Steve Bannon says things like “We’re at economic war with China. It’s in all their literature. They’re not shy about saying what they’re doing. One of us is going to be a hegemon in 25 or 30 years and it’s gonna be them if we go down this path.” And: “…the economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we’re five years away, I think, ten years at the most, of hitting an inflection point from which we’ll never be able to recover.”
Austrian economic analysis in the Mises-Rothbard vein takes note of the fact that China’s system includes a huge dose of state intervention. This is bound to result in malinvestment and claims of economic success (“growth”) based upon meaningless statistics. This leads me to be very skeptical of the kinds of fears enunciated by Bannon and reflected in Trump’s views. This rhetoric reminds me of the similar misguided beliefs about the superiority of the Soviet system. All the U.S. government needs to do is to get out of the way of free markets in this country. It doesn’t need to set up economic nationalism as a goal here, which is a misguided aim, as a rebuttal to China’s own misguided policies. That leads to political frictions and warfare.
China took the lead in setting up the Asia Infrastructure Investment Bank (AIIB) in 2016. There is absolutely nothing to fear from this organization, because it is based upon financing by member states, not free markets. Why must the states behind this bank make project loans? If they are such good projects, why don’t the recipients issue bonds in free market bond markets? These would be analogous to municipal bonds, highway bonds, airport bonds, railway bonds, pipeline bonds and harbor bonds that have been issued by American companies. The reason is that these AIIB-financed projects can’t or won’t compete in economic terms.
There is nothing to fear from the financing of projects that are economically unviable and unprofitable. If China and other member states of the AIIB want to build all sorts of infrastructure projects that cannot pass the market test, that’s their folly. I have the same kind of skepticism for the ballyhoo about China’s One Belt, One Road initiative, because I have negative faith in state planning of such projects.
The AIIB has so far approved of loans to 28 projects. The interested reader may go through each one, research it, and reach his or her own conclusions. Alternatively, you may consult a skeptical article. I will quote only one paragraph to get the flavor of projects within China:
“Fewer than a third of the projects the Oxford researchers examined turned out to be economically productive. And they were studying projects backed by the World Bank and the ADB; the cream of China’s infrastructure crop, picked over intensively in advance by the institutions’ financiers and due diligence staff. Where projects were conceived and financed locally, often to advance officials’ careers rather than economic development, the benefits are likely to have been even slighter, and the value destruction correspondingly greater. Worse, although the study focused on roads and railways, the authors found evidence of even greater malinvestment in dams and nuclear power stations, both of which China has built in abundance in recent years.”
There is every reason to think that the AIIB will do even worse, the reason being a lack of proper financial market monitoring, control and incentives to guide the decisions of the agents of the states, who as principals are putting up the money.
I think a detailed examination of the 28 AAIB projects, which already are attributable to a layer of socialist finance disguised as free market lending, will reveal even further links with centrally-controlled economies. For example, there is the Oman railway loan: “The objective of the Project is to achieve full readiness for the construction of a new railway system that will support the Sultanate of Oman with the diversification of its economy and to develop the Sultanate of Oman’s position as transport hub and as an exporter of minerals.”
The rail project is by central decree: “Royal Decree announces new rail project in Oman”.
The bottom line is that American leaders would do well to learn from the breakdown of the Soviet system and apply the lessons learned to those states of today, including our own, that are employing Soviet-lite systems or systems of various strains of central control and regulation. All such systems, which we may variously call socialist or interventionist or centrally-managed or centrally regulated or national socialist or third way, are inferior to true free markets, the kinds of markets advocated by true libertarians who understand economics.
1:41 pm on September 13, 2017
