An acid test for liberal democracies

An ever increasing reliance upon debt by the US simply to aid consumption will have enormous consequences ahead in the form of inflationary pressures alone, as suggested by Peter Schiff (Euro Pacific Capital, November 21, 2008). Schiff argued that the US government can hardly afford new loans to fund its ailing industry sectors with new money “either printed or borrowed from abroad”.

Addressing debt in the future may mean harsh decisions with disastrous consequences for many Americans, in the form of much less social welfare assistance if taxation levels are not increased.

Some might argue that the different circumstances faced by the US and China reflects the need of any nation committed to freer trade to accept the reality that all economies must remain competitive and productive rather than relying more and more on debt.

I agree.

However, if one believes that Western societies are the most progressive societies, the current level of economic competition between Western and developing nations is unfair, although many Western nations still retain most of the highest levels of per capita wealth and income.

While it would be a positive development if the Chinese government diverted wealth to its poorer population, its transition towards a Western-style democracy is likely to be a very slow process and one which cannot be guaranteed.

It is good to remember the acceptance of voting rights and decent working conditions in many Western nations only emerged after a long period of struggle over many decades during the late 19th and early 20th centuries.

It remains to be seen how generous China’s middle and upper classes will be. With the 2008 Global Wealth Report noting that China now has 391,000 households worth at least $US1 million in assets, the fifth highest number in the world, its level of inequality remains obscene given a World Bank estimate in December 2007 that 300 million Chinese were still living on just one dollar a day.

And China, a nation with an estimated 5 per cent of its population being Communist Party officials as of 2006, has a very high level of corruption which hardly enhances its prospects of becoming an effective pluralist society. The Transparency International 2007 survey ranked China 72nd of 180 countries with a score of just 3.5 on a scale of 0 to 10: similar to India, Mexico, Brazil and Saudi Arabia although higher than Russia with 2.3, and well behind New Zealand, Denmark, and Finland with a score of 9.4 and the US with 7.2.

While the West’s promotion of liberalism has allowed Japan and Korea to rise and to develop western democratic practices, and it does rightfully give the opportunity for any nation to improve its economic plight, how can the West deal with a booming China? At best, China may evolve into a gigantic version of Singapore, which Freedom House noted is only “partly-free”, although Singapore was judged one of the least corrupt nations in 2007 with a score of 9.3.

Clearly China, due to its ability to organise and utilise a large pool of cheap labour, has much more room to manoeuvre in economic terms than any Western nation. China has $US2 trillion of foreign exchange reserves, although about half is in US Treasuries or mortgage-backed securities and agency bonds now directly or indirectly back by the US government. It produced a national fiscal surplus for the first half of 2008 of about $US179 billion (4.2 per cent of China’s GDP), and it has a national debt of just 18 per cent of GDP well below the 60 per cent rate of many developed nations.

So are we going to accept Peter Schiff’s argument that we should emulate the economic example set by China, Brazil, Russia, and India due to their wealth creation ability in contrast to the West’s greater reliance upon debt and consumer spending?