The Challenge of China and How NOT to Respond

There is no doubting the status of China as a global economic superpower. Through the wide expansion of its manufacturing sector, with combined elements of statism and neoliberalism, it created historical record double digit growth rates for 30 straight years. By virtue of its massive size, China is both large and dynamic enough to significantly affect the world economy and contribute to global growth. Through its strategic open engagement of trade and capital flows, China is deeply integrated into the world economy. China, by definition, is a superpower. More crucially for the world, however, it is increasingly acting like one. Rising under conditions defiant of international norms, China poses this century’s major challenge to the existing United States-led global economic order. On the front of trade policy, China is disruptive to the norm of multilateral arrangements and liberalizing obligations. In 2008, it rejected the multilateral initiative of the Doha Round, marking the first failure of a major multilateral negotiation in the postwar period. Consequently, the World Trade Organization-led trade regime is in jeopardy. Instead of multilateralism, it seeks to lead politically-motivated bilateral trade in the Asian region to pit against, not cooperate with, the established trans-Atlantic bloc. With regards to the international monetary system, China continues to frustrate the US by rejecting the rule of a flexible exchange rate policy through its intervention in making the renminbi competitively undervalued. When criticized by the International Monetary Fund, China brazenly questions the existence of the IMF and threatens to create its own Asian counterpart. Indeed, China-led Asian Infrastructure Investment Bank is the boldest concrete rejection of a US-dominated global economic governance. On the area of production, China remains to be the world’s manufacturing powerhouse while maintaining its relative independence from foreign capital. The three areas of trade, financial and production are the critical pillars from which the global economic order stand; and China has managed to aggravate every one of them.

China is flexing its muscles; yet the world, primarily the US, still engages it as if it were a status quo superpower. Responses continue to be dominated by cooptive approaches, forcing China to get on board the status quo norms and existing global institutional architecture. These cannot be any more mistaken. The battle for global supremacy begins with a clear understanding of the enemy. China is a revisionist power; it seeks to upend a global economic order that it absolutely had no part building. In this case, efforts to forcibly integrate it to existing norms and institutions are not only misguided but also counterproductive. An effective response necessitates a recognition of the patterns of China’s calculated moves. Yes, a revisionist power ultimately wants to change the status quo. However, it understands that the decks are stacked against it for it throw an immediate huge blow. Critical observation reveals China’s strategy—frustrate the status quo, gauge the response, calculate whether to push forward or step back. Case in point: The Doha Round. After effectively blocking the multilateral trade initiative, it can be argued that China calculated the moves to be made thereafter. Without a strong response from proponents of multilateralism, China pushed to frustrate the global order even further by leading an Asian trading bloc. The same calculations can be observed in China’s approach on the issue of the West Philippine Sea. Initially frustrating international norms by claiming on the basis of its historical nine-dash line, it pushed even further to land reclamation activities in the absence of an effective response from the vocal opposition in the Philippines and Vietnam. The legal approach of the Philippines is another example of engaging China for what it is not; it does not and will not back down on the basis of status quo legalities. A revisionist power will not respond to status quo forces. The world needs to beat China at its own revisionist game.

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Constructivist Reflections on the Philippine Political Economy

(This piece was written primarily as a reaction to my International Political Economy professor's, Prof. Amado Mendoza, opinion piece on his Interaksyon opinion column, entitled "How did the PH economy grow despite the messy political situation? Since then, I have realized it is not a reaction piece, but a reflection. I found that I could not disagree with the critical mind of my Professor... at least regarding this article.)

Photo adopted from the article

Organized around the title question of the opinion piece, the author, Professor Amado Mendoza, makes two thesis statements—first, the policy lag in time from the first point of implementation to the point of the policy fully taking effect makes the results of past economic reforms impervious to the present’s political instability.

Second, the perception of good governance effectively hides and trumps the material reality of incompetence of the current administration. Both hypotheses are with merit. Indeed, macroeconomic policy is as much as getting the correct policy as implementing it at the right time.

Economists and policymakers recognize the difficulty of timing in pursuing certain policies because of lags. The complexity of both the legislative and administrative process creates a temporal disjunction between problems and solutions; the problem and its situational context may change while the solution is still being legislated or implemented.

Macroeconomic policies, therefore, may see its impact only beyond the tenure of the administration that proposed it. The author recognizes this and gives credit to the Ramos administration, three administrations before the current Aquino one, for today’s economic growth. The policy lag effect is common knowledge and already reaches the awareness of Filipinos as part of the mainstream discourse.

The author’s more innovative analysis lies in his argument of “perceptions become material force.” Owing much to the constructivist school, the author recognizes the disconnection between ideational perceptions and material reality. Constructivism, founded on an ontology of subjectivity, argues that reality is not an exogenous and natural fact of life; rather it is constructed by the beliefs, values and norms of society.

