Chimericas

The relationship between China and the United States (Chimerica) has become problematic. At the same time, the relationships between China and some major Latin American countries has become promising. Brazilian development exemplifies that promise, while Mexico exemplifies the difficulties of an older model of dependency.In the first chapter of this book I tried to present in an anecdotal and folksy fashion the main contours of a new global division of labor that combined the Chinese and the American economies. Chinese exports and American consumption led the world’s economic growth. From 2000 on, this symbiosis produced robust rates of growth in the American economy and spectacular rates of growth for the Chinese. At the time and on the surface, it seemed like a “win-win” arrangement. As I took a closer look, however, I noticed something strange and lopsided about such grand deal. As early as 2005, and to an observer not blinded by the irrational exuberance of the markets, the bargain did not seem sustainable for too long. It was beset by a peculiar imbalance. In essence, the bargain consisted of a credit line from the People’s Republic to the United States that allowed Americans to overspend, that is to live beyond their means –an indulgence, by the way, that American policy makers had always scolded Latin Americans for practicing with irresponsible abandon.

For many years, the control of overspending was the essence of IMF recipes of stabilization for developing countries, under unchallenged American influence. They often resulted in pro-cyclical policies that threw many a country into a ditch. The experience showed that sometimes “doing the prudent thing” is foolish, and confirmed the barb of William Blake, which would be an apt epitaph for the old IMF: “Prudence is a rich ugly old maid, courted by Incapacity.”

We have come a long way. The Latin American countries have managed to put their fiscal houses in order. Now it is the turn of the developed economies to receive a prescription of the same medicine they purveyed to their poor brethren for so many years. On November 3rd, 2009, the International Monetary Fund warned the central countries: “While it is premature to begin exiting from fiscal support, governments should not hesitate to announce a credible exit strategy now.” It was in essence a call for fiscal austerity mindful however of the fact that premature austerity could kill recovery. For the industrial nations that is a novel dilemma. For Latin Americans, such predicament was once familiar, and treacherous, territory.

During the heyday of this brave new world, historians Niall Ferguson and Moritz Schularick coined the word “Chimerica” to describe the combination of the Chinese and American economies. The expression aroused considerable interest among the chattering classes in both academic journals and the blogosphere. As these authors have recently reminded us, the word was chosen because “we believed this relationship was a chimera — a monstrous hybrid like the part-lion, part-goat, part-snake of legend,” and they appended an ominous afterthought: “Now we may be witnessing the death throes of the monster.” The cause of this demise is simple: no line of credit is infinite, and Americans have exhausted theirs. From now on, they must consume less and save more, as they dig themselves out of the hole of accumulated debt. And indeed the economic crisis started in the financial sector and took the form of the drying up of credit. The immediate consequence was deflationary. Hence, the “desperate” measures of financial rescue and the various stimulus plans seek to re-inflate the economy and to restore trade. Yet the healing process will take considerable time, and in the best of all scenarios, rates of growth will be modest the world over. Re-balancing is the catchword.

What will this re-balancing look like in the various parts of the globe? What geopolitical de-couplings and new couplings will take place? The future is not uncharted territory, but it looks like a terrain of forking paths. In this chapter, I will look at two of these forking paths: the future of “Chimerica,” (China and America) which is the primary fork, and down the road, the implications of this primary re-balancing for a secondary fork, namely, some Latin American development options. To be more precise, is there a “Chimericas” (China and the Americas) option on the road ahead?

Let us start with the prospects for “Chimerica.” Who are the winners and losers in this unholy matrimony? As Ferguson and Schularick wrote “With a combined 13 percent of the world’s land surface and around a quarter of its population, Chimerica nevertheless accounted for a third of global economic output and two-fifths of worldwide growth from 1998 to 2007.” Impressive. But if we disaggregate these figures and look at the differential impact on the partners, we arrive at the problematic heart of the matter.

The United States was able to maintain a high standard of living and the semblance of healthy growth (both in productivity and GDP) by outspending its national income and issuing debt in its own currency, a bonus that helped considerably in prolonging the simulacrum of prosperity. Having reached the sustainable limit of private indebtedness –now transferred to the public sector—it must reconvert the economy and produce real, not fictitious, commodity counterparts in trade. It has the potential to do so in several areas: aerospace, bio-medical inventions, alternative energies, and services, as well as keeping the lead in information and communication technologies. All of these areas have a significant military component, which gives America an edge, as the US continues to produce, albeit wastefully, international security as a global public good (I have no space here to discuss the morphing of old fashioned imperialism into global security).

