America has made a mighty effort to destroy capitalism, and China is taking the opportunity to save it. The global financial crisis has taken the world through the looking glass into a bizarre new set of realities that would have seemed impossible a few short months ago, and the startling role reversal of China and the US in defending capitalism is just one of them.
Beijing hopes to emerge from the ruins as a more credible and respected leader in the international community. The Asian financial crisis of 1997-98 was something of a trial run. In that episode, Beijing operated a restrained and benign policy towards other nations.
While every other country in the region saw its currency hugely devalued, China was expected to devalue too to protect its competitive advantage. But this would have put even more pressure on the most beleaguered nations and made it harder for them to regenerate growth. Instead, Beijing decided that it would hold its currency firm.
Its exports had been booming with annual growth of 20 per cent in 1997, but export growth stopped stone dead in 1998 and foreign investment stalled. Still, Beijing held its nerve. It concentrated on domestic stimulus to keep its economy growing. This won plaudits and admiration across Asia.
The US initially struck a posture of insouciance to the crisis. As the IMF and a group of developed countries mobilised big loans to the first victim, Thailand, the US stood apart. Washington refused to contribute to the bail-out of Thailand, which was a friendly country, even as Tokyo, Canberra and others arranged immediate support.
This fundamentally changed the perception of the US in Asia. The biggest, richest country in the world, the leading power in the Pacific, was prepared to stand by and watch an ally descend into international insolvency. This was enormously damaging to the standing and status of the US. It was a failure of analysis and an abdication of leadership. Only when the crisis shattered Indonesia and then South Korea did Washington realise that this was a crisis that struck at its own vital interests. The US then joined the IMF rescuers for these countries.
This time, the damage to the standing and credibility of the US is far greater. The global financial crisis of 2008 was made in America. It’s a clear failure of US policy and US regulation. And it has led to the failure of many of America’s biggest and proudest institutions. Financial institutions, certainly, but also institutions of government. The decision by US Congress on September 29 to reject the Bush Administration’s $US700 billion bank rescue bill stunned the world. In a disgraceful reflection on Congress, the bill had to be loaded with $US150 billion in inducements to win the support of the Senate.
This included tax credits that the pharmaceutical industry and the high-tech sector had been demanding. The chairman of the Federal Reserve, Ben Bernanke, had told Congressional leaders in private negotiations that “if we don’t do this, we may not have an economy on Monday,” according to The New York Times. Yet this was not enough.
Congress members needed to be bought off before they would vote in the national interest. This was another disgraceful moment. Policy failure was compounded by political failure. Brazil’s president, Luiz Ignacio Lula da Silva, could have been speaking for the entire developing world when he gave his views on the US-made financial collapse: “They spent the last three decades saying we needed to do our chores. They didn’t.” Lula is not a Chavez or a Castro or a Kim Jong-Il, but the moderate, right-of-centre leader of the dominant power in South America. Even close allies have found it difficult to find a kind word.
The leader of Washington’s uniquely reliable ally, Australia, denounced America’s “extreme capitalism”. Combined with its illegitimate and illadvised decision to invade Iraq, the US financial collapse has seriously degraded US leadership. As America sinks into its inevitable recession, China is suffering economically, too. How is it reacting to the crisis? For the first time, it joined the big, rich countries of the world in a coordinated cut in interest rates to support the global economy. This implies a new role in sharing the economic leadership of the world.
Beijing is likely to take further stimulus measures. With its $US2 trillion in foreign exchange reserves, it is well placed to do so. Crucially, even as Western capitalism has entered a deep funk, China has forged ahead with its own pro-market reform program. Its decision to allow farmers to use their landholdings as collateral is a historic intensification of the country’s evolution into a capitalist economy.
But what kind of capitalism? As China develops its own model, it hopes to lead the world in redefining the ideal market economy. For all its flaws and weaknesses, it will do so with greater credibility than it has had at any time in the modern era.
Peter Hartcher is international editor at The Sydney Morning Herald