China’s economic policy: A ‘Great Wall’ or Capuan complacency?

By Arthur Kroeber

“China’s spirit”, opined the People’s Daily in a recent editorial, is a “Great Wall” built to ward off global crisis.

In purple prose heralding China’s recent heroic successes, the editorial extols the Communist Party for leading China back from the global economic abyss after the country recorded 7.9 per cent growth in the second quarter of this year.

“This situation in China is in sharp contrast with Western developed nations, where the economic growth has kept sliding,” it concludes.

The nauseating tone of the editorial reminds us of a famous quotation by the Roman historian Livy, explaining why the Carthaginian commander Hannibal failed to destroy the Roman Empire.

“Capua was Hannibal’s Cannae,” Livy wrote. It is a judgment that China’s leadership (and smug editorial writers) would do well to heed today.

Cannae was the great battle in 216 BC in which Hannibal, having brought a motley force and some elephants over the Alps into Italy two years previous, annihilated the entire Roman army.

One of his generals urged him immediately to march on to Rome and end the war by decapitating the Roman state, which he could have easily done. Inexplicably, Hannibal chose not to but dithered a while, giving the city time to organise its defence.

That delay, the racy if moralising historian Livy wrote a couple of centuries later, saved the Roman Empire – and hence, we may fairly speculate, made possible a couple millennia of Western civilisation.

Hannibal instead led his troops into winter quarters in the decadent city of Capua, where they became so demoralised by pleasure that they lost their fighting spirit.

The Carthaginians spent another decade knocking about the peninsula, engaging in a series of desultory and inconclusive battles, after which they retired back to north Africa where Hannibal was finally defeated and disgraced.

The moral of the story, according to Livy, is that complacency is more destructive than calamity.

The Romans bounced back from calamity because they had a resilient set of alliances based on well-developed political and economic ties and a constitutional system that enabled a broad array of talent to come forward and express itself. No error lasted too long unchecked.

The Carthaginians, on the other hand, proved unable to recover from their morale-sapping complacency because they relied on a single strongman and had no mechanism to correct his errors.

One of our firmest maxims is that economics is not a morality play. But the widespread tendency now to point to the financial crisis as an omen of the inevitable decline of the west and the inevitable rise of China causes us to suspend the rule for a day and apply Livy’s moral point to the current situation.

The financial crisis was a calamity, and it will force important changes in how markets in advanced economies are run. But these changes occur within a system that is extremely robust and resilient, precisely because it is open, power is widely dispersed, information flows freely, and talents of many kinds find many avenues to express themselves.

The strength and dynamism of that system have not been called into question, any more than during the financial panics of the late 19th century, which the current crisis resembles more strongly than the oft-invoked Great Depression.

China’s ability to maintain economic growth of around 8 per cent despite the global shock took many by surprise. But this ability has nothing to do with systemic advantages, a distinct “China model” of growth, or skill in macroeconomic management.

Still less has it anything to do with the reasons cited by the People’s Daily editorial.

China’s present economic vitality results from a Great Wall all right – a Great Wall of borrowed cash. There is nothing remarkable or spiritual about an economy growing at 8 per cent when credit is allowed to expand by 34 per cent.

The fact becomes even less remarkable when we recognise that nominal GDP (the appropriate comparator for nominal credit growth) grew just 3.8 per cent in the first half. In other words, 10 dollars of new loans were required to generate just one dollar of economic growth.

In fact China’s first-half growth shows one thing and one thing only: the existence of a powerful state with the ability to commandeer its citizens’ wealth and plough it into more buildings, bridges and roads, with no regard for the return those investments will bring.

We were bemused last winter when people convinced themselves that the Chinese state lacked this capacity, and hence that growth was doomed.

Today we are perturbed when the self-congratulators within China and the Cassandras of global capitalism without proclaim that this desperate binge reflects some kind of systemic strength.

This spending spree was fine as a temporary measure to buy time for serious structural reforms that will increase private consumption and investment, which are the only reliable drivers of long-term growth.

But the government’s decision last month to leave in place the current let-’er-rip monetary policy suggests a rising risk that Chinese policy makers will make the same mistake as Hannibal in Capua.

Addicted to the creature comforts of high growth, they are unwilling to stop the money flow and undergo the tough re-training necessary to ensure that China evolves from the road-building and widget-assembling behemoth it is today into a diversified, vibrant, genuinely competitive economy.

Despite present appearances, it is a better bet that the West will recover from its deservedly humbling financial Cannae than that China will shake off the demoralising effect of its Capuan complacency.

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