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This chapter is from the book

State Capitalism

As time passed US economic success, the consequences of which were greater power-projection capabilities and domination of the world's geopolitical scene, made a great impression on the rest of the world. Russia and China set out to emulate this Western model—once given the chance. China, under the guidance of Deng Xiaoping in the late 1970s, was finally able to reverse Mao's disastrous policies and establish a trajectory of economic growth the spectacular likes of which very few people around the world would dare even contemplate at the time. To its credit American leadership at the time, from 1977 and up to the presidency of George H. W. Bush, understood the implications of Deng's market-oriented reforms and, by building upon former President Richard M. Nixon's initiatives, laid a foundation that would allow American companies and investors to capitalize on opportunities in China for years to come.

Ironically, it was Mao's political instinct—a great asset during the early days of his leadership—that led him to bring Deng to Beijing in 1952. Deng was promoted rapidly to secretary general of the party. In terms of importance, he ranked behind Liu Shaoqi, then Chairman of the Standing Committee of the National People's Congress, and Zhou Enlai, the first Premier of the People's Republic of China. According to Mao's contemporaneous view, "Deng is a rare and talented man; he finds solutions. He deals with difficult problems responsibly."5 These qualities the future leader of China would put to good use for years to come.

In the late 1980s, when the communist states in Eastern Europe were falling apart and the Chinese leadership was wracked with anxiety, Deng famously observed, "Don't be impatient; it is no good to be impatient. We should be calm, calm, again calm, and quietly immerse ourselves in practical work to accomplish something—something for China."6 Deng's resolve to "do something for China" was a stark contrast at the time with the chaos surrounding the recently dissolved Soviet Union. The disastrous years of the Yeltsin administration, the main achievement of which was the humiliation of Russia on a global scale, pushed economic and institutional reform back by a decade. With the ascent of Vladimir Putin in 1999, Russia regrouped and began to make good use of its strategic natural resources. Proceeds from these strategic assets—contrary to past practice—have been used to secure Russia's future and to modernize its economy. The economic and geopolitical rise of the so-called BRIC countries (Brazil, Russia, India, China) demonstrates that economic growth comes wrapped in many political covers—liberal democracy is not a prerequisite for successful economic expansion. The one-size-fits-all policies advocated by Western operatives and financial zealots in the 1990s proved to be nothing more than nonsense, and actually almost destroyed countries as old and large as Russia.

The financial crisis of 2007-09 demonstrates the failure of the governments in the Anglo-Saxon sphere of economic influence to properly police the system. This failure may not destroy the capitalist model, but has altered it decisively. The failure of state agencies to perform their duties—provide a level playing field, intervene where there's foul play—was deconstructed, vividly, during Congressional hearings about the Bernard Madoff scandal.7 When the state did intervene in the financial markets, during the years leading up to the crisis's peak in 2008, it did so in a way that invited high levels of moral hazard. The Federal Reserve's moves during the mini-crash of 1987 and the rescue of Long-Term Capital Management (LTCM) set a tone that permitted the 2007-09 bailouts that define the current era of American finance. The 1987 incident, had it been allowed to run its natural course, would not have undermined the US economy overall or the average American's economic security. But, stepping in as it did, the Fed demonstrated a reluctance to allow market forces to correct excesses. Traditionally, such excesses end with the punishment of unscrupulous, arrogant participants. As one observer noted at the time, high finance rewards success, but in the twilight years of the 20th century, it strangely protected failure as well.8

It was worrisome then and it's worrisome now that authorities in capitalist economies would step in to ensure endlessly rising markets. Implicit in their actions is the message that nothing can go wrong. This implied guarantee eventually almost caused the Western financial system's demise in 2008–09. This crisis revealed that for the first time in 65 years America doesn't hold all the cards in the global economic and political game.

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