It interesting to me to observe the natural backlash that is occurring in the West right now towards government “outsourcing” or “privatization”. I think this is specifically going to be targeted towards health care (take Moore latest movie), military (PMC’s) and probably sadly education.

The truth is that government’s role in our lives has always been something hotly debated, and to which there probably will never be a perfect answer. With that said, this second part of China Shakes The World provides some great views of the power of capitalism being unleashed from a communist state.

China Announces Its Arrival:

Quite suddenly, or so it seemed, China became an issue of daily international importance. It is difficult to pinpoint when, exactly, that transition took place; perhaps it was late in 2003, or maybe it was early the next year. I could not be sure. In any case, it was unlikely that there would have been any single moment when everything changed. An object as large as China cannot turn on a sixpence. Nevertheless, in my imagination at least, there may have been a tipping point. It occurred during the several weeks from mid February 2004 when, slowly at first but with mounting velocity, manhole covers started to disappear from roads and pavements all over the world. As Chinese demand drove up the price of scrap metal to record levels, thieves almost everywhere had sold them to local merchants who cut them up and loaded them onto ships to China. The first displacements were felt in Taiwan, the island just off China’s southest coast. The next were in other neighbours, such as Mongolia and Kygystan. But soon the gravitation pull of resurgent “middle Kingdom’ was reaching the furtherest sides of the world. Wherever the sun set, pilferers worked to satisfy China’s hunger. More than 150 covers disappeared during one month in Chicago. Scotland’s ‘great drain robbery’ saw more than a hundred vanish in a few days. In Montreal, Gloucester and Kuala Lumpur, unsuspecting pedestrians stumbled into holes.

http://www.panama-guide.com/article.php/20070627183359656

http://www.chinadaily.com.cn/english/doc/2005-12/21/content_505203.htm

http://news.bbc.co.uk/1/hi/scotland/3725918.stm

http://www.npr.org/templates/story/story.php?storyId=4190127

It was not the first time that a great power had telegraphed its arrival in an unusual way. The first inkling the British had of the thirteenth-century Mongol invasion of Europe, for example, was when the price of fish at Harwich, a harbour on the North Sea, rose sharply. The explanation for this, people learned later, was that the Baltic shipping fleet, abruptly deprived of sailors required to fight the enemy approaching by horse from the east, had remained at its moorings. That had reduced the supply of cod and herring to Harwich, and prices had risen accordingly.

Capitalism Unleashing:

Deng was forced to improvise to coax growth out of an economy that had only just started to recover from the Cultural Revolution, the decade of Moaist madness that had officially ended in 1976. He brought in Chen Yun, an expert at defusing economic crises, to conceive of new strategies. Chen’s view was that the activism of farmers, who comprised some 700 million of China’s then population of 1.1 billion, had been suppressed for too long under the system of agricultural communes instituted by Mao. From 1979 onward, farmers could form smaller ‘work groups’ to cultivate fixed parcels of land, reaping the benefit – or sorrow – of their harvest. A key tenet of the new policy, however, was that such work groups would not be single families and the land they tilled would remain state-owned. But, in one of the first of several important acts of creative disobedience, farmers took the new policy as a license to start cultivating family plots. Local officials knew exactly what was going on, buy they could also see that the activism of the peasant farmers had been unleashed and that it was consigning the lassitude of the communes to history. The impact was immediate. By 1984, the national grain harvest rose to 407 million tons from 305 million in 1978, and meat became more widely available.

