Monday, April 1, 2013

China’s Century & The downfall of the West.

            In his book “Collapse”, Jared Diamond pointed out that in the end, what allows a society to succeed, while others collapse is the ability to adapt to a constantly changing set of challenges, which may pose a mortal threat to communities, groups, countries and ultimately to the whole planet.  We in the western world pride ourselves for the possession of what we see as the most flexible and dynamic set of values on the planet.  We see ourselves as the heirs of dynamism rooted in ideals of the enlightenment.  We went further and included our much prized and touted ability to include other people into our society, thus becoming a magnet for the “best and the brightest” the world has to offer. The immigrants bring with them the skills they learned on the back of other people’s resources.  They come, they invent, they invest, they want to buy property and live in the western world.  Strictly, from an economic perspective, as the subject is being learned currently, this wave of immigrants is a great boost to our well-being.  So, apparently we are adapting to take advantage of opportunities, meet challenges and arguably remain near the top of the pack.

            Our largest current challenger hailing from the developing world is China.  It is seen as a rigid state, unable to allow for the freedoms needed to spur individual creativity, deemed necessary for a society to be successful.  We often pointed this out in the past decades, and we guessed that the century will in fact not belong to them, but to societies more like our own, such as India, which is another fast growing giant.  Two decades after philosophizing in that direction, we have to admit that our prognosis was as wrong as could be.  India is still nearly as poor on a per capita basis as Sub-Saharan Africa.  Their infrastructure is only developed sufficiently in a few large urban centers, with most of the rest of the country being left in a medieval stage of development.

            China on the other hand managed to build its infrastructure more evenly, even though it is still concentrated on the more populated eastern region.  At least half of their country is infrastructuraly-speaking equal to most western countries in quality, sophistication, and utility.  Their nominal GDP per capita according to the latest IMF stats, is currently $6,200, which is only marginally lower than EU members Bulgaria and Romania.  They will be on par with them within the next three to five years if current trends continue.  That is a huge difference from India, which has a per capita GDP of $1,500, and is unlikely to catch up to countries like Romania, at least until the middle of the century, if ever.  India’s rate of growth is currently in the 7% range, compared to about 9% for China.  Growth rates in the 7% range are something to be envied by our stagnated western economies, but in reality, it is a sign that India cannot compete presently with the Chinese model, and it will most likely fall further behind, rather than catch up.

Time to question our assumptions?

            So, India, which more closely resembles western society administratively and in many respects culturally speaking is doing alright for itself in terms of its current growth trajectory, but in no way does it have what it takes to challenge China as top regional and eventually global dog.  It may not be easy to do, because after all, we inherited a head start that is five centuries old, compared to our emerging competitors, but I think it is time to reflect upon our established view of the world, given that we are repeatedly being proven wrong lately.  I mentioned that China’s GDP per capita is in the $6,000 range, but reality is that EU, US, Canadian and Australian GDP per capita is in the $40-50,000 range.  Not quite comparable. In fact, we have a larger gap between China and us than China has over India.  We are the society, which millions all around the world want to be part of.  We are dominant economically, militarily and culturally.  So why should we question our values and beliefs?

            We should do just that (question our established beliefs) in my view, because we have to recognize that for more than half a decade now, we seem to be unable to deal with any of our major challenges.  We have a demographic problem, which we pretend that we can deal with through population replacement facilitated through immigration.  Our society is getting ever older however, despite our willingness to import people from other cultures, which arguably will eventually lead to population and cultural replacement, rather than complementing our own culture and population, because with our own population shrinking, it is highly unlikely that we can absorb and assimilate others.  Shrinking populations do not absorb growing populations.  Our predicament is in fact getting worse, because it seems our young people are increasingly lacking the ability to establish themselves career wise, which in turn is leading to an even smaller generation being currently born to replace those nearing retirement, and dying.

China may be criticized for its one-child policy, but reality is that the ethnic European population, which is the base of the western world, has a cultural one-child policy as well.  The average birth rate in the EU is about 1.4 per woman, which translates to about 1.2 for the ethnic European population.  It is about the same in Canada, and it is only marginally better in the US, where a higher percentage of committed Christian worshipers is helping boost natality.  We do not have an answer to this problem, even though it is a huge problem.  We choose instead to pretend it is not a problem, and we discourage discussion of this topic through our cultural institutions, which frown on raising the issue.  China on the other hand, can and probably will repeal the one-child policy soon, at which point, they will most likely see a boost in birth rates.  We all know that if need be, China will do what is necessary to boost birth rates, if need be.  So, on this one, it is the rigid Chinese society which has the necessary tools to deal with the problem, while we the “dynamic”, flexible societies are looking at it helplessly, and we pretend it is alright, while in fact it is far from it.  Pretending things are all right is the best we can do it seems, which is not quite what is needed in terms of cultural adaptation, if we are to survive.

            Due to our rapidly aging population, we are staring at a huge gap between savings for retirement and healthcare to be provided to senior citizens on the part of government, as well as a big gap between what current and future seniors should have stashed away for retirement, and what we in fact are doing to prepare.  The first defaults on the promises we made to future seniors are already starting to appear in the form of municipal bankruptcies.  The towns of Stockton and San Bernardino, in California are recent examples.   The gap is becoming more and more insurmountable with every year that passes in the absence of prompt action.  The solutions put on the table by our elites, divided in two ideological camps, known as the left and the right are both unsuitable to our needs.  On one hand, we have the left agreeing to perhaps raise the retirement age, somewhat, and make up for a small portion of the gap through extra tax levies on the economy.  Problem is that raising the retirement age crowds out further the already struggling young generation looking to join the workforce, while increases in taxes lead to a slowdown in potential growth and a lack of competitiveness.

