Audio-book Review
By Chet Yarbrough
(Blog:awalkingdelight)
Website: chetyarbrough.blog
Red Flags
By: George Magnus
Narrated by : Derek Perkins
George Magnus (Author, UBS Economist, International Banker, Globalist.)
As a former UBS economist and Associate at the China Centre at Oxford University, Magnus studied economic progress in China. He has acted as an adviser to asset management companies that dealt directly with China.
George Magnus develops a cogent argument that illustrates differences between American and Chinese economic strengths and weaknesses.
Magnus develops his analysis by recalling the history of China. He recounts a country ruled by authoritarian Emperors, a nationalist dictator (Chiang Kai-shek) and communist revolutionaries (Mao and Deng Xiaoping). He then offers an analysis of the revisionist leader, President Xi Jinping.
After Mao’s death Deng Xiaoping chose to expand; some would say re-envision, Mao’s version of communism.
Deng continued centralized party control but recognized the value of private enterprise in meeting GNP goals. Deng’s theory of communism is exemplified by his comment that “It doesn’t matter if a cat is black or white; as long as it catches mice, its a good cat.”
Deng still believed in a controlled or “planned economy” but opened the door to private enterprise. The results speak for themselves.
However, Magnus notes that Xi is returning to a more ideological form of communism. The cat has to be more of one color. Xi re-emphasizes party’ planned control of the economy. Magnus suggests this is a red flag portending economic trouble.
Ordered isolation of Singapore’s residents tests Xi’s autocratic economic style of government. The economic impact of China’s command economy remains to be seen. Though America has dealt haphazardly in its response to Covid19, China’s actions may fare little better.
Magnus explains the growing importance of State Owned Enterprises (aka SOE’s) is raising China’s debt. Magnus argues Xi’s focused attention on increasing GNP is a red flag because of its negative economic impact on a burgeoning middle class. The middle class is earning less even though GNP continues to rise.
Magnus explains China’s middle class is not proportionately benefited by an increasing GNP.
This disproportionality exists in the United States as well as most post-industrial nations. The gap between rich and poor in America is well documented in Piketty’s book about “Capital in the Twenty First Century”.
However, America is acknowledged by the world as a capitalist country that encourages and multiplies innovation. Even Putin, in a “60 Minutes” interview, applauded America’s innovation. Putin expressed a wish for the same level of innovation in his own country. Controlled economies limit innovation to a few controllers. Capitalist economies expand innovation based on a multitudinous and diverse citizenry.
Here is a major difference between America’s and China’s economies. Innovation is a fundamental value of capitalism, noted by Adam Smith in the “The Wealth of Nations (published in the 18th century).
Interestingly, China considers itself a Democracy though classified as a communist state. Note that the word Democracy is capitalized. There are no democracies in the world. The closest one comes to democracy is as a republic. America is a Democratic Republic meaning it has a representative government. By that definition, one would classify China as a Democracy. President Xi is popularly elected. He represents his country’s controlling majority. There is a fine line between democracy and autocracy. That fine line is drawn by a majority of a country’s people who popularly elect their leaders. No government guarantees equality of all its citizens. America’s history of slavery, and institutional discrimination are a case in point. China’s imprisonment of Uighurs is another case in point.
Magnus implies another distinction between America and China.
Magnus notes that a misstep by a President in China has a wider affect on the local economy than a misstep by an American President.
Magnus notes China can more quickly respond to an economic crises. America is more deliberative. The chance of being correct or wrong when taking action is quickly implemented in China. Quickness is both a danger and a benefit. It is a danger when the decision is wrong; a benefit when it is right. (One would be hard-put to suggest China did not respond more correctly and quickly to the Covid19 pandemic than the United States.)
Magnus relates an example of the value of China’s economic strength in its avoidance of much of the 2008 financial crises.
At the same time, Magnus notes the red flag of too much control by a top down manager can be catastrophic. The Chinese famine during and after the cultural revolution illustrates the danger of being wrong in a top-down management system.
Xi’s emphasis on party ideology and a controlled economy has the potential for another disastrous cultural revolution.
