It is a safe bet that Asian currency intervention was not on the minds of Republican primary voters in Delaware this month when they selected a Tea Party favorite, Christine O’Donnell, as their Senate candidate. But the pendulum swings in American politics are a key concern of Wen Jiabao and Naoto Kan, the prime ministers of China and Japan, respectively, who both met with President Obama in New York on Thursday, with the loss of American jobs to Asian competition high on the agenda.
The Asian nations’ interest in American politics stems not just from America’s standing as the sole global superpower, but also from a growing belief among Asian leaders that the era of United States hegemony will soon be over, and that the polarization of its politics symbolizes America’s inability to adapt to the changing nature of global capitalism after the financial crisis.
What does this sweeping statement have to do with the price of yen? Plenty. On Sept. 15, the yen dropped sharply against the dollar, improving the competitiveness of Japanese exporters. After a brief bounce last week, expect the downward trend to continue. Mr. Kan’s government has decided to follow the lead of China and other Asian nations in “managing” (some critics would say manipulating) its currency; it spent a record $23 billion in a single day on foreign exchanges — the largest such intervention ever — instead of leaving the yen’s value entirely to market forces.
To understand how this decision will affect the United States, we must start with parochial politics — not in Delaware, but in the larger parish called Asia, which remains terra incognita to most American politicians and voters.
In Asian politics, what you see is often the opposite of what you get. On Sept 14. Mr. Kan, generally seen as favoring free markets, held on to his job in an intraparty election after a bitter challenge from his rival Ichiro Ozawa, who had loudly demanded a Chinese-style policy of currency intervention to keep the value of the yen low. Given Mr. Kan’s victory, investors assumed that currency intervention was off the agenda and piled into the yen, lifting it to a 15-year high against the dollar. It turns out, however, that Mr. Kan, in winning the election, may have tacitly ceded control of economic policy to Mr. Ozawa, known as the “shadow shogun” for his prowess in backroom dealing. Hence the ensuing sell-off of the yen.
The decision to break with free-market ideology and spend government money to control the yen’s value against the dollar was mainly driven by Japan’s relationship with China, not America. Japanese companies including Sony and Toyota that had demanded government action devaluing the yen were not concerned primarily with their competitiveness against America rivals. The motivation was a fear of being undercut by exporters in China, Korea, Singapore and Taiwan — all countries that aggressively manage their exchange rates.
With Chinese economic policy now serving as a model for other Asian countries, Japan was faced with a stark choice: back United States criticisms that China is artificially keeping down the value of its currency, the renminbi, or emulate China’s approach. It is a sign of the times that Japan chose to follow China at the cost of irritating America.
Japan’s action suggests that, in the aftermath of the recent financial crisis, the dominance of free-market thinking in international economic management is over. Washington must understand this, or find itself constantly outmaneuvered in dealings with the rest of the world. Instead of obsessing over China’s currency manipulation as if it were a unique exception in a world of untrammeled market forces, the United States must adapt to an environment where exchange rates and trade imbalances are managed consciously and have become a legitimate subject for debate in international forums like the Group of 20.
Market fundamentalists who feel that government interference with free markets is anathema should be reminded that, by today’s dogmatic standards, Ronald Reagan is one of the great manipulators of all time. He presided over two of the biggest currency interventions in history: the Plaza agreement, which devalued the dollar in 1985, and the Louvre accord of 1987, which brought this devaluation to an end.
The fact is that the rules of global capitalism have changed irrevocably since Lehman Brothers collapsed two years ago — and if the United States refuses to accept this, it will find its global leadership slipping away. The near collapse of the financial system was an “Emperor’s New Clothes” moment of revelation.
In this climate, the market fundamentalism now represented by the Tea Party, based on instinctive aversion to government and a faith that “the market is always right,” is a global laughingstock. Yet more moderate figures from both parties largely hold the same view: a measure to punish China over its currency passed the House Ways and Means committee on Friday with bipartisan support.
Outside America, however, a strong conviction now exists that some new version of global capitalism must evolve to replace what the economist John Williamson coined the “Washington consensus.”
If market forces cannot do something as simple as financing home mortgages, can markets be trusted to restore and maintain full employment, reduce global imbalances or prevent the destruction of the environment and prepare for a future without fossil fuels? This is the question that policymakers outside America, especially in Asia, are now asking. And the answer, as so often in economics, is “yes and no.”
Yes, because markets are the best mechanism for allocating scarce resources. No, because market investors are often short-sighted, fail to reflect widely held social objectives and sometimes make catastrophic mistakes. There are times, therefore, when governments must deliberately shape market incentives to achieve objectives that are determined by politics and not by the markets themselves, including financial stability, environmental protection, energy independence and poverty relief.
This doesn’t necessarily mean that governments get bigger. The new model of capitalism evolving in Asia and parts of Europe generally requires government to be smaller, but more effective. Many activities taken for granted in America as prerogatives of government have long since been privatized in foreign nations — even in what so many Americans view as socialistic Europe.
In France, Germany, Japan and Sweden, water supplies, highways, airports and even postal services are increasingly run by the private sector. For home mortgages to be backed by government guarantees would be unthinkable anywhere in Asia or Europe. Tax systems, too, are in some ways less redistributionist in Europe and Asia than they are in the United States. According to the Organization for Economic Cooperation and Development, the proportion of income tax raised from the richest tenth of the population is 45 percent in America, compared with only 28 percent in France and 27 percent in Sweden. These countries raise money for public services mainly from middle-class voters, through consumption and energy taxes, not by soaking the rich.
As a result, these nations’ budgets are more stable and their governments have more ability to support their economies in times of crisis. They are also better positioned to manage their currencies and their trade relations, subsidize long-term investment in nuclear and solar energy, and spend money on infrastructure, job retraining and education. In America, by contrast, the tax system’s dependence on revenues from the richest citizens means that the social safety net and long-term goals like energy independence can be achieved only if the rich keep getting richer.
Which brings us back to Delaware. What if America decides to ignore the global reinvention of capitalism and opts instead for a nostalgic rerun of the experiment in market fundamentalism? This would not prevent the rest of the world from changing course.
Rather, it would make it likely that the newly dominant economic model will not be a product of democratic capitalism, based on Western values and American leadership. Instead, it will be an authoritarian state-led capitalism inspired by Asian values. If America opts, for the first time in history, for nostalgia and ideology instead of pragmatism and progress, then the new model of capitalism will probably be made in China, like so much else in the world these days.
Anatole Kaletsky, the chief economist of a Hong Kong-based investment advisory firm and the author of Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis.