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CHINA BUSINESS
ASIA TIMES ON LINE
China and a new world economic order
By Henry C K Liu
January 12 2010PART 2
Dollar hegemony
This phenomenon is known as dollar hegemony, which is created by a geopolitically constructed peculiarity through which critical commodities, among the most notable being oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars into other dollar assets is the price the US has extracted from oil-producing countries for US tolerance for the oil-exporting cartel since 1973. The trade value of a currency is no longer tied to the productivity of its issuing economy, but to the size of dollar reserves held by its central bank.
By definition, dollar reserves must be invested in dollar assets, creating an automatic capital-accounts surplus for the dollar economy. Even though the US has been a net debtor since 1986, its net income on the international investment position has remained positive, as the rate of return on US investments abroad continues to exceed that on foreign investments in the US.
This reflects the overall strength of the US economy, and that strength is derived from the US being the only nation that can enjoy the benefits of sovereign credit utilization while amassing external debt denominated in dollars, largely due to dollar hegemony. Unlike other economies, the US economy incurs no foreign debt, only domestic debt denominated in dollars held by foreigners. These debts can always be repaid by the Federal Reserve, the US central bank, printing more dollars.
Since such a move will devalue the exchange rate of the dollar, foreign holders of the US dollar sovereign or private debt are prevented from demanding payment. Further, when basic commodities are denominated in dollars, the US essentially owns all such commodities. Foreign owners of dollar assets are merely unwitting temporary agents of the US dollar hegemony.
Under the Westphalian world order of sovereign nation states, which has framed international relations since 1648, only coordinated economic nationalism that focuses on domestic development can pull the world economy out of its current downward spiral.
Economic nationalism should not be confused with trade protectionism. Decades of predatory cross-border neo-liberal finance and trade have generated strong anti-globalization sentiments in every country around the world. It has become a class struggle between the financial elite and the working poor in rich and poor countries alike.
Before the end of the first decade of the 21st century, in a world where market fundamentalism has become the operative norm, misguided trade protectionism appears to be fast re-emerging and developing into a new global trade war with complex dimensions. The irony is that this new trade war is being launched not by the abused poor economies that have been receiving the short end of the trade stick, but by the US, as leader of rich nations which have been winning more than they have been losing in the current economic order and trade system.
Much of this protectionism is designed to protect industries that the rich nations have voluntarily moved offshore for financial and environmental advantage. Such protectionism aims to protect non-existent economic activities by imposing tariffs on goods that the importing nations chose not to produce.
The biggest battles of this new trade war are being fought on the currency exchange rate front under dollar hegemony, a global monetary regime in which export nation ship real wealth produced with low wages and high environmental abuse in exchange for fiat paper money of uncertain exchange value and zero intrinsic worth.
Rich nations need to recognize that their efforts to squeeze every last drop of advantage at all levels from already unfair finance and trade will only plunge the world into deeper depression. History has shown that while the poor suffer more in economic collapse, the rich, even as they are financially cushioned by their ill-gained wealth and structural advantage, are hurt by the sociopolitical repercussions of such a collapse, in the form of war, revolution or both.
The structural problem of the Chinese economy can be described in one sentence: China produces from plants on its soil financed by foreign investment that operate with low domestic wages for foreign markets that pay with dollars that cannot be used in the Chinese domestic economy.
Domestic markets the keyThe solution to this structural problem can also be summed up in one sentence: China must finance Chinese plants with sovereign credit to produce for the domestic market where consumer purchasing power will come from high wages, with sovereign credit repaid by increased tax revenue from a vibrant domestic economy.
The adverse impact from the current global financial crisis on the Chinese economy originates from the bloated export sector financed in large part by foreign capital denominated in dollars. Foreign markets have abruptly contracted since mid-2007 to cause massive closure of tens of thousands of foreign joint-ventures or wholly owned enterprises, big, medium and small, in the Chinese export sector located along the coastal regions that has caused serious unemployment.
Economic recovery through the shifting from export dependency to domestic development requires coordinated actions by both the state and the private sectors. The government's role is to guide state-owned enterprises and private-sector incentives toward a national full employment program through tax incentives and regulatory regimes.
Government fiscal spending should be limited to funding infrastructure, both physical and social, that cannot be efficiently financed by private or even collective capital. Consumer demand should be enhanced as a priority in a national income policy to quickly raise wage levels in parallel with a well-funded social security program to eliminate the need for compulsory over-saving out of concern for emergency health expenses and provision for old-age security.
In conclusion, China can exert a positive influence on a new world economic order by setting an example with its own national development policy. To achieve this goal, China needs to adopt the following policy initiatives:
1. China must recognize that a deregulated market economy is counterproductive to national development. The clear evidence of this is what deregulated markets have done to the US economy, destroying US superpower status within three decades. China must revitalize central planning to guide national development and to use the market mechanism only to augment central planning targets. National destiny and national interest cannot be subjected to the dictation of market profit incentives.
2. China must place full employment with rising wages as a national economic priority and shift from the current market fundamentalist, macro-management on growth in gross domestic product, with unemployment as a natural outcome of a monetary policy of price stability. Economic equality and justice must be the guiding developmental principle within the context of merit-based compensation.
3. China must break free from dollar hegemony to use sovereign credit to finance balanced domestic development and to reduce excessive dependence on export for dollars and reliance on foreign capital denominated in dollars. A first step in this direction is to require all Chinese exports be settled in yuan, not in dollars.
4. China should conduct its foreign trade on the principle of mutual development for both trading partners rather than as a financial profit center for Chinese capital. China must reject the predatory terms of international trade developed during the age of imperialism. Unlike 19th century England and Japan, the huge size of the Chinese economy and its domestic market does not require imperialist terms of trade to survive. The US model failed because it aped the British model of empire after World War II. China must avoid making the same error.
5. China must guard against the fallacy of hoping to use green-tech investment as a stimulus to recover from the current global financial crisis. The global environment needs protection. But the time-scale concerning the needs of the environment is not congruent with that of the current global financial crisis. The environmental protection problem cannot be solved without first solving the global financial crisis. Attempting to use green-tech investment to jump-start the current economic crisis is putting the cart before the horse. Such an approach will only end up falling short on both environmental and economic aims.
Henry CK Liu