Late last month, the Biden Administration unveiled a USD 2 trn infrastructure programme that aims to modernise American infrastructure. The American Jobs Plan has four major spending components over the next eight years. First, invest USD 621 billion on clean energy, upgrading and repairing highways, railways, bridges and city transit systems. Second, focus USD 650 billion on improving life in homes, schools with water and broadband systems. Third, spend USD 400 billion on caregivers for elderly and disabled people to create jobs. Finally, invest USD 300 billion in research, development and manufacturing, including USD 50 billion on semiconductor manufacturing. Underlying is a strategy to deliver green lifestyle to combat climate change.

Coming on top of the USD 1.9 trillion stimulus package and USD 0.9 trillion approved under Trump, the US is committing USD 4.8 trillion or 22.9 percent of 2020 GDP, setting the stage for Big State competition with China.  To fund this, the corporate tax rate would be raised to 28 percent from the current 21 percent, which Trump slashed from 35 percent in his 2017 tax package. The Biden package would also plug US corporate taxation evasion through capturing offshore income at domestic tax rates.

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This attention to infrastructure and jobs is long overdue. Furthermore, the world needs this large fiscal stimulus to help global recovery from the pandemic. The OECD estimates that up to 1.5 percent would be added to global growth from the US stimulus package.

The downside is whether US can implement such investments without inflation and whether the rest of the world will fund this without higher interest rates.   On inflation, LSE Professor Charles Goodhart and Manoj Pradham have already documented that since the 1980s, global benign inflation was due to China becoming the world’s new source of cheap goods and services. They think that this will not last. University of Texas Professor James Galbraith warns that “China is missing from the Great Inflation Debate.” He, however, thinks that China will not rock the boat by pushing up prices.

On US debt funding, out of US net foreign liability to rest of the world of USD 14.1 trillion at end-2020, just under three quarters are funded by East Asian surplus economies (Japan, China, Hong Kong, Singapore and Taiwan), with the balance by Europe (Germany, Netherlands, Norway and Switzerland). As Harvard Professor Kenneth Rogoff put it, “it seems an article of faith among US policymakers and many economists that the world’s appetite for dollar debt is virtually insatiable.” 

What could totally disrupt both assumptions? Worsening US-China relations!  By retaining Trump’s tariffs on China and hardening rhetoric on China, the Biden Administration thinks it can pump up the US and fight China and Russia at the same time. 

Is this unipolar hubris justified?

The latest China Academy of Social Science (CASS) 2020 National Balance sheet report showed that by 2019, China amassed national net wealth and GDP at market value at 80 percent and 65 percent of the US respectively. China is a net lender to the world with USD 2.2 trillion or 14.4 percent of GDP, running current account surpluses, whereas the US is a net borrower to the tune of USD 14.1 trillion or 66.9 percent of GDP, running growing twin fiscal and current account deficits and debt.

The real race is which form of state capitalism is more sustainable and effective—a marathon rather than a short-term dash. State capitalism has evolved from managerial and financial capitalism of recent years because financialization and technology created growing income and job disparities that only government intervention can correct. There may be ideological differences, but ideology does not ensure performance outcome.    

The Chinese use state-owned enterprises (SOEs) to implement long-term national goals, such as modernisation of Chinese infrastructure, stabilisation of jobs, regional development and provision of social utilities. Although less efficient than the private sector, by keeping sufficient reforms to ensure profitability, SOEs contributed to China’s growing net national wealth to USD 88.6 trillion. With the state owning one quarter of such wealth, there is more than ample reserves to address Chinese modernisation without higher taxation on the citizens. A 40-year review of Chinese SOE performance consider that SOEs are best labelled as “social enterprise”, created to achieve social goals through business methods, not wholly-for-profit.

In contrast, the combination of shareholder capitalism and frequent elections induces the US to act for short-term considerations. With contentious domestic politics and complicated Federal State relations, infrastructure projects have hitherto faced formidable obstacles and delays. Money politics have reached the stage where everything depends on monetary creation, but that in turn relies on growing net foreign debt.

In short, one state capitalism relies on domestic savings and the other relies on foreign savings.

The US has been running down its public infrastructure, because the bulk of net wealth is in private hands. In contrast, China uses SOEs to own and build infrastructure, but allow private sector to innovate and compete across usage rights. Over the last two decades, China has reduced state-ownership of assets and allowed the private sector to push market innovations. Despite criticisms that privatisation was slow, sufficient SOE reforms were made to hold back growing SOE leverage and ensure that they remain profitable and deliver on national objectives.

As CSIS Jude Blanchette argued, “Absent a deep and enduring commitment to rebuilding internal competitiveness, as well as creating an economic system that is vastly more inclusive, the United States can only tread water while China continues to march toward the future.” 

As governments assume larger roles in the US, Europe and China, the issue is how to deliver performance along the whole range of military, economic, social, technological and organisational dimensions, without capture, corruption, concentration and widening social injustices. So far, American free markets have allowed the 1 percent to increase concentration of wealth and power, including capture in politics. The Achilles’ heel of procedural democracy is the enormous difficulty of reforming itself when captured.

In contrast, China seems able to lift the majority out of poverty and deliver modern infrastructure and living standards, at the cost of individual freedom.  The competition is, therefore, between different forms of state capitalism that may in practice look like market socialism.

Who wins in this competition is not about wishful thinking that the other side will collapse or falter. It’s about who makes the least strategic mistakes.

 

Andrew Sheng is an honorary adviser with the CIMB Asean Research Institute and a distinguished fellow with the Asia Global Institute at the University of Hong Kong. He writes on global issues for the Asia News Network (ANN), an alliance of 24 news media titles across the region, which includes The Daily Star.

 



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