation in all things tends to work best, let's not get hung up on dogmatism.

Now on to state capitalism vs. market capitalism.

To expand on @Chinese-Dragon and what I have also discussed in other threads, state capitalism has been shown to work in the "catch up" phase, and not so well in the "leading economy" phase. Why is that? It's the same as the Keynes vs. Friedman debate. In the "catch up" phase, the course of action, and the stages of development, are well-known. Agriculture to textiles, textiles to heavy industry, heavy industry to services, services to R&D. That is to say, move from the most commoditized labor-intensive industries to the most difficult creative and knowledge-based industries. The former are easy to understand and are easily replicable, which means that even inferior life forms (i.e. government bureaucrats) can efficiently direct the state's resources to carry them out.

The latter industries (knowledge-based) are difficult to understand, because they are forging into areas that have not been well-tested, or may never have existed before. Do you know how many countries have declared that they will be the leaders in nano-technology? I know the US, Germany, Singapore, China, Russia, and Israel at least have made such declarations, but I am sure many, many more have. Who is winning? Who knows? But we know billions of dollars have been wasted in the effort so far. The same for solar energy--the US, Germany, and China alone have wasted tens of billions of dollars on subsidies to develop their industries, and we still have no viable alternative to carbon-based energy sources, at least on a large scale. So our good friends, the bureaucrats, are not able to allocate resources efficiently, because they don't know what works, they don't know what the market wants, and they don't know what will be profitable. And let's be clear, profitability is critical, because profit is the only viable sustenance for a company. Taxpayer subsidies will not last forever.

So to recap, in the 20th century, when the way to industrialize has been well-known, state capitalism has been available as a tool for disciplined cultures (Japan, the Asian Tigers, China, etc.) to rapidly modernize their economies. Less-disciplined cultures (Russia, South America, India) simply use it as a tool to rapidly line the pockets of those in power. However, state capitalism has its limits, and China is starting to reach those limits due to the factors mentioned above. To compete in a knowledge-based economy, one must create knowledge, through R&D. Then one must reward R&D by respecting intellectual property rights, and allow profit to be made off of that IP, to incentivize further R&D, and further profits, etc.; and that, gentlemen, is how advanced economies grow.

Market capitalism doesn't always work, either. The Japanese keiretsu and Korean chaebol are the favorite whipping-boys of Western critics, but before them came the Western conglomerates. The US corporate structure has undergone many changes over the last century, from horizontal integration (which led to trust-busting) to vertical integration (think Apple, which temporarily allowed Apple to capture profits all the way from design to retail sales, but killed competitiveness both in the 1980s and today--does Apple ever learn?) to conglomeration (think of GE, which is involved in, or has been involved in finance, engines, lighting, nuclear-energy, etc.)

Conglomerates are the closest Western example to the SOE problem of today. When the holding company decides how much profit each operating company will keep, and how much it will disgorge as dividends to the holding company, that interrupts the market mechanism. It's each company that knows best what its budget should be, how much should go to R&D, capex, working capital, etc., but if those budgets are artificially squeezed, the operating companies will underperform vs. their pure-play competitors. The solution, for the most part, was breaking up the conglomerates, but a few like GE have managed to hold on primarily through the great transparency that the modern US GAAP and SEC reporting standards demand, which have overcome the worst inclinations of management of the holding companies. (Believe me, Jeff Immelt is more of a figurehead than he is given credit for, and Jack Welch's great turnaround wasn't due to his supposed aggressiveness and "#1 or #2, or out" philosophy, it was due to the creation of GE Finance. But that's for another post.)

