godless red

The East Asian export model is the worst economic model – except for all the others that have been tried.

Winston Churchill was actually referring to something else but we are going to apply his quip to development economics because the original hasn’t been aging so well.

While some may marvel at how Japan, South Korea, Taiwan and, of course, China exported their way to riches, it was, in reality, an arduous, grueling and brutal process that has left lasting scars. Economic development really is not supposed to happen this way.

The East Asian export model is swimming upriver, playing the video game on hard mode, running up the down escalator. What kind of development strategy requires poor countries to scrimp and save only to lend that money to rich customers to purchase one’s manufactures?

East Asia had to do battle with the Lucas paradox. East Asia won not because the export model is so effective; it won because East Asia is East Asia.

The Lucas paradox is the observation that capital does not flow from rich country to poor as predicted by classical economics. In theory, as capital experiences diminishing returns in rich economies, it will flow to poorer economies which still have low-hanging fruit.

In practice, however, rich countries have hoovered up capital from developing economies, leaving much of the world starved for investment.

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The acid-tongued venture capitalist Eric Li recently quipped that China’s biggest economic problem is that it can’t go out and get itself a bunch of colonies. Imperialism is the other development model that has worked spectacularly well. But like the East Asian export model, it too has left lasting scars. On balance, overworked salarymen is probably less objectionable than colonial ills.

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US Treasury Secretary Janet Yellen’s recent trip through China kicked off a round of hand-wringing in the Anglo press over industrial overcapacity in China.

Without a single Chinese electric vehicle (EV) sold in the US, Senator Sherrod Brown has already called for their ban, declaring, “Chinese electric vehicles are an existential threat to the American auto industry.”

Western progressives are mired in cognitive dissonance over long-trumpeted climate commitments when the solution presented to them is low-cost, made-in-China solar panels.

This entire overcapacity issue is another tiresome demonstration of Western solipsism. As Asia Times’ David Goldman likes to say, “China’s just not that into you.”

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China’s car exports map larger trends. China’s exports to developing countries doubled in the past five years and now exceed exports to developed economies. Not only are China’s exports not a threat to industries in the Global South, but “overcapacity” in China is entirely necessary for their development.

The Global South cannot accumulate capital through imperialism and it should not accumulate capital through the backbreaking East Asian export model. They are in luck because China’s “overcapacity” is exactly how development should work under classical economics.

Excess capital in China should flow to developing economies in the form of loans and investments along with capital goods – 5G base stations, railroad equipment, electrical systems, commercial trucks and, yes, cars. This is the entire theoretical basis of President Xi Jinping’s Belt and Road Initiative (BRI).

Without “overcapacity” in China, the Global South would have access to neither capital nor capital goods. Given its current account deficit and capital account surplus, it is mathematically impossible for the West to provide development assistance to the Global South on an appreciable scale.

Long-forgotten initiatives like Build Back Better World (B3W) and the Blue Dot Network die on the vine because the US does not suffer from “overcapacity.”

Sanctimonious concern over China inundating developing markets with manufactured goods is confused thinking. A development model based on capital inflows requires developing countries to run trade deficits by definition. The inflow will be used to purchase capital goods required for industrialization. This is the Lucas paradox resolved.

The Communist Party of China appears to have embraced its Industrial Party faction. The Industrial Party is an ambitious political identity that dispenses with the hoary left-right divide and believes that industry, science and technology will determine China’s future.

While not necessarily an economic ideology, Industrial Party precepts have an intuitive understanding of the necessity of China’s “overcapacity” and that it is up to China to reverse the Lucas paradox.

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When all is said and done, the squabble between China and developed economies is ultimately a sideshow. The real action will be the flow of Chinese capital and goods to the Global South.