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A case of mistaken identity

Prabhudev Konana

Those who prophesied the ‘coming collapse of China’ didn’t see what was coming. Ironically, it is to China that the world looks for major stimulus spending.

Is the current financial meltdown poetic justice for all those pundits who prophesied the “coming collapse of China?” Ever since China began to experience spectacular growth in the last three decades, some business scholars have been on a mission to declare this growth a sham. The logic is that all those jazzy buildings, airports, and roads were built on debt from state-owned enterprises with little transparency and accountability. Even the Olympics event was a way to hide the reality, so exclaimed the pundits.

Scholars sitting in the highest pedestal of learning vouched for China to crumble with its heavy load of bad debts. Leading scholars from Harvard and MIT, like Tarun Khanna and Yasheng Huang, declared that China’s inefficient banks and unreliable capital markets put them in a dire situation. They argued that for these reasons India is in a better position to succeed. It could very well be that but what an irony! They probably mistook Chinese market for U.S. financial system that imploded under bad debts, sham financial instruments, and a host of Ponzi schemes.

Steve Ballmer, CEO of Microsoft, in his comments to the U.S. House of Representatives Democratic Caucus Retreat said about excessive leverage and private debt: “In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 per cent. Last year, private sector debt as a percentage of the GDP: 300 per cent; far more leverage.” We may not know the real debt in Chinese banks but we know it has $2 trillion in foreign exchange reserves and bought almost $1 trillion of U.S. debt.

Nobel Laureate Joseph Stiglitz was asked on a business channel about strategies for the United States to rescue the failing banking system. He suggested that we should “hold our nose” and do what Sweden did by nationalising banks to get toxic assets out and bring liquidity and credit market back quickly. He was referring to Sweden’s 1992 meltdown of financial markets, a result of shortsighted economic policies and a lack of transparency. The TV anchor shot back asking whether the government was capable of running banks efficiently, to which Dr. Stiglitz replied that it could not be worse than what the private sector did! Of course, he did not mean to keep the banks nationalised for ever. As in Sweden, the nationalised banks can be privatised later, possibly for a decent profit. Sadly those who blasted Chinese banks missed the mess created in their own backyard.

The arrogance exhibited by banks to shower themselves with $20 billion bonuses from bailout money is a blasphemy to capitalism. Bernard Madoff’s Ponzi scheme is bringing out various forms of other rip-offs. Many wealth managers who made millions on management fees did nothing but outsource the work to other institutions or individuals like Mr. Madoff. They take fees to invest in a “fund of funds” where each fund knocks off more fees. The source of easy money is staggering.

Such is the state of capitalism. A student in my class suggested that we call Wall Street capitalism “crapitalism.” I guess it best describes the mindless leverage, lending practices, and investing schemes. I am sure the champions of capitalism from Adam Smith to Milton Freidman must be turning in their graves.

But let me quickly point out there are thousands of companies that have done wonders because of capitalism. Some who emailed me with contempt for capitalism ignore the fact that much of the technologies they used to send that email – the Internet, computers, routers, software, fibre, etc. — are a result of U.S capitalism. Most technology firms like Microsoft, Cisco, and Apple who make real products swim with billions of dollars of cash and reward employees while avoiding major lay-offs. They truly represent the benefits of capitalism. These companies have also invested significantly in corporate social responsibility.

There is another irony with respect to corporate governance. The business scholars mentioned earlier called corporate governance in China an oxymoron. They were on a mission to suggest the holier-than-thou practices of Indian businesses compared with that of Chinese firms. Obviously, it would have been more prudent to really study corporate governance in India as well as in the U.S. Satyam’s flagrant lynching of shareholders and the employees and the recent ban on Wipro and other companies by World Bank laid to rest the holier-than-thou attitude. Of course, Satyam may just be a blip in the Indian corporate world. But as more news comes out of insider trading and a nefarious network of transactions that go unnoticed for decades, who knows how many rotten dealings are hiding in the closet?

The economic growth of the last decade in India has led many scholars to make bogus, feel-good, talk about a billion entrepreneurs and developed India. These do not even have rhetorical value given the magnitude of the problem. Children and women desperately eking out a basic living by picking garbage for recycling do not constitute entrepreneurship. Let’s put empty rhetoric to rest. We should be outraged in support of millions of impoverished people trying to barely survive each day.

Going back to the ironies, the world again looks at China for major stimulus spending. We know how the last decade transformed the world because of the demand from China in preparation for Olympics. In fact, the best way for the world economy to improve is for the International Olympic Committee to urgently shift the next two Olympic events to China – one in the mid-western and the other in the western part of China. Yes, that would be one major stimulus for the world!

(The author is the William H. Seay Centennial Professor and Distinguished Teaching Professor at the University of Texas at Austin and can be contacted at pkonana@mail.utexas.edu)

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