For America, the challenge is considerable –an uphill socio-political battle in a downhill economic environment. During the giddy years of over consumption, the U.S. neglected three crucial domains: basic education, general health, and physical infrastructure. Let us take education as an example. In the 19th century, public education in America was both a success and an inspiration to the world. The plans and proposals of Horace Manni inspired an Argentine statesman, Domingo Faustino Sarmiento, to institute the most successful program of primary and secondary education in South America, thus giving Argentina a prolonged advantage over her sister republics in human capital and overall economic performance. Fast forward to the 21st century: in 2006, in a ranking of 15-year-olds in 30 industrialized countries, American teenagers came a dismal 21st in science and 25th in mathematics. In short, America as a whole has fallen behind (the figures for Argentina are equally dismal).

The phenomenon is neither novel nor unique. In the course of its history as a discipline, comparative institutional economics has offered some explanations. Thus Thorstein Veblen sought to understand how some latecomers to the industrial world made rapid strides in machine technology and outstripped older powers from who emanated the modern industrial enterprise. In the early comers the necessity of protecting the nominal capitalized values of investments obstructed the further growth in technical innovation. This is the case of mature industrial societies like the U.S. and older nations in Europe. Veblen emphasized the negative influence of ownership structures and financial concentration.

Veblen maintained that some countries avoided this “penalty of taking the lead” by virtue of their recent entrance among the great powers. This was the case, in Veblen’s days (1915) of Imperial Germany, and today of The People’s Republic of China. They are relatively free from the dead hand of funded capital. As a result, their technology can develop at a faster pace than in the land of its birth.

Collective-action theorist Mancur Olson in The Rise and Decline of Nations (1982) further elaborated the hypothesis but took it in a sociological direction. Olson’s idea was that small distributional coalitions tend to form over time in countries. Groups like cotton-farmers, steel-producers, and labor unions have the incentives to form political lobbies and influence policies in their favor. These policies tend to be protectionist and anti-technology, and therefore hurt economic growth; but since the benefits of these policies are selective incentives concentrated amongst the few coalitions members, while the costs are diffused throughout the whole population, the “logic of collective action” dictates that there will be little public resistance to them. Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline. We can draw a practical corollary from the thesis. The difficulty of reform in the world of late Western capitalism lies in this: good policies are obstructed by bad politics, and politics is hobbled by the gridlock of vested interests.

China, on the other hand, profited from its lopsided relationship with America to build a formidable industrial base –probably the most impressive process of rapid industrialization ever undertaken in human history. Industrialization, in turn, brought hundreds of millions of poor peasants into the cities and into the ranks of a working class. It also generated a numerically enormous new “middle class”. China’s marriage to America may have been a marriage of convenience destined not to last too long, but it was a means to develop Chinese society in all dimensions of the concept of capital –economic, social, cultural, and symbolic—beyond the wildest dreams of the most radical revolutionaries. Although Marx and Mao eulogized the revolutionary nature of capitalism, it would not have occurred to them that developmental communism would be an evolutionary stage in the progress of a more advanced capitalist society. Yet it turned out to be precisely that, ever since the “Copernican” turn in policy effected by Deng Xiao Ping.

To be sure, Chinese progress has entailed large costs, and shows signs of structural stress: the environment is being ravaged, the government remains authoritarian if not totalitarian, the regime is brittle and overreacts to dissent or even to simple difference, human rights are not respected, the population is ageing. But the momentum of change is undeniable. To disengage from Chimerica will be a difficult and perhaps slow process. But it is also an exciting prospect, for it involves nothing else than further improving the standard of living of the large majority, and in directions more sustainable than the wasteful patterns of the overdeveloped west.

China could take a page from Brazil in this respect. Despite the reduction in poverty, China’s Gini coefficient of income inequality is going up while Brazil’s is coming down. According to World Bank economist Francisco Ferreira, Brazil has shrunk its income gap by six percentage points since 2001, more than any other country in South America this decade. While the top 10 percent of Brazil’s earners saw their cumulative income rise by 7 percent from 2001 to 2006, the bottom 10 percent shot up by 58 percent, according to Marcelo Côrtes Neri, the director of the Center for Social Policies at the Getulio Vargas Foundation in Rio de Janeiroi. (2)

For China, a Brazilian strategy will be good for the masses and good for the economy, as China weans itself from the addiction to exports and shifts its focus to what in the past made America great. For it is apt to remember, as one drives through the industrial ruins of cities like Detroit, that America was once a country that made tangible products, put people to work, and paid them decent wages, a place where mass production for the home market was also a school to the world, and the cradle of the modern middle class.

During this transition to a more complete and prosperous industrial society, and after the shift as well, China will find other partners to trade with, to produce goods and services with, and to exchange people and ideas with. Some of these partners are and will continue to be in the other Asian nations, but many others will be in the wider global South, among them many Latin American countries. And this opens up the prospect of a more complex and dynamic multi-polar world: China and the Americas –the Chimericas.

