State capitalism versus the virus

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State capitalism versus the virus


Kim Dong-ho
The author is an editorial writer of the JoongAng Ilbo.

China has expanded at a staggering pace after liberalization. It reached a milestone in 2010 by edging out Japan as No. 2 in GDP. China is projected to pass the United States by 2040. Its role as the global manufacturing base may not be a sole drive behind its stunning rise. Chinese experts point to a growth by state capitalism as the primary engine.

In an interview with the Nikkei, Graham Allison, the founding dean of the John F. Kennedy School of Government at Harvard University and famous for the theory of the Thucydides Trap — an inevitable conflict between existing and emerging powers — observed, “If a more directed system [like China’s] facilitates things happening, that would end up leading to better [economic] performance” than democratic countries like the United States in today’s world. These days, competitiveness hinges on the employment of artificial intelligence and big data. As Prof. Allison’s argument suggests, state-led capitalism that places national interests first could have an edge over free economy that prioritizes privacy.

State capitalism puts the country before freedom. Although it enables market principles, state planning — and control — regulates the market. Invisible hands are behind all Chinese corporate names including Huawei and Alibaba. The New York Times said that founders of tech titans like Alibaba, Tencent and Baidu have resigned or reduced their managing role amid pressure from the government as Beijing does not tolerate hereditary succession of wealth. The Financial Times reported that China’s Communist Party was also controlling the “One Belt, One Road” initiative — an ambitious infrastructure development project to build a new Silk Road on land and at sea.

China-style planned capitalism has so far been extremely successful. Since opening was adopted by Deng Xiaoping in 1978, China has been on a roll. It became the world’s factory and last year passed the $10,000 milestone in per capita income. Its per capita GDP over the last 20 years ballooned by 10 times from $1,000 in 2000, shortly before it joined the World Trade Organization (WTO). A country is considered “high-income” by the World Bank when per capita GDP exceeds $12,375. The turnaround for a country with the biggest share of poor people in the world with its colossal population of 1.4 billion is more or less a miracle.

China aspires to prevail over the United States to become No. 1. New York Times columnist David Leonhardt shared an interesting insight. He believed that China has made stunning progress in geopolitical terms because its rival — the United States — has retreated. China plans the future in terms of decades, which can be divided into its ambitious five-year economic development plans. China leapfrogged over the last decade, whereas the United States economy has been moving slowly. Wealth and life expectancy have stagnated for much of the population in America, feeding angry national mood and political divisions. The United States has been neglectful in key investments in education, science and infrastructure in the period, said Leonhardt.

China’s state-led capitalism gained further traction in the age of the fourth industrial revolution. It needed not fret over resistance from traditional players and promoted new innovations. Tech names like Alibaba, Tencent and ByteDance transformed into global companies after e-commerce and big data became game-changers in the corporate world.

The United States is trying to contain China, but cannot find ways to effectively keep it at bay in a technology power struggle. The two states finally reached a first-stage trade deal, but Washington was unable to stop Beijing’s subsidization of its corporations and its technology theft. Korean battery makers and Hyundai Motor have been doing poorly in China because of the government’s favoritism towards local industry. The New York Times reported that 20 percent of foreign enterprises doing business in China had been pressured to transfer technology in return for market access. Such practices are a violation of the WTO rules and won’t be tolerated by the United States, said Choi Byung-il, a professor of economics at Ewha Womans University.

U.S. multinationals, including Google, Apple, Facebook and Amazon, also have been struggling in the tilted playing field of China. Despite their global power, they cannot match Alipay or WeChat Pay, as finance, shopping, medical services and public administrative services — not to mention housing transactions — are all possible on China’s platforms. China also has been eager in fintech and blockchain to promote the ascension of the Chinese yuan through the digital platform. It believes it can replace the U.S. dollar hegemony through fintech. State-led capitalism benefits in the big data-based industrial age.


Children wear improvised face protection made from water bottles in order to protect against the coronavirus at the airport arrival terminal in Guangzhou, Guangdong Province, in China on Feb. 1. [EPA/YONHAP]

Joseph Nye, a professor of political science at the John F. Kennedy School, is doubtful about China replacing the United States in global dominance, as it cannot, he says, match the U.S. military power and its influence in trade, financial system and alliance. But his view mostly went ignored.

The cynicism, however, gained strength due to the Black Swan of the new coronavirus. The novel virus outbreak from Wuhan, Hubei Province, exposed the limitations of state-led capitalism. The flaws of Chinese totalitarianism gushed forth through the fast spread of epidemic. The New York Times argued that the powerful and effective façade of the Communist Party has been exposed in the coronavirus outbreak. “We gave up our rights in exchange for stability and prosperity,” an angry netizen wrote on the social media site Weibo. “Where will our long-lasting political apathy lead up to?” The post was shared over 7,000 times and liked 27,000 times before it was deleted by state censors.

The strong can break easily. Chinese President Xi Jinping has granted himself emperor-like power to usher the country towards the “China dream” of becoming a superpower. The wealth under state capitalism, however, has been showing signs of vulnerability. According to the Peterson Institute of International Economics, liquidity strains in the private sector have worsened. In 2013, 35 percent of bank credit went to state enterprises and 57 percent to private companies. By 2016, the share turned 83 percent for state-backed companies and 11 percent for private businesses. As bank funding was mostly funneled into the public sector, defaults and bankruptcies in the private sector have multiplied.

The South China Morning Post cited a poll by, a Chinese job website, in which 34.6 percent said they became substantially indebted last year, up 12.7 percent from a year ago. According to the Proceedings of the National Academy of Sciences of the United States, China has the world’s highest Gini coefficient, a measurement of inequality. The institute found the gap stemmed from structural problems with China’s political system. State capitalism has been effective in fueling growth in the economy, but worsened inequality because of its inefficient distribution. The downside of China’s state capitalism has been exposed.



JoongAng Ilbo, Feb. 17, Page 26
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