Book Review: China's Silent Army

China's Silent Army:  The Pioneers, Traders, Fixers and Workers Who Are Remaking the World in Beijing's Image.  By Juan Pablo Cardenal and Heriberto Arajúo. Translated by Catherine Mansfield.  New York: Crown Publishers, 2013. $26.00.

China's Silent Army is a tour de force.  Cardenal and Arajúo have written, and Catherine Mansfield has translated, an exceptional book based on around-the-world journalism from Beijing to the Democratic Republic of Congo to Costa Rica.  Their vivid, beautifully panoramic descriptions of their journeys to suffering third world countries, to Burma's jade mines and to Peru's iron mines, will fascinate any reader, but their great contribution is in their book's on-the-spot reportage about the complex role that the Chinese have played with respect to resource-and-human exploitation in mining, logging, construction, other extractive industries, and, in a few instances, vice.
 

There are at least three levels of implications of the rapid expansion of China's silent army, i.e., the increasing involvement of the Chinese state, Chinese nationals, and foreign citizens of Chinese extraction, with the economies of third world countries.   

First, the silent army is involved in distribution as well as resource exploitation.   The Chinese diaspora-- businessmen and businesswomen who have, since the 19th century, left China but retained links to their homeland--serves as a distribution system for Chinese merchandise and development of Chinese retail investments. These can be seen in massive distribution centers that have been built in places like Dubai.

Second, the Chinese have developed a formula for exploiting third world human-and-natural resources; the book carefully recounts it.  The Chinese formula is this:  offer infrastructure and financial subsidies, as well as graft, to third world politicians and dictators in exchange for much more valuable natural resource rights.  The infrastructure subsidies include Chinese construction of stadiums, roads, and public works.  In exchange for, say, $5 or $10 billion in such projects, which are presented to the host countries' rulers as completed or turnkey ones--which they can use to garner public support--the governments sign away resources worth, say, $50 or $60 billion.

Put another way, third world rulers who have short time horizons, who are corrupt, and who are unconcerned about future generations, are willing to trade $5 billion in football stadiums and roads for $50 billion in natural resources.  Moreover, there is frequently a cognitive issue: the third world rulers are not adept negotiators and may not do the math, as seems to have been the case with respect to Hugo Chavez's oil deal with the Chinese.   

Moreover,  in the third world countries some Chinese firms often maintain racially based pay differentials between Chinese and indigenous workers that they justify (in accordance with simple free market models)  in terms of signaling or compensating differentials: Chinese workers are more reliable, in the view of some Chinese firms.   This kind of pay differential is illegal in most of the world for obvious social equity reasons. It is remarkable that the economic endeavors of a socialist state frequently witness racial and ethnic discrimination.

 

According to the Chinese imperialist formula, indigenous workers are underpaid and subjected to serious health-and-safety risks, often for a small increment in profit to Chinese firms.  The authors point out that the Chinese themselves, even within China, are also typically underpaid and subjected to health-and-safety risks. Indeed, there are cases, recounted in the book, where Chinese nationals are duped to take jobs in Africa and then treated as little more than slaves.   This pattern raises a question as to the real meaning of the Chinese economic miracle:  Is it a primitive, unsustainable form of mercantilism based on human and environmental exploitation?  The authors present a balanced view, and there is no doubt that the buyers of cheap Chinese merchandise around the world, including the third world as well as the United States and Europe, benefit.  But is the benefit of cheap manufactured goods going to last forever?  If it does, will the low wages to Chinese and third world workers continue forever?  

One of the downsides to mercantilism is that it does not emphasize innovation.  In The Power of Productivity William Lewis emphasizes the importance of the organization of work and free market innovation to increasing productivity.  The Chinese invited the world's best manufacturing firms to open up shop in China, but it seems that the Chinese have continued along the path of what Lewis calls resource-intensive development, which cannot sustainably elevate the world's standards of living.   Because the Chinese mercantilist model rests on cheap labor and natural resources and not technological innovation, it may not lead to progress.   In the US, 40 years of wage stagnation has run parallel to the Chinese economic miracle, and the incentive for breakthrough innovation seems to have been reduced (but not eliminated) by the ease of moving factories to low-wage China.

The third level of implications is that when it comes to military and social issues, there is a long-term versus short-term paradox.  While the Chinese claim to think long-term with respect to investments in third-world countries' infrastructure in exchange for longer term payouts in the form of oil, iron, jade, and other resources, when it comes to adopting risky strategies with respect to transfer of nuclear technology to Iran or threatening Taiwan and other countries located near the South China Sea or on the Mekong River, the Chinese seem to think short-term.  The same is true of their attitudes toward labor relations and the environment.  They are remorseless polluters;  for example, they are willing to defoliate the Siberian forests without concern for replanting or sustainable harvesting.  The West learned these lessons a century ago; China's short-term thinking about pointless risk taking with respect to transfer of nuclear materials and technology, labor relations, and the environment,  should benefit from the West's recent errors, but it does not.   

