What westerners don’t understand about modern economy

May 9, 2012 — 2 Comments

Why is the Chinese economy thriving while that of the West is in crisis? The answer is of great relevance to Africans who have for decades embraced development models created in the boardrooms of Western capitals. Source: AllAfrica.com

Social dumping, unfair competition, undervaluation of the Chinese currency, the Yuan … these is some of the blame that most Western economists and politicians are laying on China. What about if this small beautiful world was off-target?

The growth of China and its strategic position as the first world emerging power have caused unprecedented disarray among the former powerful nations and a consistent visual navigation among Western economists and politicians who were undeniably a few years ago a reference for the success of their economic model which seemed to be irreplaceable. There was a state of complete disarray over 10 years in developed countries struggling to find a compass to better guide their ideas and understand where the position of the East is over the 21st century.

WHAT WOULD HAPPEN IF COMPETITIVENESS TOOK A NEW FACE?

It is disconcerting to see Western economists take childish considerations to explain their lack of competitiveness with China and saying that a huge industrial desert seems to have comfortably established itself in the West and arguing that employees are low wage-earners in China. It is not true. This assertion is wrong because wages are twice lower in Africa and South America than in China, although these two regions of the world do not attract the same amount of investments. The real reasons lie elsewhere.

1. There is a strong state in China exercising influence in almost all the economic process with clear and visible objectives to help millions of Chinese out of poverty.

2. In the make-up of product cost, labour accounts for about 2 to 4 percent or 10 percent at most. It is absurd that in the West, people use the issue of alleged high wages as an excuse to justify non-competitiveness of businesses. If an Italian producer put an item in the market for 100 Euros, whereas his/her Chinese rival is able to sell the same item for 25 Euros, the 200 percent difference cannot be justified as 10 percent of labour cost.

Even if wage cost was granted for free to Europeans producers, there will always be a 190 percent gap to be filled. Focusing on the value, the West will possibly find an initial solution to its current economic crisis which is, unfortunately, at its beginning; a solution to the costs of industrial architecture in the country, purchase of raw materials, the quality of vocational training and logistics to capture the customers who are at the other side of the world. We will review this issue below.

3. State purchased raw materials: Each manufacturer in the West has to find inputs on his own throughout the world, but China is using other methods through state giants to combine all purchases and, therefore enabling the country to be more successful and enjoy the best purchase conditions than a private Western individual waging a humanitarian war.

4 State semi-finished products: A car manufacturing company, for example, in the West has to get supplies from sub-contractors, but in China the government provides necessary stuff and bike manufacturers, for instance, will buy state-provided parts.

It is the same case for air-conditioner manufacturers and other key economic sectors; where an Italian manufacturer has to ensure alone the whole production, his Chinese counterpart, with whom he will be competing in the market, will only deal with a part of the production process, very often, when it comes to assembling and selling items. The parts that Chinese assemble in their factories are donated by their government in need of more revenues by creating more jobs with a view of revitalizing the national economy.

5. Energy is not sold in the opinion of the Chinese. In terms of stock exchange capitalisation, according to the news article published in the magazine Fortune Global for 2010, among the seven largest companies in the world, six of them are dealing with energy: American, British and Dutch companies and the three others are Chinese.

But the most interesting thing is the gap between Western and Chinese companies regarding the profits made by the former; they are higher than for the latter. For example, oil company Shell with 97,000 employees makes $20.116 billion in profits; Exxon Mobile with 103,000 employees generated a net profit of $30.40 billion. The Chinese company Sinopec seems to lag behind; with its 640,000 employees it made only $7.63 billion while its counterpart China National Petroleum, employing 1.5 million people, made just a profit of $14.37 billion.

According to conventional assessments in the West, Shell and Exxon are to be praised for their good job. However, in the pragmatic view of the Chinese, high profits are an indicator of impediment to nation to remain competitive. Chinese authorities consider that business competitiveness begins with energy cost. Companies operating in the energy sector should make profits to conduct their own market research and to explore potential customers, whereas in the West, generating huge profits will delight shareholders, because their names will be on the list of richest individuals in the world.

This different view on the economy was even more acute in 2008 during the crisis marked by a rapid rise in crude oil prices in the markets enabling all Western oil companies to make historically high profits. Exxon Mobile, for example, says there has been an 11 percent increase in its profits last year, $45 billion compared with 2007’s figures in France.

During the same year, the French company Total said that its profits were $22 billion (17 billion Euros), but its Chinese rival, Petrochina, a leader in terms of quantity of petroleum products, lost money because, I think, a very smart political decision made by Beijing government on freezing fuel prices led to a drastic drop of 22 percent in the net income in order to allow Chinese companies to remain always the most competitive in the world.

It is obvious that many petroleum products, such as plastic toys, car accessories, and packaging materials are made in China. Labour costs are not cheaper in the country, but the government expects real benefits at the end of the production line in terms of job creation, accumulating foreign currencies and trade surplus. China is not speculating foolishly in everything that moves, because it can cause a hard blow to the economy following the current situation of the West. China has set a clear objective to distribute generated wealth, to contribute to help millions of people out of poverty, and not to praise the glory of people whose names are on the annual list of the world billionaires in Forbes news.

In terms of petroleum products in Europe, it seems that those in power want to have their cake and eat it at the same time. We want business competitiveness, but at the same time put a 77 percent tax on energy products, accounting for nearly 40 percent in the make-up of the cost of finished products to be transported to the shop and delivered; even the travelling cost incurred by the buyer can also be taken into consideration.

The rise in oil prices is similar to this, but it is even worse in the electricity sector in China, which is almost free of charge. In 2010, power company State Grid Beijing Corporation, the top in the world, with its 1,564,000 employees and hundreds of millions of subscribers, made only $4.56 billion in profits, that is to say less than $5 billion generated by EDF, the French Power company, in 2009 (before it plummeted to 74 percent in 2010 due to setbacks suffered in foreign markets). This company has 158,000 employees, 10 times less people working for its Chinese rival and the number of its subscribers as well is 20 times fewer. The truth is that EDF, a state-owned company’s subscribers are like pigeons that need to be plucked with increases at the beginning of each year by using various pretexts, such as approval is to be obtained for a change in the oil price when it rises.

LOGISTICS AS A GEOSTRATEGIC TOOL FOR POWER

China has got sea behemoths that determine very often political prices. It is not dumping, but operators are just charged at cost price. For example, China Ocean Shipping Company (COSCO), owner of 201 container ships equivalent of 900,000 20-feet average size of a container, allowing freight forwarders to charge 20-40 feet containers from China for delivery in any port in Europe at incredibly low prices, in line with the goals the Chinese government wants to achieve in terms of export. It means that COSCO, a state-owned company, is not looking for profits for itself but looking for benefits of the whole Chinese nation. It is a very powerful geostrategic instrument contributing to the achievement of objectives, winning potential markets in order to bring the Chinese coasts closer to the rest of the world. So, the paradoxical thing is that the cost of land transport within Europe is often four times more expensive than a 30-day maritime transport from China to Europe. We know that 75 percent of trades in Europe are done between European countries and it is easy to guess that this represents an opportunity for China in the coming years if nothing is done by European economists to find a long-term solution to the current economic situation.

On 7 June, 2010, Cosco purchased parcels of land for 1.90 billion Yuan sold by Shanghai local authorities, meaning that this area will become in 10 years the first financial centre in the world. The real estate business is still under the Chinese government control. In fact, out of 11 parcels of land offered for sale, nine were purchased at auction by state-owned companies and only two were purchased by Chinese private companies.

The image of Cosco reflects the versatility of Chinese state-owned giant companies controlling almost everything in the industrial sector, ranging from port management ($ 3.4 billion to handle containers in the port of Piraeus in Greece in 2008) to real estate through the construction of ships and manufacture of containers.

This type of business provides the company with great advantages relating to competitiveness of Chinese businesses while their rivals have to go through a wide range of specializations, let’s say, to make as much profit as possible, according to the capitalist development model. For example, the French branch of COSCO, headquartered in Paris, has been operating in all the French port cities, primarily as a shipping company in the field of consignment, ship repair and air freight in order to achieve the same objective as a new product out of a Chinese factory and it should reach every destination without suffering any penalties regarding transportation or logistics.

In June 2011, 52 Airbus A320 were built in a new plant in Tianjin, China. Once again COSCO acted as a major contractor to execute programmes of Tianjin Airbus Company and was responsible for shipping heavy pieces from Europe to Tianjin, especially barge, inland and maritime transportation of containers, including domestic air transport to the unit in Tianjin.

Once again, the choice of a Chinese state-owned company is not made by chance, but it is the result of a geostrategic decision carefully thought out. In fact, COSCO has been chosen to conduct the same operation, but in the opposite direction, from China to Africa, for assembling an aircraft called XIAN MA-60, with which China pledged to replace the bad habits of Africans who buy only old airplanes from the West. This type of airplanes have been proved as real flying coffins over Africa and are paradoxically more expensive than the new ones built in China. The Chinese company, Xia MA-60, has already been providing equipment to Zimbabwe, Burkina, Burundi and South African airlines.

The Chinese People Daily newspaper of May 25, 2011 said that British Caledonian and Laos Airline and Sri Lankan Air-Force are serving about a hundred destinations and several companies in Asia, Africa and South America. Some indiscreet sources in Beijing report that COSCO will shortly transport aircraft pieces from Chinese coasts to Africa, in the port city of Kribi in Cameroon, where a deep water port is being built to dock large boats.

When the European Aeronautic and Defence Space (EADS) was installed in China, the Chinese government required this company to purchase a large number of its aircraft, but the country is planning to build airplanes for Africa to be used on African soil. Chinese economists and strategists are showing that they understand what Western economists are still struggling to understand about modern economy. The West cannot persist to be successful alone while everything goes perfectly. It’s the right time to help them build new partnerships with other countries to help them when tough times come, because you can provide them with means and opportunity to find a way out.

DEMOCRATIC WEAKNESS

If the democracy of universal suffrage was something so wonderful, there’s no doubt that the West would prefer to keep it or even hide it as a military secret with a view of using its advantage over the rest of the world. If democracy of universal suffrage could allow the development of a nation, it is obvious that the West would not commit itself to back ad hoc opposition groups in such countries to help them become redoubtable rivals in terms of industrial and intellectual production. The truth is quite different and much bitterer. The West understands that one reason for its decline is universal suffrage democracy which brought to power the most mediocre personalities, provided that they are supported by rich people who rarely serve public interest.

The mediocrity of politicians was accompanied by economists trapped over the alleged unwavering superiority of ultra-liberalism. We saw famous economists in Spain, Greece, Portugal, France and Italy arguing that Germany should provide financial assistance to European countries in crisis, because they believe that Germany has been generating huge revenues from the sale of large saloon cars in those countries.

This kind of reasoning betrays the state of collapse of the economists who are unable to understand that Germany cannot afford to save itself and the beginning of its economic crisis is a matter of time; all Western countries seem to be unaffected by this situation because they are governed by the same economic models. The worst is that, the same nations are planning to compete with China. How can they achieve if they refuse to do the easiest exercise in order to share profits generated by Germany, and they have to wonder if they can manage to sell their items in Germany, the first marketplace in the European Union?

The truth is that these economists have already surrendered themselves and given up fighting for lack of ideas. They are moving on to the secondary plan saying that the West would become a tourist destination for people coming from developing countries. President Barack Obama revealed on January 18, 2012 at a tourist park in Florida that he wants to make the United States the first tourist destination in the world in order to boost employment. Mr. Obama does not know that tourism has never helped a country to develop.