To cut to the chase, there comes a point where there are too many layers between upper management (or for SOEs, government bureaucrats) and the markets they serve, so inefficiency creeps in, and growth of the company slows. When the entire market is made up of SOEs, then the overall economy slows. Remember that the root of all economic growth is productivity growth--the creation of more output given the same amount of input as before. Productivity growth can only sustain itself for so long without new techniques, new technology, new knowledge--or what is commonly known as innovation. China needs innovation now, and that's why the leadership, which knows exactly what's happening, is pushing so hard to open industries to competition to unlock the genius of the Chinese entrepreneur and unleash the innovation that they are capable of. Countries which hold on to state capitalism for too long, or even worse, re-nationalize industries, turn into France--and I think we can all agree that it's the worst fate imaginable to turn into a bunch of cheese-eating surrender monkeys.

 

[senheiser]

yeah sure Japan, EU and US are all free market and libertarians. Thats why their central banks are printing money for them

 

[LeveragedBuyout]

@Edison Chen Sometimes I think editors from The Diplomat read our posts here on PDF.

Entrepreneurs: China’s Next Growth Engine? | The Diplomat

Entrepreneurs: China’s Next Growth Engine?
With shrinking growth and changing demographics, China is looking to innovation instead of cheap labor.

By Julia Ebner
August 07, 2014

Should China want to remain an international economic superpower, it will need to substitute its current growth model – one largely based on abundant, cheap labor – with a different comparative advantage that can lay the foundation for a new, more sustainable growth strategy.

Chinese policymakers are hoping now that an emerging entrepreneurship may fit that bill, with start-ups and family-run enterprises potentially becoming a major driver of sustainable growth and thus replacing the country’s current economic model. In 2014, international conferences on private entrepreneurship and innovation were organized all across China: The China Council for the Promotion of International Trade organized its first annual Global Innovation Economic Congress, while numerous innovation-related conferences were held at well-known Chinese universities such as Tsinghua University, Jilin University and Wuhan University.

New Growth Model Needed

Although China still ranks among the fastest growing economies in the world, the country’s growth rates have decreased notably over the past few years. From the 1990s until the 2008 financial crisis, China’s GDP growth was consistently in the double digits with only a brief interruption following the Asian financial crisis of 1997. Despite a relatively quick recovery after the global financial crisis, declining export rates resulting from the economic distress of China’s main trading partners have left their mark on the Chinese economy. Today’s GDP growth of 7.8 percent is just half level recorded immediately before the 2008 crisis, according to the latest data provided by the World Bank.

This recent slowdown in China’s economic growth has naturally been a source of concern for the government. A continuation of the country’s phenomenal economic growth is needed to maintain both social stability and the Communist Party’s legitimacy. Sustainable economic growth has thus been identified as one of China’s key challenges for the coming decade.

That challenge is complicated by demographic trends, which are set to have a strongly negative impact on the Chinese economy within the next decade. Researchers anticipate that as a consequence of the country’s one-child policy, introduced in 1977, China will soon experience a sharp decline of its working-age population, leading to a substantial labor force bottleneck. A labor shortage is likely to mean climbing wages, threatening China’s cheap labor edge. The challenge is well described in a recent article published by the International Monetary Fund.

Replacing the Cheap Labor Strategy

Entrepreneurship is widely recognized as an important engine for economic growth: It contributes positively to economic development by fuelling job markets through the creation of new employment opportunities, by stimulating technological change through increased levels of innovation, and by enhancing the market environment through an intensification of market competition. Entrepreneurship and innovation have the potential to halt the contraction in China’ economic growth and to replace the country’s unsustainable comparative advantage of cheap labor over the long term. As former Chinese President Hu Jintao stressed in 2006, if China can transform its current growth strategy into one based on innovation and entrepreneurship, it could sustain its growth rates and secure a key role in the international world order.

Indeed, increasing levels of entrepreneurship in the Chinese private sector are likely to lead to technological innovation and productivity increases. This could prove particularly useful in offsetting the workforce bottleneck created by demographic trends. Greater innovation would also make China more competitive and less dependent on the knowledge and technology of traditional Western trading partners such as the EU and the U.S.