http://www.time.com/time/asia/2005/journey/revolution.html

Similar types of subterfuge attended China’s prototype private businesses. In areas around the Pearl River Delta bordering Hong Kong and in Zhejiang and Jiangsu provinces to the north and south of Shanghai, people began to from companies that were socialist and state-owned on paper but capitalist and privately owned in reality. The main ruse employed to conceal this disobedience was semantic acrobatics with the word ‘collective’. When Mao had used it, the word meant that a company was entirely owned by the state but by more than one branch of it. In its new incarnation, however, ‘collective’ could also mean a collection of private, or partly private owners. It was a fig leaf that came to be known as ‘donning the red hat’ and it would not have fooled anyone had it not been for the complicity of local government officials. They were willing to allow such sophistry to flourish because they soon saw that ‘red hat’ collectives could be the most dynamic job creators and tax payers in their districts. Often, of course, they had the additional incentive to co-operate that came from direct shareholdings. Within a few years, an unsanctioned amalgam of ‘red hats’, collectives and ‘township and village enterprises’ had become by far the fastest-growing sector in the national economy.

The willingness of local government officials to disobey Beijing was therefore a crucial ingredient in the free-market reforms of the 1980’s. And the artifice did not end with that decade. It was to continue well into the 1990s, notably with the establishment of thousands of unlicensed ‘development parks’ to which local governments attracted corporate investors by offering a package of frequently illegal incentives. Taken together, then, these realities suggest that Deng was not so much of the omniscient architect of free-market reform that he is often hailed to have been. A significant part of his success can be attributed to the disobedience of local government officials, farmers and entrepreneurs towards central government officials, farmers and entrepreneurs towards central government policies.

Understanding the haphazard nature of much that happened in the 1980s assists in appreciating where men like Shen came from. Chaotic times throw forth heroes. Several of the entrepreneurs who by the late 1990s were driving Mercedes, flying first-class to the World Economic Forum in Davos, Switzerland and sending their children to the best British public schools started at the bottom of the social pyramid in the early 1980s. In fact at that time, misfortune – particularly if it came in the form of unemployment – could be the ultimate blessing.

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Shen borrowed heavily to finance the purchase, and had to sell equity to a Hong Kong investor. But opposition to the whole plan was building among government officials and even within the ranks of his own workers. During one meeting in Jinfeng, a worker shouted out that the idea of buying the Bidston plan was ‘like putting the hens to flight and breaking all the eggs’. The Vice-Minister of Metallurgy made a special trip all the way from Beijing to persuade Shen to change his mind. Even large state companies had not been daring enough to acquire untested foreign equipment and hive it shipped back and reassembled in China. Operations like this, said the Vice-Minister, were akin ‘to trying to eat the sky’. But Shen would not listen. If the equipment did not work, he told a massed meeting of workers in Jinfeng, they could pout it in a museum. ‘You can hire me to stand outside and sell the tickets,’ he said at the time.

His gamble came to within an inch of failure. The plant was bought and reassembled in China. But the whole operation took three years, during which time inflation had spiraled almost out of control, millions of anti-government protestors had taken to the streets in large cities all ove rthe country and Deng had responded by ordering the People’s Liberation Army to massacre the people in the streets around Tiananmen Square in central Beijing. The economic consequence of the 1989 crackdown was a state of nervous stagnation and Shen, lumbered with heavy interest payments on his loand, was faced with the prospect of selling steel at below cost into a glutted market. Then, out of the blue in early 1992, Deng embarked on what became known as his famous ‘southern tou’. Like the emperors of old, he traveled with a retinue of mandarins to inspect the situation beyond his sequestered leadership compound in Beijing. Everywhere he went in the Pearl River Delta bordering Hong Kong he was feted. At first, conservatives in Beijing tried to suppress his message, but soon the news leaked out that he was exhorting the people to ‘be a little bolder, go a little faster.’ It was if a touch-paper had been lit. In the few brief weeks, the whole country had shifted gear and Shagang was perfectly positioned to ride the boom that followed.

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Over the next few blog posts I will quote some more of the interesting facts and the impact that China is starting to have on the world-economy. I will also provide some research on similar transitions from socialism to capitalism, its benefits and its pitfalls.

The reality is that it’s a very complicated transition the global economy finds itself in. Globalization is not longer something to be loved or hated is merely a brutal reality. The question that arises is how do we position ourselves to be successful in a global economy.