The folly of growth via consumption

Growth through saving or consumption: Part 3

History has shown that the balance of world power shifts in cycles. The US economy quickly rose through investment in agriculture, industry and utilities. Yet as its wealth multiplied, such investment became increasingly subordinate to other endeavours.

The US has consistently led the world in military spending while conflicts in Vietnam, Afghanistan and countless other battlefields across the globe have been monumentally costly, and of questionable benefit.

The Cold War too cannot be discounted as an economically costly period for US. While mass espionage and the costs of developing, constructing and manufacturing an enormous nuclear arsenal are direct costs, the space race and the Marshall Plan – where mass economic aid was flooded into Europe and Japan to rebuild and stabilise their capitalist economies – were also highly expensive.

Is a nation a true superpower if it does not use said power to bend the world’s economy to its liking?

Unquestionably, the decline, or at least stagnation, of the US economy and its hold on world power has been hastened by government spending that has failed to effectively reinvest.

Further, the US economy has long since been a consumption driven economy. The image of the hyper-consuming America may be a stereotype, but by far its two biggest employers are Walmart and Amazon, firms that by their very nature encourage consumption and erase prospective investment. The argument can be made that the US tech sector is continuing to drive innovation, yet firms that promised us limitless access to information and communication – Google and Facebook – now focus their business on advertising, and thus, further consumption.

The Dutch lost their competitive edge in ship building once Britain could outcompete through lower labour costs and soon built larger and more able ships than the Dutch. Britain lost their industrial edge when the US invested more astutely and rode the second revolutionary wave. Are Chinese tech companies like Ali-Baba, Tencent and Didi really that far behind their American equivalents?

From the first Opium War until the end of the second world war Chinese growth was depressed through ‘The Century of Humiliation’. The West often forgets that prior to British interference in Chinese trade China was consistently one of the world’s great innovators and economic powers. China’s economic suppression was extended by disastrous economic management by Mao Zedong. The ‘Great Leap Forward’ was a monumental failure on both a social and economic front resulting in the starvation of up to forty-five million in four years. The cultural revolution too was a brutal and bloody decade that targeted, supressed and murdered academics and paralysed China’s ability to innovate. However brutal and archaic, Mao consolidated power, ensured political stability and maintained China’s tradition of being ruled legalistically and by autocrats.

Deng Xiaoping’s economic reforms that allowed for greater freedoms in economic markets then saw the beginning of miracle-like growth in China were GDP per capita increased by over 1100% in 60 years. While Xi Jingping maybe have moved away from the capitalist reforms of Xiaoping’s Open Door Policy its resounding impact on Chinese growth cannot be overstated. It is here the pattern of cycles repeat.

No foreign intervention was required to plague the US economy with addictive hyper-consumerism, but China has been the willing benefactor. It has risen to become the world’s dominant manufacturing superpower. It has outcompeted the current world order. Fuelling its aggressive need for hyper-consumption the US continually bought debt from China, just as it had risen from selling debt to the European powers in the early 20th century. The US trade war failed to meaningful improve the trade imbalance and America’s consumption addiction as there was still close to half a trillion USD worth of Chinese goods and services bought during the peak of the economic conflict.

Just as the US has consumed like no other nation on earth, few have been as successful at saving, and thus investing, as the Chinese. China’s gross domestic saving rate of around 45% is over double that of the US. Herein lies the folly of growth via consumption. While having a valuable reserve currency does allow the US to become the world’s great consumer, it has created a culture that inherently disincentivise saving. Contrast this with China where state capital controls restrict expenditure on foreign goods and assets ensure that capital is constantly reinvested. This high rate of reinvestment has enabled China to develop at such a rate that infrastructure, such as its high speed rail system and policy of constructing ‘ghost cities’, has actually overheated and seen development of economically unprofitable projects.

Some strong caveats need to be put in place. Recent research has shown that such capital controls have pushed many of the newly formed Chinese middle class away from investment/savings and into levels of consumption that dwarf that of Westerners with comparable gross incomes. China has also placed significant pressure on its biggest private firms. Didi was forced to de-list from the New York Stock exchange, Ali-Baba chairman Jack Ma has gone into hiding after making criticisms of the government and government regulation has significantly hurt the market capitalisation of video-game provider Tencent and the once booming EdTech sector. There is a strong case to be made that Chinese capital controls are discouraging further foreign investment while some analysts believe Chinese banks may be hiding up to ten times as many bad debts as are being reported. Yet, the power and authority of the Chinese government is ensuring investment stays within China, political tensions are quickly suppressed and students now study in a system with significantly less wealth bias than most Western countries.

A western eye may look upon this system and see excessive, perhaps oppressive, government controls. Yet like with the rise any new world order, the way business and capital markets operate will inevitably change. A strong case can too be made that previous world orders of the Dutch Republic, British Empire and US laid their foundations in the trade and exploitation of slaves.

With Xi Jinping having been in power since 2012 the theme of investment continues through projects such as ‘The Belt and Road Initiative’ and ‘Made in China 2025’. The aim of the ‘Made in China 2025” initiative appears one dimensional as the nation tries to maintain its place as the worlds manufacturing super power. However the ‘Belt and Road Initiative’ is far more complex.

1) By making huge developments in nations outside its borders it looks to gains serious political capital and supporting votes on matters relating to the UN. While the US has a litany of official allies China’s only ally is North Korea and only recently signed a strategic partnership with Russia.

2) It also allows China to continue loaning money to other nations, and for defaulting countries like Sri Lanka, allows China to take possession of economically and strategically important pieces of infrastructure.

3) By constructing significant projects for other nations China has been able to leverage its position to employ its own citizens. China has also taken the opportunity to bug, hack and use the infrastructure it builds for other nations as a tool for espionage as it did at the African Union headquarters.

As China becomes increasingly powerful culturally, politically and militarily Chinese influence and power can be exerted more overtly. The impacts of such influence can be seen directly through America’s policy of ‘Deliberate Ambiguity’ in regards to American defence of Taiwanese independence and Australia’s own nondescript acknowledgement of the Uighur genocide within China.

China’s voyage of monumental growth is marred by secrecy, controversy and a history of famine and violence. Yet the use of political, cultural and military power are all intertwined and fundamentally driven by economic forces. No nation has gained so much power without using some of it along the way. Without question China has risen through its ability to develop, innovate and invest, and while luxury goods and traits of traditional capitalist have made their way into China, it is yet to fall into the familiar trap of nationwide hyper-consumerism. From past world powers we have learnt that the idea of ‘disposable income’ is misleading. The cost of our consumption is not merely the currency spent, but the loss influence that wealth no longer possesses. Consumption may increase GDP, but it does not perpetuate the power that comes with wealth.

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