Transition

In fact, China has long been preparing the ground for entrepreneurial revolution. When Deng Xiaoping became chairman of the CPPCC National Committee in 1978, he ended China’s era of economic isolation. The country de-collectivized its agriculture, opened up its economy to foreign investors, and liberalized its markets. Investment spilled over from Hong Kong and Macau and pushed the Chinese economy into the international system. The establishment of China’s special economic zones (Shenzhen, Zhuhai, Shantou and Xianan) in 1980 attracted foreign direct investment and encourage private business. There was no shortage of Chinese entrepreneurs willing to take advantage of the new opportunities. According to the CEO of a copper refinery in Zhejiang Province, “the Chinese people really exceeded the government’s expectations.”

Starting in the 1980s, the Chinese government actively encouraged entrepreneurship across the country, by introducing the first patent law, allowing state-owned enterprises (SOEs) to go bankrupt, and creating a more investor-friendly environment for private entrepreneurs. Contrary to the popular belief that China’s miraculous economic growth over the past three decades has been exclusively driven by its SOEs, the emerging private sector has played a major role. Examples of China’s most successful entrepreneurs include Jack Ma (Alibaba), Ma Huateng (Tencent), Robin Li (Baidu), and Lei Jun (Xiaomi smartphones).

Although historically subject to the dictates of the central government, China’s entrepreneurs have been grantedincreasing self-determination and independence in recent years. The government has officially recognized the rising importance of entrepreneurship to China’s future economic success. Chinese Premier Li Keqiang, for instance, recently pleaded for entrepreneurship to be encouraged and for start-up businesses to be given support. More specifically, he called for support to be given to entrepreneurial students, a measure which could play a role in fighting youth unemployment in China. In recent years, China has also given higher priority to the development of the R&D and high-tech sector, investing a larger portion of its budget in R&D, increasing its high-tech output, and encouraging Chinese students to pursue engineering degrees.

Obstacles

Still, despite these recent steps, the Financial Times writes that “entrepreneurial education remains a relatively new concept and practice, particularly in China’s university sector.” More “entrepreneurship education is needed” and “the country’s business schools should adopt western tactics and have start-up labs.” The incompatibility of classical Confucian values which laid the foundation of the Chinese culture such as “obedience,” “respect for authority” and “emotional control” with the entrepreneurial spirit constitutes one of the key challenges in entrepreneurial education.

Moreover, there are still a number of obstacles for entrepreneurs that make private investments in China riskier than it is in most Western, high-income countries. Because of the “heavily state-based, government-run legal system” and the relatively high corruption levels in the Chinese court system, private entrepreneurs who lack Communist Party connection are still disadvantaged in many aspects compared to SOEs and politically well-connected private investors. For example, a survey of court proceedings in China reveals that small, private enterprises usually lose against large state firms. Also, starting a business is still relatively bureaucratic and time-consuming. It takes 38 days to complete all the required procedures in China, compared to an average of 5.7 days in OECD countries.

Another major challenge is the funding shortage in the private entrepreneurial sector. While the government has sought to give budding entrepreneurs access to funding in order to support Chinese start-up businesses, financing remains a key bottleneck. As the Beijing correspondent of Time magazine pointed out in a report released in 2009, credit standards are often too high to be met by small business. Moreover, state-owned banks often give preference to SOEs and partially state-backed companies when it comes to issuing commercial loans. There is, however, reason for optimism, with recent promises made by both former premier Wen Jiabao and current president Xi Jinping to facilitate access to credit for private entrepreneurs and to create a more investor-friendly lending environment.

In early 2006, Hu Jintao said that “China will be built into an innovative nation in about fifteen years.” Today, about 8.5 years later, China still has a long way to go before it could be called an innovative nation; its dependence on cheap labor remains critical to its economic success. Given the recent economic slowdown and expected demographic changes, the Chinese government is under pressure to accelerate the country’s transition to an entrepreneurial and innovation powerhouse. With both social stability and the Party’s political legitimacy are at stake, this could prove to be one of the government’s most pressing challenges over the next few years.