He is challenging France as the first tourist destination in the world with 77 million visitors in 2010 (against 59 million in the United States, the second), but the country would not have faced the current financial crisis if tourism was a magic wand. Western economists who believe they have found a miraculous plan to end the crisis by predisposing infrastructure to house rich people from China, India and Brazil, will ask themselves why the French Riviera, the prestigious place for tourist attraction in Paca region where the number of poor people is paradoxically the highest than in the rest of the country.

No country will be able to fight poverty if some people refuse to be in the production trade. Even the richest tourist in the world is not going to consume alone food for five people and if he has to import it to meet his needs, he will return to the starting point, regardless of the difficulty he will encounter to become a specialist on rich people. As some Western paedophiles visited Thailand, the Mauritius government fearing the spread of sex tourism in the country decided to promote luxury tourism.

Unfortunately, 30 years later, drugs are being smuggled into the capital Port Louis by luxury yachts and private jet aircraft, which are not controlled by the authorities who do not want to offend the rich. Nevertheless, we wonder if the current crisis in the West can transform institutional racism because only white people could enter the United States without a visa. The keen interest of the American president in tourism will be a progress for the world, primarily Taiwan, a long-standing US ally, will be the first country to benefit from it. The truth is that the North in crisis is no longer attracting many people, even the poor from the South.

INTELLECTUAL COMPETITION

According to an article by Christine Murris published in Valeurs Actuelles, a French magazine, dated 19 January 2012, in France only 14,700 students enrolled at engineering schools out of 16,800 seats available in 2011. The worst thing happened to graduate engineers in 2010: only 42 percent of them have been able to create wealth. The others have been hired by job speculators in the financial sector. Before students’ graduation, several insurance companies and banking institutions are interested in their mathematical skills to make them earn more money without making any efforts.

At the same time, nine universities out of 11 in Tianjin, the third largest city in China, provide engineering education. In the West, political power is held by people who studied law or literature, whereas in Chine political power is in the hands of engineers. So, we can now understand why Chinese and Western young people are keenly interested in a wealth creating profession. However, both parties are competing with each other. It is surprising to see that all measures taken against industrial desertification in the West will not affect the true values of the whole society.

Today, there is a real intellectual competition among nations. A nation will develop if it has the ability to be ahead of the competition by making sure that sufficient numbers of people are trained and are available to work for factories where they can imagine and create things.

The West believed for over two centuries that intelligence was related to the DNA of so-called white Caucasians. The West is unable to take up a huge challenge represented by the East; that is to say engineers’ competition. A computer and a phone get old after three months of use, that’s the challenge. Symbols are not going to change things.

NATIONALLY COMMUNIST AND INTERNATIONALLY CAPITALIST

In the 2011-2012 report of the forum of 1600 European companies operating in China, it is said that China is a communist country on the national level and capitalistic abroad. This severe report says that ‘it must be particularly good for China to practice the most unbridled export-oriented economic liberalism policy while building up fundamentals of state-controlled economic system in the domestic market following the examples of the Soviet.’ This 338-page report signed by the chairman of European Union Chamber of Commerce, Davide Cucino, and his general secretary, Dirk Moens, reflects the frustration of all Western entrepreneurs operating in China in the hope of getting a billion Chinese consumers. They have no choice other than exporting from China to their native countries.

We are all concerned by this and we need to review thoroughly any economic theories of the two previous centuries taking no consideration of a country’s possibility to play two roles simultaneously: A communist system practiced within the country and unbridled capitalism abroad. Without this rewriting, there is no solution to competitiveness of Western businesses. It may even reduce to nothing the labour cost in the West and will not change significantly the path of the race towards the wall when the issue is vitiated by an uncontrolled variable, such as the role played by the state in modern economy.