China's Silent Army  is first and foremost a human drama that hearkens back to Dickens and even  further back to the era of mercantilism in Spain, Britain, Holland, and France and to the imperialism that is concomitant with the mercantilist, resource-based model of economic development.  An irony that runs throughout the book is that the Chinese state, which adopted socialism, an ideology based on rectifying human exploitation, has become exploitative on the level of the most rapacious periods of European state capitalism.  

 In the end, I wondered whether the Chinese economic miracle is not about, more than anything else, the narcissism of the Chinese communist leaders.  The Chinese people suffer and the third world workers suffer.  In exchange, the world gets cheap consumer goods, the profit from which the Chinese state uses primarily to enhance its own--and its leaders'-- power. The world seems to have struck a bargain with Chinese socialism to unsustainably ravage the environment in illogical deals that provide us with cheap t shirts and watches.

Coming Chinese Instability

This is a tale of three nines: 1989, the year of Tiananmen Square; 1999, the year of the tech bubble; and 2009, the year of Chinese support of and complaints about the dollar.

The current global monetary regime seems to parallel the 1999 tech bubble. During the tech bubble investors believed that the stock of Drugstore.com and Cisco Systems would indefinitely escalate. Like all asset bubbles, the tech bubble came to an unhappy end. Ten years later, in 2009, the Chinese seem to think that if they keep buying dollars with yuan and threatening to withdraw the investments then in the end the investments will hold their value.

The Chinese have subsidized the dollar at the expense of their already low-wage workforce. If they keep holding up the dollar, then the Chinese people will become poorer. But if they pull out of the dollar, then their substantial dollar holdings will diminish in value, the Chinese workers will be thrown out of work and the Chinese people will become poorer because of the losses due to the dollar holdings.

Shall we conclude that the Chinese economy is headed for a rough ride?

What do we know about the stability of Chinese society? In 1989 the Tiananmen Square Protests led to hundreds of communist killings. Anyone who was conscious that year will remember the young man standing in front of the tank (see above). Since then, the Chinese have enjoyed a vibrant bubble economy based on fast money growth. But crashes inevitably follow monetarily induced bubbles.

When the Chinese economy tanks there will be alot of unhappy Wal-Mart-supplying factory workers. Perhaps the power of the Chinese state will prevent social unrest. Perhaps not.

An Open Letter to Hu Jintao, General Secretary of the Chinese Communist Party

Dear Mr Hu:

If the Chinese adopt a systematic laissez-faire economic policy and a hard money, gold standard, then they will have the world's leading economy within 150 years. By the year 2250, the Chinese could regain its position as the world's wealthiest nation that it held until the 17th century and also outstrip the western nations with respect to technology.

The Chinese have made two crucial errors in their attempt to westernize their economy. (1) You have assumed that Wall Street and the American financial system is responsible for America's economic success. That is an error. Wall Street has been of at most secondary importance and may have served to reduce economic progress over the past century. (2) As a corollary to (1), you have decided to focus on exports to the US and to adopt a financial system that parallels America's. Although exports are useful and free trade is wise, it is wiser to allow the Chinese people to determine ways to satisfy Chinese markets. In part because of China's size, China cannot duplicate Japan's and Korea's export-led growth strategy. By focusing on exports, China has chosen a less stable and less productive path than would a free market or spontaneous approach.

One fallacy of America's economic policy is the idea that unconstrained flexibility in currency expansion can lead to better outcomes than a hard money (gold-based) system. Businesses are like children. They want ever more candy. But if you give them too much candy, it hurts their teeth. That is why today's American businesses from General Motors to Wall Street lack teeth. They have eaten too much candy.

For the past 110 years, America has lived off the innovation and growth of the 19th century. The reason is that America left the gold standard in 1933. The gold standard has the effect of stimulating innovation. Because of currency deflation, firms scramble to innovate. Workers enjoy rising real wages under deflation, and as a result can save and so do not suffer excessively during depressions. Depressions can be limited by insisting that banks do not lend excessively, by ending fractional reserve banking, and by requiring specie (gold) reserves.

American bankers and corporations have insisted that a "flexible" currency helps them. At the same time, they have engaged in double talk claiming that monetary expansion helps the poor. However, China is now seeing first hand the duplicity inherent in these claims. You are holding more than one trillion dollars in potentially worthless greenbacks and the losses due to America's reckless monetary expansion will cause harm to the Chinese people.

I urge you to familiarize yourself with the history of America's sixth president, Andrew Jackson, who abolished America's second central bank in 1836. The explosive economic growth that followed, despite a short term inflation and recession that followed, state-level paper money and the Civil War inflation, is testimony to the power of monetary responsibility.

America's economic success was due to laissez-faire. Even Marx does not claim that socialism is possible until laissez-faire has run its course. Should China adopt a laissez-faire policy and gold standard, I myself would be interested in living there.

Sincerely,


Mitchell Langbert, Ph.D.