Julia Ebner is a postgraduate student in International Affairs at Peking University and London School of Economics.

 

[Beidou2020]

US, EU, Japan, South Korea, China and other economies are state capitalist economies. Some countries have varying degree of state involvement. Before 1978, China had near 100% state involvement in the economy. But in 2014 the state involvement in the Chinese economy is around 40-50%.

France has more state involvement in its economy than the US.

US has state involvement in some sectors including the bond market, property market, setting short term interest rates, etc.

China and Russia have more state involvement than France, South Korea and Japan.
But France, South Korea and Japan have more state involvement than the US.

No economy is 100% pure capitalist. All these economies has some degree of state involvement. It just depends of the varying degree of state involvement.

 

[Indos]

@Developereo , @Maxtini

 

[Edison Chen]

@Edison Chen Sometimes I think editors from The Diplomat read our posts here on PDF.

Entrepreneurs: China’s Next Growth Engine? | The Diplomat

Moreover, there are still a number of obstacles for entrepreneurs that make private investments in China riskier than it is in most Western, high-income countries. Because of the “heavily state-based, government-run legal system” and the relatively high corruption levels in the Chinese court system, private entrepreneurs who lack Communist Party connection are still disadvantaged in many aspects compared to SOEs and politically well-connected private investors. For example, a survey of court proceedings in China reveals that small, private enterprises usually lose against large state firms. Also, starting a business is still relatively bureaucratic and time-consuming. It takes 38 days to complete all the required procedures in China, compared to an average of 5.7 days in OECD countries.

Another major challenge is the funding shortage in the private entrepreneurial sector. While the government has sought to give budding entrepreneurs access to funding in order to support Chinese start-up businesses, financing remains a key bottleneck. As the Beijing correspondent of Time magazine pointed out in a report released in 2009, credit standards are often too high to be met by small business. Moreover, state-owned banks often give preference to SOEs and partially state-backed companies when it comes to issuing commercial loans. There is, however, reason for optimism, with recent promises made by both former premier Wen Jiabao and current president Xi Jinping to facilitate access to credit for private entrepreneurs and to create a more investor-friendly lending environment.

In early 2006, Hu Jintao said that “China will be built into an innovative nation in about fifteen years.” Today, about 8.5 years later, China still has a long way to go before it could be called an innovative nation; its dependence on cheap labor remains critical to its economic success. Given the recent economic slowdown and expected demographic changes, the Chinese government is under pressure to accelerate the country’s transition to an entrepreneurial and innovation powerhouse. With both social stability and the Party’s political legitimacy are at stake, this could prove to be one of the government’s most pressing challenges over the next few years.

Julia Ebner is a postgraduate student in International Affairs at Peking University and London School of Economics.

I think so...the bold part, it's very similar to me.

When SMEs can't get commercial loans from state-owned banks, they turn to some small loan companies and bonding companies for help. Standard LPR is 5.7% for state-owned banks, for bonding companies, however, it could be 30%. In Zhejiang province and other developed regions, it could be 40%. That's why so many small companies got bankrupted, the owners committed suicide when they can't repay the loan. This is bad situation.

 

[tranquilium]

Back in the summer of 1989, American political scientist Francis Fukuyama wrote an influential essay in The National Interest, arguing that the Cold War’s demise meant “the end point of mankind’s ideological evolution” had been reached with an “unabashed victory of economic and political liberalism.”

When viewed from today's perspective, the bold part is just down right stupid. Human ideology is constantly evolving. Ideology 50 years ago is different from today and 50 years later it will be different again.

 

[Edison Chen]

Conglomerates are the closest Western example to the SOE problem of today. When the holding company decides how much profit each operating company will keep, and how much it will disgorge as dividends to the holding company, that interrupts the market mechanism. It's each company that knows best what its budget should be, how much should go to R&D, capex, working capital, etc., but if those budgets are artificially squeezed, the operating companies will underperform vs. their pure-play competitors.

