The New Silk Road: Myth Or Reality?

The AIIB has certainly stirred the imaginations of many a reporter and politician.  Many see the coming of the Asian Infrastructure Investment Bank challenging the hegemony of the Washington headquartered World Trade Bank.  A few see it as a challenge to the reserves status of the American Dollar.  And not a few see this new challenger on the world block as the decline of the Us and even the western world.  Asia is destined to take over with China leading the way.  With China at one end of the land mass and Russia at the other, discounting western Europe and parts of eastern Europe, this axis of trade power and world development will usher in a new world order and sweep the old aside.  There is one reporter of Asia affairs who believes this is the wave of the future based on the political power of the China.  Yes, China is building bases out of coral atolls and challenging the US Navy and Air Force to do anything about it.  Not be be outdone, Russia is busy challenging American and NATO capabilities.  Everywhere the western powers are on the run.  Pretty soon the words of Kruschev will become reality, Russia will bury us.  Or so it might seem.

Well, China and Russia have announced the possible construction of high speed rail service to connect each other’s manufacturing centers and perhaps move populations to scarcely populated areas.  Then there are the pipelines that will be built to transport oil and natural gas from Russia to China.  China needs to import most of it’s energy from outside sources as well as significant amounts of raw materials.  To the south the caravans of VLCC and super container vessels will ply the China Sea, the Indian Ocean, the Arabian Sea and the Persian Gulf.  The golden age of commerce will enter a new phase and sweep all before it.  Thee are even promises of expanding and improving the “Burma Road” into India and Thailand.  Whether the Vietnamese government will consent to having new super highways and high speed railways between it and China remains to be seen.  The Vietnamese have always had to guard against an expansionist China over the many centuries and I have my doubts that they are willing to throw caution to the wind.

Much has been made of China’s will to power over centuries of existence, that it views all others a barbarians who must eventually bow to the superiority of the Chinese civilization.  Even the Communist Chinese felt superior in their political beliefs to the Communist Russians.  The  Chinese Communist Party realized that it needed to open the country and change some of its policies if it were to avoid the Russian mistakes.  Perhaps from their close proximity to Russia they could detect the economic problems that would bring down the Russian Communist Party.  Of course many have forgotten the third corner of this three cornered hat, India.  India trusts Russia far more than it trusts the Chinese and its current economic status is far more robust than the Chinese.  On the other hand, China has sent out its trade missions into Africa and has managed some success but has also created some bitterness.  I would believe that the most pervasive problem with China’s government is that since it came from a belief in a totally government controlled economy, even in the realization of that control it has turned towards a Mercantilism mindset.

What does Mercantilism have to do with today’s modern economies?  As the Chinese businesses explore and develop resources in areas such as Africa where the business model is Chinese capital investment and management and the exploitation of the local workers, they are essentially establishing the modern colony model.  Back in the 17th century The Dutch, the British, the Portuguese, and the Spanish were racing to establish colonies in new areas of the world.  First in the new world and then reaching to China and beyond.  Second, China has engaged in extensive export subsidies and pegging their currency to the US Dollar, intentionally keeping its value low so as to extract the advantages of lower labor costs.  China also limited foreign investment to junior partnerships and made possible the ability to hide true costs from these partners.  The Chinese government also promoted research in manufacturing and design by their own companies, often stealing intellectual knowledge from unwitting partners.  And by encouraging limited wages they had discouraged domestic consumption while encouraging subsidized exports.  China has also indulged to some degree a tariff policy that makes it difficult to import finished goods.  There have always been both capital import and export controls but of late, capital has been flowing quickly out of the country, imports have come almost to a stop.  All of this suggests a modified form of Mercantilism.

One might ask what does China have to offer the world besides cheap labor?  The answer is: not much.  When we look at the countries in Southeast Asia and those to the west of China, the four “Stans”, Russia to the north, and India, Iran, and Pakistan to the south, we see the sources of raw materials and energy.  True, China has some raw resources but very little energy outside a some coal reserves.  The Chinese have bought a great deal of coal from both Australia and the United States.  Then what might be the true purpose of the New Silk Road scheme?  Perhaps all roads are suppose to lead to Peking.  Russia needs to sell its resources as exports since it lacks the industrial infrastructure to be a world manufacturing power.  Understand that most of industry in Russia is owned and operated by a few individuals who are also connected to the power structure.  What had once been the hope of the average Russian for a legitimate democracy and western style industrialization has turned into the dictator as usual style supported by a business oligopoly that controls most of the economy in that country.  The ruinous misuse of economical and political resources by the former communist regime has gone unlearn as a lesson in governance.

But the more interesting point is that for the most part, the countries China proposes to include in its sphere of economic influence are very similar to the Russians.  Uzbekistan, Kyrgyzstan, Tajikistan, and Turkmenistan are all former member states of the old USSR.  Unfortunately they inherited the same tendencies towards dictator by former communist committee while possessing great natural mineral resources.  As for Pakistan, Afghanistan, and Iran, only Iran has some strategic oil reserves and a little mineral wealth.  But the above all share one common denominator, a general Islamic faith,  China does have a province or two with similar faith but most of China is either agnostic or of one of the older religions.  The western borders of China are very inhospitable and share rugged mountainous areas that will make transit by anything by train very difficult.  Nor will China want an influx of foreigners with a very undesirable, at least to mainland Chinese, religious faith.  The point of Mercantilism is to make such other countries colonies that feed China’s need for raw materials and the ability to sell manufactured good to those same peoples.

Unfortunately, China may collapse into internal strife, including civil war.  As for growth of its economy I would not expect much this year of the next two after that.  China has succomb to greed and larceny at best.  When you job as a party functionary depends upon the reporting of the statistical information your head wants to hear, do you report honestly or make the numbers up?  So much of the statistical information on the Chinese economy is pure fiction to the point that it is becoming apparent that China is on the verge of collapse.  Quite frankly, one cannot trust the banking system since far too many loans have been made that are non performing and have no hope of funds being recovered through bankruptcy.  The party faithful has looted the nation.  They have, through their greed, undertaken giant projects that have left the nation polluted and degenerated.  It is debatable that the country can even feed itself when it comes to economic collapse.  Yet, the AIIB is supposed to provide funds, loans, if you like, to build a number of great infrastructure projects that will help China tie all its economic dependents together.  It rests on the greater fool theory.  India is the joker in this party.

India still has prospects for growth although inflation is rampant and may eventually, if not controlled, cause great economic damage to the country.  The other fact is the India has a population of about the same size as China but it is a more vibrant population.  The Chinese population is aging very quickly due to the one child per couple policy.  This means that India has a more vibrant population to support its economy.  Indeed, the New Silk Road may be India’s gain.  Their currency is not pegged to the reserve currency of the American Dollar.  China, if it wants to be the new dominant currency is Asia must unpeg itself.  When it does that it will lose whatever advantage it had in the artificial devaluation of its currency.  That means it’s labor becomes an increasingly higher cost as its public demands higher wagers.  It will lose its trade advantage and be subject to the same problems and many other currencies around the world, as Brazil has discovered.  This modern Mercantilism is China’s Achilles Heel.  Planned economies always lose in the end.  Of course the other problem is that when economies become the pawns of oligopolies then those economies will suffer the same plight.  This is the problem of the super large and powerful corporations.  They eventually lose their ability to operate in such a controlled and planned economy.  These too big to fail finally do and take entire countries with them.

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