In other words, what is real is what is in the heads of the people. President Aquino owes much to his campaign managers who concocted the idea of running under the image of good governance and anti-corruption.

The image is a powerful and resilient one simply because it is consistent with the larger Asian norm structure. Experiences with corrupt authoritarian AND democratic leaders created a strong desire in the Philippines for good governance and anti-corruption.

Indeed, the genius of this presidency, if there is any at all, is the campaign slogan that sticks.

The author relates this to the resilience of economic growth in the face of political instability by describing the nature of today’s economy. Indeed, the economy today is characterized by activities that largely care about perception. The speculative nature of the stock market and other short-term investments like real estate are the current drivers of the Philippine economy, with the Philippine Stock Exchange reaching all-time highs and the real estate market expanding to unforeseen levels.

Noticeably absent are long-term investments in the manufacturing sector that are particularly sensitive to material realities and fundamentals. Considering this fact, it is scary to imagine what will happen to the Philippine economy when perceptions finally catch up with reality.

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The Post-Washington Consensus, Development Models and the Game of Leverage

The world is made up of two actors; there are the ‘rule-makers’ and there are the ‘rule-takers.’ On one hand, the rule-makers have a high degree of both normative and coercive power at their disposal to illicit the obedience of rule-takers. On the other hand, rule-takers, in the absence of sheer coercive power, rely on a counter-normative strategy to resist the imposition of rules. In every aspect of social and power relations, the dynamics between the rule-makers and the rule-takers are focal. In no other are these dynamics more consistently located than in the area of the global political economy, more specifically in the aspect of development. The rule-makers are the United States and the Washington institutions that are the World Bank and the International Monetary Fund. The rule-takers are developing countries like those in Latin America and Asia. The rule being promoted is the Washington Consensus, a set of policy recommendations by Washington institutions that are essentially neoliberal in character. The game is essentially played by leverage. Prior to the heyday of neoliberalism, developing states engaged in inward-looking models for development. In Latin America, industries were nationalized, protectionist tariffs were instituted and capitalization was found internally. In Asia, the state was more pro-private capital and sponsored domestic businesses through large amounts of technological recapitalization and favourable industrial policies. These models were at the opposite spectrum of US interest; it restricted their access to raw markets of the region. The models, nevertheless, led to incredible strides in economic growth and development in the regions. The leverage was clearly with the developing countries. However, the 1982 debt crisis in Latin America and the 1997 Asian Financial Crisis, coupled with a post-Washington Consensus emphasizing democracy, delegitimized the national development models of largely authoritarian regimes in both regions. Latin America adjusted to neoliberal policies conditioned by the IMF for its financial assistance, Northeast Asia saw foreign competition challenge the dominance of state-sponsored domestic businesses, and Southeast Asia became heavily reliant on foreign direct investment and export-oriented industrialization. While there are some minor resistance and indigenization of the adjustment, the post-Washington Consensus of a neoliberal economic order remains intact.

Photo from carmillaonline.com

The political economy of development is a game of leverage. At the surface, it appears that leverage only comes with luck. The crises that discredited the national developmental models of Latin America and Asia were exogenous in nature and thus, outside the control and fault of national economies. But a more critical examination reveals the powerful irony of neoliberal policy. The exogenous crises were results of increasing liberalization of trade, finance and production. The liberalization of the oil market eventually led to an energy price hike that choked Latin American countries to debt. In Asia, the opening up of financial markets led to hot money short term investments and eventually bursting to the Asian Financial Crises. Neoliberal policy, it appears, has a natural mechanism of correcting divergent developmental models by naturally inducing exogenous crisis; making it, in effect, a self-fulfilling prophecy. Leverage is not a matter of luck or natural economic consequences; but, in fact, manipulated and rigged towards neoliberal interests. Such is the genius of the Washington Consensus and institutions. It presents the economy as an organic, objective and apolitical arena where neoliberal policies are the only ‘correct’ path to development. Through the infiltration of ideas in popular and policy spaces through agents of media and the educational system of so-called ‘experts,’ neoliberalism is raised to Gramscian hegemony status. The epitome of the sheer cunningness of neoliberal agents is their ability to adapt and change. When the Washington Consensus was discredited by critiques of socioeconomic inequality, proponents re-legitimised it neoliberalism through the Post-Washington Consensus where little concessions were made to poverty reduction and the discourse of market compatibility with democracy was introduced. It was no longer an issue of neoliberalism causing poverty; but authoritarianism as the bane of these societies and only market-friendly policies can ensure the democracy answer. It was a masterful reframing of critiques. Counter-hegemonic agents against neoliberalism must strike back just as creatively if there is any hope in undermining this neoliberal global order.

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