Monday, March 17, 2008

The New Colonialists?

My copy of The Economist arrived yesterday, with a headline proclaiming “The New Colonialists: A 14-Page Special Report on China’s Thirst for Resources.” The Economist’s argument that developing countries like China’s “no-strings attached” style of neo-colonialism is fundamentally flawed. In reality, what the Economist can only recognize as something akin to what was colonialism is actually driven by two related phenomena: a new mercantilism and the constitutional failure of “free-trade” ideology.

A new mercantilism is gripping the globe, and it is not driven by China, but rather by the scarcity of the very resources that fuel economies like China. There is a critical difference between the Economist’s assertion that China’s resource ventures are “no-strings attached” and the mercantilist reality. China’s economy is best where it can leverage its massive labor force, not at venturing into new territory. If it was confident that it could simply buy all the oil or LNG that it wants at market prices, it would be better off sticking to what it does best, and it knows this. The reason it is venturing into energy exploration in Africa and elsewhere, then, is because it recognizes the mercantilist reality of the coming century: there won’t be enough energy (or other raw materials) to fuel continued economic growth around the world, so those who can corner their own share of the market (and improve the odds of continued economic growth in their corner of the world) are doing so. China initially tried to wage what I have called “pipeline mercantilism,” by directing the flow of oil from the Caspian basin East to China, rather than West to Europe and the US. Their efforts here have largely failed—possibly as they tried out the US/European style of soft-colonialism without success, possibly because of a resurgent Russia, or possibly because they lost interest as Caspian oil reserves are turning out to be far smaller than once theorized. Now they are pursuing a home-grown brand of soft-colonialism, primarily in Africa. Here they are finding greater success, for several reasons: they can fully engage in environments and governments that are shunned, at least officially, in the West because of poor human rights records (Sudan, Ethiopia); they enjoy the far-sighted assistance of Chinese aid agencies, where the Chinese government has decided that subsidizing their oil ventures with free aid will pay off in spades over the long-term as Chinese National Oil Companies get lucrative production sharing agreements over Western rivals; and, it must not be overlooked, the Chinese have an advantage over Western rivals in that there is no history of Chinese abuse and colonialism in Africa. This explains why China is venturing, and succeeding, in Africa, but not how they are turning this into a neo-colonial venture (e.g. “with strings attached”) as opposed to a simple, above-board business venture. Some of this is no more than intuition on my part—we have yet to see (and may never see, due to the failing of transparency in these NOC dealings) exactly what form the exploitation will take. In fact, it may not even be exploitation—China’s key need is to enter into long-term supply contracts for resources at a price that is acceptable now and in the much more resource constrained future. China appears to be using precisely this “long-term contract colonialism” approach, whereby it will agree to pay present prices far into the future for the resources it needs. What is not yet clear is how China will prevent “re-negotiation” of these contracts, as is currently happening with Venezuela, when the producing countries realize they are selling off their natural wealth at half, or even a tenth of the then-prevailing market rate. Will China develop some kind of expeditionary military capability to force compliance? Will they leverage their ability to use means that would (for now, at least) be unacceptable to the West and simply threaten to lob ICBMs at whatever small African nation plays the re-negotiation card? Or will they try to re-work the Aid-Loans-Debt addiction already played (quite successfully) by the West from 1950-2000? It will be interesting to watch and see, but one thing seems quite certain: there will be strings attached.

Second, China’s resource plays underscore the constitutional failure of the ideology of free-trade. China built its current red-hot economy by providing cheaper labor alternatives to manufacturing in the rich West—cheaper in terms of actual wages, as well as human rights standards, environmental standards, and the ability to effectively squash unions. Already, however, China is realizing that it is losing these “cheap labor” jobs to even cheaper countries such as Vietnam. China is realizing that it cannot continue to provide the benefits of economic growth to its citizens—something it continues to need to stave off revolution and justify its constitutional structure—with this same old model. What are China’s options? Well, the option suggested by most pundits in the rich West is to develop a highly-skilled, well educated work force and transition to the knowledge and services economy. The West “suggests” this model, while simultaneously hoping that it continues to work for itself. And here is the problem: this free-trade model is intellectually and morally bankrupt. Here’s the crux of the issue: what makes American, or French (or Chinese) workers inherently better, and therefore deserving of a higher wage, than workers elsewhere in the world?

It may have once been education, but that is no longer the case. It’s pure racism or cultural elitism to suggest that one nation is more adept at learning skills than another. America and Europe may have a head start over the likes of Vietnam or India, but they are quickly closing that gap. Certainly what remains of this gap doesn’t justify the 10x multiplier on American wages.

It may have once been freedom of capital, but that is no longer the case. There are probably fewer capital impediments, and certainly there are fewer other regulatory requirements (minor issues like human rights and the environment) in China than there is in America or Europe. This no longer justifies the 10x wage multiplier.

It may have once been infrastructure, both physical and legal in the form of reliable rule of law, a dependable corporate framework, and solid intellectual property protections. These differences still exist to some extent, but they are also eroding, and are increasingly they are irrelevant as multinational corporations are involved globally, preventing them from enjoying the benefits of a single legal framework. Haier appliances (of China) enjoys US legal framework and physical infrastructure at least as much as GE (of America) is hindered by any lack thereof in China. This no longer justifies the 10x wage multiplier.

Is there anything left to justify the 10x wage multiplier between the US and China—or to justify the desired future wage multiplier between China and the future “cheap labor pool” economy? And, perhaps more importantly, if there is, for now, some justification for such a multiplier, how is that not also subject to the forces of globalization? I can think of one justification that remains to some degree in America—we still seem to be better than anyone else in the world at combining just the right mix of structure and freedom, discipline and creativity, conformity and rebellion to create the kind of synergy that drives business innovation. That, too, seems to be changing, but for now I think it still justifies some kind of multiplier—but this mix is also subject to the forces of globalization. This is the crux of the problem: globalization is, in the end, the process of treating the human element as nothing more than another factor for optimization. It cannot be the sustainable constitutional basis for a Nation or a State. And if the onset of a neo-mercantilism shows anything, it is the dawning realization of just that on the parts of these new mercantilist states. The future presents two valid constitutional platforms for Nation-States: exploitative mercantilism or sustainable self-sufficiency. While I think that only the latter is actually viable over the long term, the former allows for the illusion of maintaining the present “Western” way of life in the form of growing material consumption. For that reason, Nation-States will make the short-sighted choice and choose mercantilism, and that is quite likely to get messy.

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Rice Farmer said...

I would expect The Economist, or any other representative of the Western mode of exploitation, to find fault with China's way of doing things simply because China is now a serious competitor. Ultimately all the big players are going to dig their claws into whatever they can get in a no-holds-barred contest at monopolizing energy and resources, while publicly justifying their actions with flimsy claims of human rights, benefiting the locals, and whatnot, and slamming competitors for exploitation and all manner of unscrupulous acts and heinous crimes.

In the final analysis, China is no better or worse than its geopolitical competitors.

piterburg said...

This one is excellent - very sharp analysis. Bravo!

Anonymous said...

Yes, a great article. The lowest wage in the poorest country becomes supply/demand equilibrium for workers everywhere.

malcolm said...

Hey Jeff

Great commentary

Countless examples of this cornering of commodities all over, and not just by China.

And of course, by securing supply of commodities and continuing to develop manufacturing & high-tech the Chinese might even get into the position of being able to afford some of the MBA courses regularly advertised in the Economist :-)

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