WHAT LESSONS FOR AFRICA?

Mandatory privatisation urged by the International Monetary Fund and the World Bank are monumental blunders not be made. For example, the privatisation of the state-owned power company, SONEL, in Cameroon taken over by AES, a US private company, was a strategic mistake of great importance because not only electricity cuts continued but also in a country that intends to develop from its industries, the energy price, especially for electricity, should be determined in comprehensive policy measures to ensure that businesses remain competitive and are better prepared to operate and increase their shares in the international market.

The recipe that Western-educated Africans applied providing that tax should be levied on everything that moves is another strategic mistake that leads straight to failure.

The urgency for Africa is to produce wealth and the government should make sure that production is effective on a large-scale and distributing it will be easier if there is something to share. Africa must export its finished products in order to get foreign currencies necessary to the welfare of its people. The strategic energy prices (gas, diesel, electricity) are more important than the low cost of labour. Taxing people trading at the edge of paved roads may give the illusion of alleviating the state financial burden in Africa. This is a wrong revenue economic system in the West that impedes African competitiveness.

The issue Westerners are faced with is the morality of their system. African economists must endeavour to draft their own economic theories that take into consideration the African interests and realities, instead of being in a permanent standby in order to occupy a subordinate position in Western institutions .In my opinion, what is needed is the courage and independence of African economists to distance themselves from the formulas developed by bureaucrats in Washington to find their own way through new African variables. These variables modified in the context of the 21st century would do a great honour to intellectuals who have the ambition to be creators of a new Africa.

So, an international institution acting against the interest of Africa but dedicated to defend the interest of the West will be created. Africans must ask themselves why the European Union failed to prevent China from investing in Africa. Why the US administration, as well, failed to slow Chinese investment in Africa. Regardless of this, everybody wants to work in the future for Western institutions. How is it that Africa will be out of poverty with Chinese investment than the International Monetary Fund (IMF) turning everything upside down by taking a stand?

In early August 2011 in Nouakchott, Mauritania, the African Caucus was held, a meeting of African countries and their creditors, led by the IMF director. What can be remembered from the meeting is the excitement about a thousand billion dollars that China had drawn from its reserves to inject into the African economy (as a comparison, the famous Marshall Plan worth of $100 billion, is 10 times lower than the former).

There was astounding news from Burundian authorities, very happy for signing contracts with China, they feared reprisals from the IMF. On December 21, 2010 in virtue of a decree, the US President Barak Obama excluded the Democratic Republic of Congo from the list of African countries eligible for the AGOA project and no duty-free export to the United States from the country was possible, because of massive Chinese investments in DR Congo, even if the official reasons for this were the decline of democracy in the country.

Paradoxically, while taking advantage of AGOA and exporting finished products to the United States, authorities in Congo really needed someone to invest in their country to set up processing plants. How can we blame them for accepting Chinese funds?

African municipalities must compete in a smart way to create wealth and therefore create jobs for their own people. Ninety percent of the Bibles used by many religious groups in the United States are printed in China. Most of those printers are owned by local governments deriving income from this business to pave new roads and create more jobs. Municipalities are able to create resources that can ensure the emergence of a strong state in a position to resist and stop the selfish and individualist force. Otherwise, it is not excluded that the continent will free itself from the yoke of the West and to see an internal yoke of a few clans who cheerfully install a revenue economy, exactly the same model that is leading the West into a wall.

Jean-Paul Pougala, a Cameroonian, is director of the Institute of Geostrategic Studies in Geneva, Switzerland.

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2 responses to What westerners don’t understand about modern economy

  1. 

    I like your article! I think Chinese now are more competitive than Westerners and the are both biggest producer and biggest buyer in the World

    Best regards,
    Olga

  2. 

    Very professional article about business and economy – I think it is the most professional blog I even have read.
    Regarding China: Yes. They are a good example for Africa – they should adopt Chinese system to develop economy during next 10-15 years

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