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The Chinese will have the USA to thank if they become a hyperpower

By James Cumes - posted Wednesday, 10 December 2003

What is these days often referred to as China's "miracle" can fairly be classified as such on the basis of the scale and speed of its economic development in the past 30 years. The Wirtschaftswunder in (West) Germany, in the 1950s and 1960s, was perhaps comparable in some respects and had some of the same or similar causes.

However, the German experience had some important differences, relating especially to differences in size and to the stage the West German economy had already reached at the starting point of its economic re-development.

In both cases, an important element in the two "miracles" was the policy of the United States. However, in the case of the FRG, the objective was well defined, especially under the Marshall Plan, and that objective was achieved.


We can argue whether, in the case of China's miracle, United States policies were more or less important than in the case of West Germany but what is clear is that, in both cases, American policies were a crucial element.

On a rather different aspect, that of the slide in the value of the US dollar, I have recently written:

To understand what the US dollar problem is - and what therefore the solution is - we have to understand how the present dollar indebtedness came about. Inflation is the problem of supply being inadequate in relation to effective demand.

In that sense, the United States never solved the problem of inflation which emerged in and after 1969. On the contrary, United States policies, especially of using hikes in interest rates to "fight inflation," only made things worse and gave us stagflation.

The solution - the only genuine solution - of expanding supply through fixed-capital investment - was never achieved or indeed seriously attempted.

Instead, the continuing excess of effective demand over supply provided incentives for other countries to bridge the United States supply gap. First, these included even such countries as Britain which then applied the same American policies to "fight inflation," with the same result - an increase rather than a decrease in inflationary pressures. Germany and Japan did better. Then gradually the Asian Tigers and, of course, more recently and most significantly, China came in to meet the shortage of supply.

In other words, United States inflation was never "solved"; it was simply shifted from domestic price increases to deficits in the balance of trade and payments.

The United States was not alone in this. Australia followed much the same unhappy path, with much the same unhappy results, qualified of course - but not essentially transformed - by the massive stature of the United States in the world economy and world finance.

I know that I am unique in my interpretation of the origins of the dollar problem - and consequently, of course, of the problems of manufacturing, labour, and the downward drift in the living levels of the working and much of the middle class in the United States, especially in the last 20 years.

However, any other interpretation is difficult to justify.

It follows that the solution to the underlying problems of the United States economy - and of course, for example, the Australian economy - is to "fight inflation" by expanding domestic supply, rather than persist with dependence on overseas suppliers, which can lead only to even more massive distortion of world trade and payments and, almost certainly, major collapse, sooner or later, in the world economic and financial "system".

The only way to achieve this "expanded domestic supply" is to promote fixed-capital investment which will bring real growth to the domestic production of goods and services.

(We must remember that real, stable and persistent growth ultimately depends, not on consumer spending and consumer debt but, in the end, on fixed-capital investment which is the economy's real driving force.)

That promotion of fixed-capital investment is not easy. It's much easier to export your industries overseas - as the United States and Australia have done for the past 20 years - than it is to get them back.

So it'll be a tough struggle. It'll need all the support and encouragement it can get. The only way to get this effective support and encouragement on the scale that will be necessary is to expand fixed-capital public investment on what will probably have to be an unprecedented scale.

Unprecedented but not impossible. On the contrary, it is now an absolute imperative if we are to save the world from economic catastrophe – and political and strategic catastrophe as well.

You see this acceptance of public investment in the European Union's plans and - vital if the easy exports of the past 20 years are now to be scaled down - in the infrastructure plans of the Chinese.

That's where VOW (Victory Over Want) comes in and where it is crucial, both to the advanced economies like the United States and Australia, and to the poorer, developing countries in all the continents - and that includes Europe which of course has problems of its own making through, inter alia, the restraints - most of them foolish - of the single currency.

So the causes of China's "miracle" are neither exotic nor abstruse. At the same time, of course, the mists and miscalculations embodied within America's own policies have caused the Americans inadvertently to provide thrust to a China "miracle" which many may consider to be contrary to the United States own economic, political and strategic interests. The Americans themselves may indeed have given that vital thrust necessary to create a powerful rival claimant for their own hyperpower status.

At the same time, of course, the United States has destroyed much of the capacity on which its own strength was based. In some ways, it has travelled much the same road as the defunct Soviet Union. American policies of the past 30, and especially the past 20 years, have gravely weakened the economic and social base on which the American military/strategic preponderance has been raised.

Unless American policies are fundamentally changed, the United States "century" will come to an end and what is largely America's creation – the modern China - will begin its own Chinese "century."


Of course, it would be foolish to claim that it was enough for the United States to offer China an opportunity for extraordinary and extraordinarily rapid economic development - and, ultimately, for growth towards hyperpower status.

It was for the Chinese government to grasp this opportunity - as, indeed, several other Asian countries have done.

We then come to the question whether China is undergoing "evolution to an unknown world" or whether it is simply applying sensible and practical policies which are, with clear thinking, available to us all.

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About the Author

James Cumes is a former Australian ambassador and author of America's Suicidal Statecraft: The Self-Destruction of a Superpower (2006).

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