A singular focus on one leader is a red flag for China as is evidenced by Mao’s initial economic improvements in China that deteriorated with the advance of the “Gang of Four” during the cultural revolution.
America’s system of decision making, though slower, has made it the wealthiest country in the world. America managed to implement an economic policy that revived the economy in the face of a near financial collapse in 2008.
Judgement is premature today, but America’s response to Covid19 has been both right and wrong; in part because of poor leadership from the top, but also because of a failure of America’s checks and balances to mitigate the pandemic’s effects.
Magnus combines China’s history with its demographic and political changes. In building his argument, Magnus explains China carries an economic risk if it fails to adjust economic goal setting for more domestic goals.
President Xi’s Road and Belt Plan: Magnus suggests President Xi is focusing too much attention on GNP growth with R.B.P. It comes at the expense of living standards for a rising middle class. The inference is that political unrest in China will increase.
Magnus sees population ageing as another red flag.
Fewer Chinese children are being born to bare the burden of a disproportionally aging demographic. This is true in many nations; particularly nations that unduly restrict or over-regulate immigration.
Though Magnus’s book is published before Chinese demonstrations in Hong Kong, his prescient understanding of Chinese culture reveals a number of serious stresses.
Cultural suppression and “re-education” camps in Xinjiang damage China’s national and international reputation. There are an estimated eleven million Uighurs living in the middle of China.
Magnus illustrates this unrest comes from a conflict between communist ideology, and cultural difference. The unrest is amplified by Deng’s opening of a door to private enterprise.
American political unrest is part of our history but, unlike China, a supreme leader’s power is offset by a constitutional government of checks and balances.
Magnus notes the history of China as one of strong leaders unburdened by institutional checks and balances. President Xi’s move to increase his control of China is a contrast to an electoral process in the United States that restricts Presidents to two four year terms, or one four year term if the public is dissatisfied.
And finally, Magnus points to Trump’s foolish dismissal of a trade treaty with China.
On the one hand, it is necessary for America to fight unfair trade practices. On the other hand, a broad trade war with a giant consuming and manufacturing country is a meat cleaver approach to what should be a surgeon’s scalpel.
Magnus suggests abandoning the Chinese trade agreement because of a trade imbalance is a red herring. Trade imbalances are a natural consequence of competition.
If one company can build something faster and cheaper, the money saved by a consuming country can be used to innovate.
With free enterprise, one beats the competition by changing product or streamlining production to reduce costs. This is a harsh reality for workers in particular industries but as Schopenhauer suggests it is a matter of creative destruction.
America became the richest country in the world because of its ability to change, to innovate, to adjust to the demands of the market. The Trump administration looks to the past rather than the future.
Magnus strongly suggests China is at risk of economic failure if it chooses not to reduce its focus on GNP as a measure of success. Magnus argues more attention must be paid to domesticate needs and consumption. The Road and Belt initiative has potential for Chinese growth but it should not be emphasized at the expense of domestic need.
Magnus implies China’s ecological environment is on a knife’s edge. One side chooses growth at any cost. The other side moderates growth based on cleaning the environment for future generations.
Having traveled to China, one can see polluted rivers, and congested cityscapes in the midst of beautiful boulevards, spectacular monuments, and businesses filled with local and foreign visitors.
China and the world must recognize the importance of the health and welfare of its citizens. Magnus suggests China is at a crossroad. They can continue to grow GNP at the expense of its citizens or re-direct their economy to address the needs of a rising middle class. It does not mean they have to adopt a different form of government but they need to revise their goals.
One may conclude from Magnus’s book, there will always remain the potential for economic calamity with top down management. Magnus reflects on the history of China and infers it is unlikely to change.
Xi’s interference in free markets is troubling. China’s growth and prosperity depends on a continuation of philosopher kings which have not sustained any country in the modern age. The next king may not be as far sighted or wise as the current king.
President Xi cracks down on Hong Kong’s independence and stops the IPO scheduled for the ANTGROUP in China.
Top down management may have worked in ancient times, but world interconnectedness and interdependence require cooperation and competition for independent countries to grow and prosper.
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