There are some countries in Latin America that are ready to enter this special relationship, and some have started already. As Argentine economist Carlos Garramon has argued in a recent paper published in Opinion Sur, commodity-rich countries in the Americas are strategically positioned for another round of export growth pulled by the Chinese locomotive, which will replace America as an engine of world economic recovery. The Southern Cone of the continent produces one third of the grains consumed worldwide; it produces half the meat exported around the world (a market that will increase as the standard of living of Asian populations rises), and it has energy reserves (oil, gas, and bio-fuels) that rival those under Arab soil. As an example, 30% of the copper consumed by China already comes from Chile. Moreover, the region has a continent-size country which, like China two decades ago, has “awaken” from a long historic slumber: Brazil. It is a regional force already, and it is one of the more attractive of the BRICs: economically diversified, politically stable, and democratic to boot, with all the advantages of the economies of scale. Its new middle classes will stimulate through their consumption, neighboring economies, which will coalesce around the Brazilian pole. At the same time, Brazil will maintain generally good relations with the United States, acting both as a buffer and a broker in the more contentious issues that beset the continent. Additionally, Brazil and the other countries of the Southern Cone have weathered the world financial crisis with their economic houses in order. For them, the world crisis has been more a setback in trade than a financial meltdown.

Garramon concludes, and I concur with his prognosis, as follows: “The near future for the Southern Cone is promising, the recovery will arrive earlier and will manifest itself in 2010 in growth rates in the order of 3% to 4%. This year, Brazil initiated its recovery and capital inflows and foreign investment are being restored; Uruguay is one of few countries in the world that will show a slightly positive growth rate in 2009; Argentina has reverted its capital flight and is leaving behind the constraining effects of its default and its debt with the Paris Club. We are approaching a promising 2010. In order to consolidate these trends it will be necessary to acknowledge that China is the strategic partner par excellence for Latin America’s Southern Cone, and based on this conclusion, to accordingly coordinate the region’s trade policy.” As opposed to Chimerica, the Chimericas are not a chimera. To support this hypothesis, I will offer an additional proof a contrario, which is the Mexican post-crisis situation.

Since the opening up of its former rigid political system, and the simultaneous opening of its economy through the North American Free Trade Association, Mexico has tied its fate ever more closely to that of the United States. The resulting interdependence of the two countries has been at best a mixed blessing, and at worst, as with the current American slump, a drag on Mexico’s potential. In the past, when Mexico succumbed to an endogenous crisis, the United States came to the rescue. Mexico then pulled out of its troubles by putting itself on the American dole. In the present, when Mexico succumbed to a financial crisis generated in the United States, it cannot pull itself out of the hole. The situation is made worse by the fact that, while the bilateral relation with the US moved forward, Mexico postponed or avoided necessary reforms, and thus cut itself off from alternative paths of growth. NAFTA left Mexico highly dependent on the health of the American economy. The treatise brought a lot of American investment as manufacturers set up plants south of the border to make use of lower labor costs: maquilas, car companies, construction, and tourism buttressed Mexican growth, but the input was almost exclusively American. As these very sectors were hardest hit by the recession, exports plummeted, transport suffered, and even the flow of remittances from Mexicans in the U.S. dwindled when it did not go into reverse. As opposed to Brazil and some of the other countries in the southern cone, Mexico was quick to enter in recession and will be long in exiting from it. As the country looks for other partners to boost its growth, it finds itself at a disadvantage, due to its previous neglect of ties other than those to the United States.

In the end, NAFTA has proven to be a chimera, while the Chimericas are becoming a reality. Not only did NAFTA bring little change to the domestic economy of Mexico; it made it possible for its entrenched monopolies and oligopolies, and its hidebound labor organizations, to hamper internal growth when it is most needed. Mexico’s tight embrace of the United States has isolated it from sister republics to the south and from a wider, rising world. In the end, there will be reform and re-balance here too, but it will be a longer and more painful process than in many other parts of Latin America. For the moment however, it is springtime in Brasilia, and winter in Aztec land.

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Notes:

(1) Horace Mann (1796-1859) was an ardent American abolitionist, social reformer, and visionary educator. One of his outstanding contributions was the transformation of Massachusetts’s charity schools for the poor into a great system of free public schools. His arguments in favor of a “common school” –that is, a school commonly supported, commonly attended by all people regardless of race, class or sex, and commonly controlled — was a radical idea that President Sarmiento of Argentina put in practice to great success in the 1870s.

(2) As reported in The New York Times,[ link->http://www.nytimes.com/2008/07/31/world/americas/31brazil.html?pagewanted=print]