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The China Conundrum: NZ at a Crossroads

I wrote an article today for the National Business Review with the above title. The NBR is well worth subscribing to. See or if you're too penny pinching to sign up to the NBR, here it is:

During the Cold War with the Soviet Union, politicians in the West often referenced the lack of freedoms in that country. In his 1961 inaugural address, John F. Kennedy famously referred to how we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and success of liberty." On the economic front, business owners from Europe to America to NZ widely admired the President’s stand. After all, a Soviet takeover would have led to the wealthy being disenfranchised. Firms would be nationalized; the distinction between owners of capital and labourers which Karl Marx so despised, obliterated.

And in 1975 National swept to a landslide victory over Labour helped by the most infamous piece of advertising in NZ political history - its “dancing cossacks” cartoon on TV warning of Soviet-style communism under Labour.

Back then, the alignment of economic and political freedoms was strong. The Soviets represented neither. It was practically taken for granted in those times that a happy union existed between free markets and democracies which featured the rule of law, independent judiciary and private media. Didn’t they go hand-in-hand and reinforce each other?

Meanwhile, in the ivory towers, famous political scientists were pumping out articles arguing how economic development inexorably led to inclusive institutions. In the 1970s, the top American political scientist Seymour Lipset argued that “the more well-to-do a nation, the greater the chances it has of sustaining democracy”.

However, over the past several decades, an alternative model, one not necessarily democratic at all, began attracting more attention. State Capitalism. Although there is no unified definition, this label has been given to those countries where the government retains a dominant role as owner or investor-shareholder amidst the presence of markets and private firms. Such governments often use state-owned enterprises to manage assets which they consider their “crown jewels”. They may select privately owned companies to dominate certain sectors. As well as run sovereign wealth funds for investment purposes.

Well-known examples include Singapore and Dubai. In the 1960s these places were poor, Dubai having little oil. But they subsequently undertook free market reforms and boomed. Singapore’s GDP per capita now far exceeds New Zealand’s. That being so, it comes with a dark side. Freedom House score Singapore 19 out of 40 for “political rights” and 31 out of 60 for “civil liberties”, noting how numerous structural factors impede the development of viable electoral competition”. The United Arab Emirates, which includes Dubai, fares even worse. Freedom House score it a bleak 5 out of 40 for “political rights” and 12 out of 60 for “civil liberties”.

Although they have enjoyed stupendous economic success, the small size of Singapore and Dubai, together with failed examples of State Capitalism in the past, made the model, until quite recently, a side-show. But the emergence of its leading proponent and soon-to-become world’s largest economy, namely China, changed everything. Whilst maintaining vast government ownership and intervention within a one-party State, China defied the odds and opened up massive parts of its economy to markets, calling the system “Capitalism with Chinese characteristics”. Whatever the name, it has lifted nearly a billion people out of poverty and left the western world uneasy that another model of success exists that isn’t an American-European story.

But if the Freedom House scores for Singapore and Dubai look bad, they rate China worse. At -2 out of 40 for “political rights” and 11 out of 60 for “civil liberties”.

So where does this leave us? With the fact that although much of Kiwi business see openness to China as financially appealing, it comes with a potential moral dilemma the likes of which has not existed before. Whereas in the 1960s no trade-off existed between money and the “success of liberty” regarding the Soviet Union, which failed on both fronts, State Capitalism may have helped create one. One that has left business divided over its support for a Kennedy-style “pay any price” foreign policy.

Certainly, trade-offs are not how China wishes NZ, nor the West more generally, to see things. International trade, it argues, invoking a who’s who of America’s own leading economists, is a win-win. As for human rights, shouldn’t a sovereign state have the right to design its own institutions within its own borders? Another Cold War is in no-one’s interests these days, it adds.

As much as they try to play it down, the China conundrum is a watershed for Labour which has stood, until now, for well-being, for health, for the environment. For how quality of life should triumph over a narrow focus on quantities like GDP. Borders must be shut even if tourism suffers, least the virus enter. Attaining a carbon neutral economy is a moral obligation to future generations even should the price be high. The Prime Minister’s reputation has been built around these kinds of non-material ideals. So the sudden reversal, arguing how we mustn’t mess with our “largest trading partner”, even over the objections of allies wishing to prioritize concerns unrelated to money, seems starkly at odds with Labour’s previous themes.

The unexpected political winner out of this situation may turn out to be ACT. Many of its supporters are libertarians with strong convictions in favour of freedom of speech and curtailing the power of the State. Business already has little doubt that ACT’s domestic policies of low taxes and less regulation are beneficial to it. The party’s DNA lies in a faith that free markets are key to prosperity. At the same time, marking out a moral high ground which is based around liberty in terms of its foreign policy may strike a chord with many Kiwis.


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