Russia and China resurrected free-market democracy. Now their economies are floundering
In an address to the House of Commons in 1947, Winston Churchill quipped that “democracy is the worst form of government, apart from all those others that have been tried”.
Given democracy and capitalism normally are tied at the hip, the saying was regularly adapted to describe how best to run an economy.
Until the turn of this century.
China’s economic revolution — with its unique combination of a centrally planned one-party state atop a market-based economy — transformed the country from an agrarian society in the 1970s to a global economic powerhouse. The sheer speed and magnitude of its feat was unprecedented.
And its neighbour, under Vladimir Putin, set about restoring Russia’s economic and military place in the world after the humiliation of the Soviet empire’s collapse. He ruled with an iron fist, all the while aided by a clutch of uber rich oligarchs.
For many in the West, the transformations were unnerving. And when the Western financial system teetered on the verge of a chaotic collapse in 2008, it was China that rode to the rescue, further reinforcing the notion that free-market democracy had done its dash.
Decisive action, authoritarian leaders whipping up nationalist fervour and a sudden rise in living standards and global influence — all achieved without the niceties and the need for compromise. It was a heady mixture that prompted a lurch to the right in many Western nations.
Suddenly, however, that’s no longer the case.
Both China and Russia are floundering. Their economies are in deep trouble. Their leaders, whether through hubris or desperation, are doggedly pressing ahead regardless of the cost, and now stand accused of incredible over-reach.
In Xi Jinping’s case, his refusal to accept the inadequacy of Chinese-made COVID vaccines has thrown the economy into a calamitous nosedive which threatens to undermine his own push for an extended term at the top.
For Putin, the folly of his ill-considered military adventure has backfired horribly. It has united, rather than splintered, Europe and the United States while extracting a terrible human toll on Ukraine and on the welfare of ordinary Russians.
As the West isolates Russia and retreats from China, encouraging both into each other’s embrace, the costs globally will be profound.
The China paradox
No wonder the cadres are confused. The mixed signals emanating from Beijing grew louder last week as Premier Li Keqiang issued a dire warning about the state of the economy.
“Economic indicators in China have fallen significantly and difficulties in some aspects are greater than when the epidemic hit us severely in 2020,” he is reported to have told thousands of officials from local government, state-owned firms and the financial sector.
They must do more to stabilise growth, he told them.
It is a message, however, very much at odds with that from Xi who has consistently urged the nation to help eliminate COVID-19 regardless of the economic costs.
But the costs are mounting. Industrial output has contracted for the first time in two years and unemployment is on the rise. The jobless rate jumped to 6.1 per cent in April, just shy of a record. Even worse, youth unemployment in urban areas has soared to 16 per cent.
After almost three years of waging a cultural revolution against property developers and technology entrepreneurs, Beijing suddenly is back-peddling. Pronouncements that housing is for shelter not investment have been replaced by urgent measures to kickstart real estate investment.
Almost a dozen large property developers, including China Evergrande, have either collapsed or are on the brink. It has prompted officials to cut interest rates, loosen property sales regulations, provide stimulus and even help home buyers.
But it is having little effect as China’s economy is grinding to a halt.
Hundreds of millions of Chinese citizens have been subjected to harsh lockdowns in Shanghai, Beijing and other major industrial hubs, creating bottlenecks at ports and disrupting manufacturing and services.
The reason can be sheeted home to its two homegrown vaccines and their vastly reduced ability to combat the Omicron outbreak.
Add to that the poor take-up of booster shots, particularly among the elderly, in a country that has one of the world’s most rapidly ageing populations.
Neither Sinovac nor Sinopharm are mRNA vaccines and the leadership has been reluctant to approve foreign-made vaccines. If that continues, the only answer will be even harsher lockdowns as the virus continues to spread.
Without foreign vaccines or a massive ramp-up in booster shots, there’s a stark choice: either a potentially huge death toll or an economy facing an even greater slump than two years ago.
Rouble or nothing
The rouble is shooting the lights out. After a catastrophic decline in the immediate aftermath of sanctions being imposed in response to Vladimir Putin’s brutal invasion of Ukraine, the rouble has recovered all its losses, soaring 150 per cent to its highest level since 2018.
It is up 16 per cent against the US dollar this year, making it the second-best-performing currency in the world after the Brazilian real.
The Russian propaganda machine would have you believe that this is a work of genius on Mr Putin’s part. It is not.
Russia’s economy is in the throes of its biggest decline in decades and the muddle-headed manipulation of its currency will only exacerbate the problem.
Usually, when an economy is in trouble, its currency falls, acting as a natural shock absorber by making exports more competitive and delivering foreign income.
Shortly after sanctions were imposed, Moscow retaliated by banning sales of the domestic currency and forcing buyers of Russian commodities, particularly natural gas, to pay in roubles. That sent it into orbit.
It may have boosted Mr Putin’s ego. But it has backfired. The sanctions have prevented imports, creating shortages of essential items such as food where prices have surged 20 per cent.
Even worse, given most of the country’s tax revenues from oil and gas are valued in US dollars, the stronger rouble has undermined the Kremlin’s budget. The domestic economy, meanwhile, is on track to shrink by 10 per cent.
That will only make life tougher for Mr Putin as he tries to finance a protracted war in Ukraine, a venture that was supposed to be over in days. Then there is the extra security costs of having newly hostile neighbours such as Sweden and Finland on his border.
An easy fix to some of his financing problems would be to drop the capital controls and let the rouble fall to its natural level. That’s highly unlikely.
Inflation and conflagration
The immediate impact has been swift and severe. We’re all paying more for almost everything. Energy is required for everything from manufacturing and transport to everyday household necessities like cooking and heating.
Inflation — ignited by shortages and shipping problems as the global economy recovered from the deepest recession in a century, and exacerbated by huge fiscal and monetary stimulus — is now running at multi-decade highs across the developed world.
The Ukraine invasion, which disrupted supplies of energy, food and metals, has seen a transient economic jolt morph into a longer-term crisis.
As the political and diplomatic situation becomes increasingly intractable, the pullback from globalisation to a more “made at home” mantra may help boost local employment. But it will come at a cost: higher prices.
When China became the world’s factory, making everything from socks to space-age industrial goods, the sheer scale of its production kept a lid on prices. That trend is over. So too is the country’s attraction to Western firms.
Life for foreigners running large enterprises in China has always been problematic. But the increasingly unpredictable nature of the regime has seen a collapse in direct foreign investment, which has begun to weigh on growth.
And the trade war waged by China against Australia — which backfired spectacularly with shortages of coal and food — has prompted many global business leaders to seek out alternative manufacturing destinations like Vietnam and Malaysia.
Those tensions are only likely to continue as Beijing continues to woo Pacific nations into the fold as it recruits UN votes in preparation for its very own expansion into neighbouring territory, Taiwan.