Paradigm & Strategy in Economic Policy: China & US

China and the US are operating in two different economic paradigms and are applying different strategies in achieving different economic objectives. Who will succeed? Is there a battle between the two giants?

Bear in mind that the economics is only one element in the whole array of political considerations. Being brought into the picture are issues such as human rights, freedom of speech, freedom of assembly, flow of information as well as the environment and the system of government.

But, by and large, economics remains the lunch pin of all systems - the mandate of heaven, as it were. So long as the people do not suffer and there is no blatant abuse of power by the ruling class, the general popular will leave the power brokers alone. But then what do you do when the mandate of heaven is not derived from the people but from the power elite of another nation which wants to spread its brand of organisation, and hence its idea of how things should be done.

Central to the whole balance must be that between economic prosperity and political power.

The hardest thing to do in real life is how to promote and maintain the prosperity of an economy or a nation. The European colonists had discovered that the best way was to conquer land rich in "wealth" which were metals and later fertility of soil and minerals to feed the factories of the industrial revolution at home. The Japanese attempted at conquering as well but failed and later also resorted to the control of raw materials as well as markets, with innovation in the manufacturing technology.

The US started with conquering the lands of the red indians, being a colony of the British and then a master of their own markets which then set off a string of innovations for domestic markets, before embarking on a global expansion. The Chinese were also insular and kept themselves to themselves, relying instead on ancient green innovations which had served them well for thousands of years until they were overpowered by the industrial revolution. The opening up of the economy helped to kick start their climbing of the industrial technology ladder which they paid for by exporting the sweat of their workers - which upset the prevailing global economic balance based on American sense of fair play and benevolence when the global balance had tilted in the US favour. When they could not withstand the Chinese export onslaught, instead of competing through greater technological superior (which the Americans claim they are), they sabotaged the global economy by the incessant printing of paper money to pay for their imports and to keep the US economy afloat - with inflationary pressures mitigated to some extent by cheap Chinese imports - in order that the US presidents that the chief of US federal reserve could continue to stay in power, albeit for the second term. It is this so-called monetary easing which broke the conventional economic paradigm and which the rest of the world must suffer (including Malaysia) - and which the Chinese has refused to be live with.

So much is at stake. All that the Chinese has worked for for the last twenty odd years in accumulating the foreign reserves chiefly in the US dollar is now being threatened to come to naught - and this has brought a huge realisation to the Chinese about accumulating their wealth in fiat money issued by a foreign power. Not only do they enjoy the sweat of the labour of your people, but after having enjoyed it tells you how wrong you have been in making your people labour and in accepting the useless fiat money which they give you in return. On top of that, they ask you to tighten your pants in order their trousers do not fall off.

So, China and the US are in two different paradigms. China is now on a technological ascent, which means that its output can only increase. But it must undergo a structural shift in its production matrix - away from consumer goods which it has already mastered and towards intermediate and capital goods, including defense. This will shift employment from unskilled but extremely diligent labour from remote farms to the millions of educated and trainable graduates from their universities. Wages and salaries will go up and this has to be matched by their value-add. In this way, production will be geared towards domestic consumption, as in cars, houses, consumer goods, food and entertainment. With the urban more able to spend, farm produce can fetch better prices and this will enrich farmers and keep more people in the rural areas.

The greatness of the Chinese people is their immense ability to adapt to rapidly changing conditions, no doubt helped to some extent by their greater degree of tolerance of hardship strengthened by their determination. Every single person is apparently a versatile putty which can mold itself into any configuration as dictated by the market. The Chinese people appear to be typical rational economic man envisioned by the neoclassical economic models where there is infinite flexibility and adjustment in the system to any perturbation or shock. (In this sense, there is nothing surprising that Keynes thinks his theory more general when price rigidity is coupled monetary policy impotence. Unfortunately for Keynesian policy, fiscal policy is also impotent. Are we then back to the classical model of the real economy driven by technology and productivity growth to keep the growing population happily and fully employed?)

The two paradigms that we now see China and the US economies in are therefore nothing more than the pure economic dichotomy of the real economy (China) and the nominal economy (US). The real economy is ruled by technology whereas the nominal economy is ruled by the central bank. This happened because China has managed in a matter of two decades to cannibalise the technology not only of the US but also of the world which therefore makes China the central of world technology. China may not be as clever as Bill Gates in coming up with new technology but China can be as savvy as Steve Jobs in combining existing technologies to produce everyday applications.

Strategy. Would then a monetary solution by a revaluation of the yuan against the US dollar solve the US budget deficit and unemployment problem? Unlikely. A revaluation of the yuan may in fact be good for China by forcing China to accelerate the process of domesticating its economy, and may reduce the cost of imports particularly in the luxurious food category which is likely to benefit the Europeans than the Americans. The US will continue to suffer from its inability to bootstrap the economy which may force it to exert greater pressure on China - and which it has - and it is likely that up to a point that China is going to resist that bully - and it has.

The US now has come to the limits of its policy option of bullying its major trading partners to adjust in order to solve its domestic economic problem. The problem with the US economy is that the arms industry has refused to die a natural death as a result of the end of the Cold War which has seen economic devastation in Russia, and it is inevitable that the US should also suffer a corresponding economic adjustment, probably not as intensely as Russia, but it must still suffer. Instead, the US tries to patch that vacuum created by the end of the Cold War by inciting more hot spots in the world to engage in warfare - particularly in the Middle East.

The Obama administration seems to fall away from this strategy and hence this renewal of economic dialogue with China. For Obama, this must only the first step towards solving the US economic problem, but it must not be the only step or the only strategic direction. Obama must use the Peace Dividend from the end of the Cold War to take care of the second class citizens in the US society.

In the meantime, China only needs to concentrate on how to redirect its economic growth, maintaining the vibrancy of the coastal cities and spreading the economic prosperity up the riverine towns.