With the collapse of short sighted neo-liberal economic model in 2007-09 and global financial crisis, U.S. financial market remained no longer effective force to create demand for global production while Chinese “One Belt One Road” (OBOR) is ready to generate demand out of real infrastructural investments seems to be a replacement of neo-liberal economic system with Silk Road System.
Since global manufacturing hub, China chalked out transnational development strategy, OBOR is being seen as catalyst to generate demand out of real infrastructural investments rather financial growth. The OBOR, the brain child of incumbent Chinese President Xi Xing Ping was lunched at Boao Forum by October, 2013 is capable enough to replace neo-liberal economic order but still have challenges ahead, may impede the execution of Silk Road System. Before having comprehensive debate, lets start with understanding of key concepts relating to the subject.
The neo-liberal economic system primarily based on financial capitalism in shape of asset trading, where debt is channeled continuously into the asset market to inflate asset prices and profits are made by trading in assets. Profit making through economic and political domination exercised by the financial institutions or financiers is called financial capitalism. This system asset market needs continuous channelization of real debt.
To understand the continuous debt channelization system, we need to understand the geo politics of petro-dollar. By geo-politics of petro- dollar we mean geo political arrangements that ensure continuous debt channelization in U.S. capital account. In 1973, during Arab-Israel war has taken its toll in oil market. Oil prices soared mainly due to Organization of the Petroleum Exporting Countries (OPEC) cartel’s collective decision to hike oil price. In the same year, Brettonwoods’ agreement collapsed and so the era of fixed value of U.S. dollar with respect to gold price was over. Since then the era of free floating exchange rate started.
The value of U.S. dollar started to be determined by demand and supply of U.S. dollar like any other goods or factors in the market. The Gulf governments mainly Saudi Royal government controls OPEC and its oil price hike is associated with the decision that oil will be sold in U.S. dollar only and the risen income from oil price hike will be deposited in U.S. Federal Reserve i.e. US Treasury Bills will be bought with the U.S. dollar income from sale of oil. In modern industrial world, all countries need oil.
Hence, to buy oil entire world needs to have U.S. dollar. Thus with the decision of Saudi to sell oil in U.S. dollar only and deposit income in U.S. Federal Reserves, the demand for U.S. dollar both as mode of exchange as well as store of value rose manifold times in the entire world. The entire world starts depositing its foreign exchange reserves i.e. foreign assets and liabilities in U.S. Federal Reserves. Thus US Federal Bank starts getting huge dollar deposits which it began to distribute as debt throughout the entire U.S. financial market by fractional reserve banking system.
U.S. Finance or Asset Trading Market
Fractional reserve banking implies creating money or purchasing power through debt. The debt is channeled into asset market to inflate asset prices and profit is made by trading with those assets. The profit from this asset trading or finance is used to import cheap products from third world, mainly China. Moreover, as U.S. goes on specializing in finance or asset trading, it began to export its manufacturing base to Third World countries like China, India, and South Korea. In the process debt to GDP as well as external debt of USA soars.
Globalization Model of Neo-Liberal Financial Capitalist Order
Primarily neo-liberal financial capitalist order is shaped by three forces:
1) OPEC cartel mainly Saudi controls oil market and sales oil in U.S. dollar and deposit that dollar income from oil sale in U.S. Federal Reserve.
2) Third World especially China produces goods and services by using its cheap labor and capital from U.S. and other first world countries. Then the production is exported mainly to U.S. Third World countries including China deposit the net export income as well as foreign debts and investments in US Fed.
3) Asset market of U.S gets debt from US Fed deposits. Thus US asset prices are inflated and profits are made by asset trading. This financial profit producing demand for global production produced in Third World countries especially China. This is how a globalized system of oil, cheap labor and finance based demand management system came up.
Fall of Neo-Liberal Order and Rise OF “OBOR”
Now by 2007, U.S. economy is heavily indebted to China, Japan, Saudi, and other Third World countries. China is already global manufacturing hub with largest foreign exchange reserve in US Fed. Thus the neo-liberal financial model becomes problematic. The 2008 G-8 meeting for the first time saw U.S. begging for bail out money from China to save its financial system. China to save its $ 4 trillion valued deposits in US Fed decided to bail out US financial system.
Since China started to think about alternative way of investing its foreign earnings and generating demand from that day. Thus by October 2013 China came up with this brilliant idea of “One Belt One Road” (OBOR) where China will gradually invest its foreign exchange reserves including net export earnings in real infrastructural sectors rather than in U.S. Treasury Bills. Hence China no longer wants to depend on U.S. financial market to generate demand for its exports. Rather China wants to move to a sustainable system where China will keep current account surplus and will share its resources with the rest of the world by investing in mega investment projects throughout the world.
Challenges for “OBOR”
If we try to keep the real point why China has to come up with the idea of OBOR, we must accept that financial demand generating system is unsustainable and it is due to the failure of the later system and OBOR came in. Now the previous neo liberal system is run on short sighted debt based profit from asset trading. Hence this short sighted demand management system created a cultural side which is also short sighted. Neo liberal cultural constructions include consumerism, quick money making, individualism, feminism, etc. Neo liberal short sighted culture is destroying family, reducing birth rate resulting in demographic crisis which ends up in aged society with high percentage of economically dependent population. Since OBOR mainly deals with real productive investments it is bound to face protests against displacement, environmental concerns, etc. Short sighted culture may also prevent people from understanding long term gains and short term losses matrix.
Policy Recommendations for “OBOR”
The OBOR needs to take into account these concerns from petty producers and small traders who often have to bear the brunt of mega infrastructure projects. There is also a public perception that mega infrastructures only help big capital. The OBOR policy makers have to break that perception too. Thus OBOR policies must include incentives for petty producers-traders, environmental management, propagate “family values”, special attention to traditional society of different regions, and preservation of cultural varieties including language, religion, tribe, community, etc.
Financial neo-liberal capitalism came into being to create rapid demand. This short sighted demand management formula created short sighted social and cultural institutions. The OBOR will face challenges from these still existing short sighted culture and institutions. So OBOR has to create far sighted cultures and social institutions to match its long term demand management program.