This is interesting. So to which extent, the holding company can decide the allocation of profits? Do you have some examples? I know some banks in China mainly serves its sister SOEs within the conglomerate. They can sacrifice their profit, because their lend rate is quite lower compared to its competitor banks.

 

[VCheng]

China and Russia both view themselves as great powers that have been temporarily sidetracked by the US, Europe and Japan. And they have no reservations about charting their own path. The current era of geopolitics is a far different world than Fukuyama once envisioned.

Viewing oneself as a "great power" (whatever that means) is very easy to do, but actually making it a reality is the key. There are many aspects to this rise as a power, of which whether to follow capitalism or not is only one aspect. No nation, including USA, has a monopoly on this formula for success, which is different for every country.

It is up to the leaders and people of a country to see what works for them, whatever it might turn out to be. A dictator made Singapore into the success that it is, but another dictator made Egypt the hell it is today. USSR was a greater power under Stalin than under Gorbachev, but probably weaker than what it is now. How China evolves and manages the huge changes in its demographics and the changing world situation will be interesting to watch.

Obama once asked Hu Jintao what kept him awake at night. His answer was "finding jobs for 26 million young men every year". How China does this will determine whether it can rise further as a great power, or fade away like the once mighty USSR, no matter what shade of capitalism it follows.

 

[LeveragedBuyout]

This is interesting. So to which extent, the holding company can decide the allocation of profits? Do you have some examples? I know some banks in China mainly serves its sister SOEs within the conglomerate. They can sacrifice their profit, because their lend rate is quite lower compared to its competitor banks.

You've already provided a great example, which follows the precedent set by the Japanese zaibatsu/keiretsu, in which a conglomerate is centered around a captive bank, which must provide below market-rate financing to the sister organizations. Perhaps @Nihonjin1051 has better/more recent information on this, since he seems to have extensive knowledge about internal controls, and is still in academia, but here are two papers I read over the years about it:

The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment - Scharfstein - 2002 - The Journal of Finance - Wiley Online Library

We develop a two-tiered agency model that shows how rent-seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent-seeking, division managers can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra compensation may take the form not of cash wages, but rather of preferential capital budgeting allocations. One interesting feature of our model is that it implies a kind of “socialism” in internal capital allocation, whereby weaker divisions get subsidized by stronger ones.

Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates

When external capital markets are stressed they may not reallocate resources between firms. We show that resource allocation within firms' internal capital markets provides an important force countervailing financial market dislocation. Using data on US conglomerates we empirically verify that firms shift resources between industries in response to shocks to the financial sector. We estimate a structural model of internal capital market to separately identify and quantify the forces driving the reallocation decision and how these forces interact with external capital market stress. The frictions in internal capital markets drive a large wedge between productivity and investment: the weaker (stronger) division obtains too much (little) capital, as though it is 12 (9) percent more (less) productive than it really is. The cost of accessing external capital funds quadruple during extreme financial market dislocations, making resource allocation within firms significantly cheaper. The estimated model allows us to simulate the propagation of the 2007/2008 financial market dislocation. The counterfactual out of sample simulated data is remarkably consistent with the actual data and shows that improved resource allocation in internal capital markets offset financial market stress during the recent financial crisis by 16% to 30% relative to firms with no internal capital markets.

---

In other words, the holding company overrides the natural budgeting process and determines capital allocation based on its own priorities, and based on the market rates of capital (i.e. if market rates are high, the holding company turns to internal financing by borrowing/stealing from cash cow operating companies). Sometimes this is visionary, as those weaker divisions simply require some support in order to grow and become dominant industry players, but more often than not, this interference ends in failure, which is why most conglomerates trade at a discount to the sum of their parts valuation (i.e. if one spun off each of the OpCos and then took the sum of their value as pure play companies, it would be greater than the market value of the conglomerate).