            On the right, we have the proposal of dismantling the social safety net, which has become an integral part of the western economy in the past one hundred years.  It is a simple straightforward idea, “we can’t pay for it, so lets get rid of it”.  Sounds good, except for the fact that 70% of the economy is dependent on consumer spending.  This level of spending, which the economy depends on, is not possible without having a social safety net to give people the confidence to shun saving, in favor of reckless spending habits.  It may seem righteous to promote thrift, but in reality, it would be disastrous if it were to ever happen.  Dismantling the social safety net would be the kind of event, which would be a culture changer.  Our culture would not survive it, unless it would be done in conjunction with major changes to the structure of the global economy, as I pointed out in my book dedicated to the need to standardize global trade tariffs.  Ironically, it is the political right, which most often frowns on ideas, such as international action to deal with certain problems, even though in this particular case, it is exactly what is needed.

            China has a rapidly aging population, not so much due to their cultural evolution, but rather due to government policy.  Government policy can be changed, and even reversed in order to promote the opposite, in other words a baby boom.  Even if they were to do that however, they would still have to deal in the next few decades with a poor potential worker to retiree ratio.  Once again, however, we see China instituting policies, which our society cannot dream of doing.  Recently, it was legislated that parents should be able to sue children for neglect, including for not visiting them.  This of course, is meant to reinforce the traditional Confucian family values ethic, which shaped Chinese society for over two thousand years.  This is coming from a Communist, statist government, which up to recently, tried to undermine Confucian cultural values, in favor of statist values (a cultural battle, which has been raging in Chinese society for over two millennia).

            If this is not evidence of a society flexible enough to adapt to new challenges, I don’t know what is.  They have a similar demographic problem staring them in the face to ours.  They do not however want to inherit the same entitlement dilemma, which is troubling our society.  They decided instead to make sure to reinforce family responsibility for their elders, which will arguably cost the state and the economy far less, than our entitlements will cost us.  Many may argue that this is not a solution, because they are neglecting the internal consumer demand aspect of their economy, but in reality we all know why that is not such a huge problem.  Our “dynamic”, society, true to our values, decided to free global trade, without any preconditions meant to bring our social protection values to our trading partners.  In effect, this allows countries like China to worry less about consumer demand, and many other pesky things like basic human rights, and the environment, because the consumer demand is already there, courtesy of our social safety net.  So, once more, who is better adapted to dealing with the problems of the future?

            “But they lack innovation”, some point out, when talking about China’s future.  That may be true, but do they really need it in today’s global context?  We may innovate all we want but by the time our innovations make it on the market, the whole process provides far more jobs to the developed world than it does to us.  Truth be told, even this innovative gap is closing, because R & D work is increasingly moving to the developing world, including to China.  It is great that we are willing to modernize our economy through initiatives, such as clean technology, but our initiative gives manufacturing jobs to China, while we only get the installation side.  Efforts to produce solar panels in the US ended in the government being discredited through its support for companies such as Solyndra.  It is fair to say at the very least that our innovation does not create more jobs at home than it does abroad, so from that perspective, the innovative gap is not really a huge problem for the moment.

            Some may argue that we still control the capital, but is that not in the process of changing as well?  China’s recent acquisition for $15 billion of Canada’s Nexen, late last year was a 1.5% bite into the TSX (Canada’s main stock exchange).  That was just one deal, while smaller positions on the part of China’s state or China’s semi-mercantilist private corporations in Canadian as well as companies in other countries all around the western world, probably add up to hundreds of billions of dollars, and I do believe they are just getting started.  With over $3 trillion in reserves, they can do some real damage to our global shareholder status.

            Furthermore, while the United States spent about a $2 trillion dollars, and incurred as much as another $2 trillion in future obligations on trying to secure Iraq’s resources, and pacify Afghanistan, with little to show for it, except perhaps a few corporate deals in oil exploration, China managed to tie down resources all around the world.  In fact, China will account for as much as one third of new oil production in Iraq, which is more than American companies will account for.  The Chinese made deals of exclusivity, ranging from copper in Congo, to oil in Brazil and farmland all over the world in their countless bilateral deals, removing these resources from the global open market.  We no longer poses the capacity needed to make rational strategic decisions anymore, while the unelected leaders of China evidently do. 

            So are we still the dynamic society that always managed to out-compete the rest of the world? Alternatively, are we just deadbeats, living off the giant credit card our predecessors built for us in the last few centuries?  Adaptability is the true measure of a successful society.  In light of the evidence before us lately, we seem to be lacking.  Instead of addressing our current challenges, we have an elite content with continuing to fight the same old tired, and irrelevant ideological battles between left and right.  This is no light matter, because after five centuries on top, we should by now know what happens to those who fail to adapt and compete.  We certainly destroyed many societies around the world.  As for the new masters, we already know what they are capable of doing to their own people and environment in order to get to the top.  Now imagine what they will do to those they consider not their own.      

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