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Reagan's Revolution Getting Chinese Makeover

By William Pesek, Bloomberg - March 30, 2009

Ronald Reagan wouldn't be happy.

The free-market revolution that the U.S. president championed in the 1980s isn't just over. It's about to get a Chinese makeover as officials in Beijing assert themselves as rarely before. The way they are scolding the world ahead of this week's Group-of-20 meeting leaves little doubt about that.

Now let's see, what can China teach us about running an economy? First, don't lend $740 billion to someone you worry can't pay you back (Whoops, did that!). Second, don't rely on a single industry such as manufacturing for growth (Damn, did that!). Third, don't ratchet up defense spending when your economy needs fixing (Oh man, did that, too!).

The point here isn't to pick on China. Nor is it to defend Reaganomics and its simplistic faith in the wisdom of markets. The laissez-faire crowd has done more than enough damage with its contempt for regulation and its financial innovation. The point is that we shouldn't get ahead of ourselves in thinking China has a how-to guide for others to emulate.

Give credit where it's due. China has done an impressive job of raising millions of people out of poverty. Its rapid growth filled a void in Asia left by a Japan that never fully recovered from the deflation of the 1990s. China worked fast to shield its 1.3 billion people from the global credit crunch.

Load of Cash

Yet having a load of cash -- including $2 trillion of currency reserves -- doesn't necessarily make you an economic leader. It does buy you considerable influence, particularly when you hold the deed to the world's biggest economy. China is playing a role somewhat akin to that of financier John Pierpont Morgan in 1907. Its money is propping up the U.S.

As the third-biggest economy, China will have a prominent seat at the table when G-20 officials gather in London on April 2. It's still not clear what the world can learn from a nation that has so little in common with developed ones.

It's no mystery why China's top-down system has yet to create an indigenous corporate star. For all its challenges, India has produced names such as Infosys Technologies Ltd. and Tata Motors Ltd. China's focus is still on acquiring recognized names from overseas rather than creating an environment to empower entrepreneurs.

Who knows, perhaps history will show China is creating a smart model here: leapfrogging over an entire level of development. Yet how does a country that censors Google and polices the Internet so actively compete in the Information Age?

Economic Inspiration

China critics often point to the frequency of mining accidents, pollution or the lack of worker rights, product quality and food safety. All are valid concerns. So is China's reluctance to build an economy that inspires grass-roots energy and creates jobs. There's some of that, but not enough. There is a reason why China isn't even close to producing its own version of Bayerische Motoren Werke AG, Sony Corp. or Microsoft Corp.

If China really has a "superior system advantage,"� as central bank Governor Zhou Xiaochuan argues, it's one that's a plus in the short run and a negative in the long run.

Chatting with officials in Japan, India or the Philippines, you often hear comments such as, "It would be nice to be China right now."� What they mean is that democracy slows and complicates stimulus efforts. The Communist Party can say "do this now"� and "do that tomorrow,"� whereas democracies require consensus. Look no further than the bickering in Washington.

Saving Capitalism

The U.S. has lots to answer for. China can't be happy that its 10 percent-plus growth was interrupted by the fallout from U.S. excess and greed. Export growth has evaporated, leaving 20 million migrant workers jobless. China worries its U.S. debt holdings may lose value.

China makes some valid points, too. "Market forces, if left unchecked, will lead to asset bubbles and ultimately a disastrous market clearing in the form of a financial crisis like the current one,"� its central bank said in a report.

That is, after all, what happened in the U.S. economy. Also, China's calls for a so-called systemic-risk regulator to oversee big financial institutions and a federal authority to seize them if they run into trouble jibes with recent suggestions by U.S. Treasury Secretary Timothy Geithner.

There's no doubt the world that Reagan envisioned didn't work out. The "Washington Consensus"� of free markets, small government and unfettered globalization that characterized the 1990s also is over. China knows it, and it's speaking out more confidently -- and rightly so.

Capitalism isn't dead; it lost its way. Expect a more sensible version than the one that just crashed in which capital flows freely and regulations see that markets don't go off the rails. As perverse as it sounds, a touch of socialism is needed to resuscitate capitalism.

This idea of capitalism with Chinese characteristics is fine for China, which is destined to be a great economic power someday. In 2019, we'll talk. In 2009, China shouldn't be lecturing the world on how best to run economies.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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