Russia’s, China’s economic eclipse proves US system is still the best

Winston Churchill famously said that democracy is the worst form of government — except for all the others that have been tried.

Something similar might be said of our democratic and free-market economic system.

For all its faults, it beats hands down the top-down and autocratically run economies of our main political rivals.

Anyone who doubts the superiority of our system over that of our rivals has not been paying attention to the wheels coming off the economies of Xi Jinping’s China, Vladimir Putin’s Russia and Recep Tayyip Erdogan’s Turkey.

The one thing these three faltering economies share is autocratic leaders who make their country’s key economic decisions without the checks of independent and well-functioning economic institutions.

While the United States seems to be on the dawn of another productivity-enhancing round of new technology in artificial intelligence, robotics, 3D printing and driverless cars, China’s economy is rapidly going from a so-called economic miracle to a Japanese-style lost economic decade.

Communist China of course is no stranger to egregiously poor economic management by overly powerful presidents.

One only has to think of the 1960s and ’70s economic disaster Mao Zedong’s Great Leap Forward and his Cultural Revolution spawned.

Today, it is China’s misfortune to have as its leader Xi Jinping, who has arrogated for himself the most political power since Chairman Mao.

Worse, President Xi is using that unbridled power to make a series of major economic-policy mistakes that are going to cost his country dearly.

The most recent blunders are his economically costly zero-COVID policy and his heavy-handed clampdown of the country’s high-tech sector for political reasons.

More serious yet has been his overreliance in the past decade on a property and credit market-led economic-growth model.

That has produced a bubble in those sectors that the Bank for International Settlements estimates exceeds the corresponding bubble that preceded Japan’s lost economic decade in the 1990s.

A recent slew of poor economic data suggests China’s property and credit market bubble has burst and the economy is in deep trouble.

Chinese developer Evergrande has filed for US bankruptcy protection.
REUTERS/Aly Song/File Photo/File Photo

Indeed, the country is now experiencing deflation and its youth unemployment rate has skyrocketed to more than 20%.

Meanwhile, its property developers are defaulting on their loans, house prices are falling, and the local governments are experiencing large budget deficits as a result of slumping land sales.

Once-giant developer Evergrande just filed for US bankruptcy protection as it finishes its debt restructuring, and Beijing is expected to cut prime interest rates Monday.

This hardly bodes well for the Chinese economy in the decade ahead, especially since with a declining population thanks to its earlier one-child policy, it’s difficult to see how China can grow its way out of its private-sector-debt mountain.

Even before his economically disastrous invasion of Ukraine, Vladimir Putin had reduced Russia to a kleptocratic and sclerotic economy overly dependent on natural-gas exports to Europe.

Russia's ruble has continued to drop in value amid the invasion of Ukraine and sanctions from the United States and Europe.
Russia’s ruble has continued to drop in value amid the invasion of Ukraine and sanctions from the United States and Europe.
Mikhail Klimentyev, Sputnik, Kremlin Pool Photo via AP

As underlined by the ruble’s plunge over the past year from a little more than 50 to the dollar to around 100 to the dollar, the Ukraine war, together with the associated draconian Western economic sanctions, is putting the country well on the road to bankruptcy — in much the same way the Soviet Union’s Afghanistan war contributed to its unraveling in the late 1980s.

Turkey offers yet another example of strongman rule ending in economic tears.

Recep Tayyip Erdogan’s stranglehold on political power and his neutering of the country’s economic institutions have allowed him to pursue his harebrained idea that lower interest rates are the right policy prescription to combat high inflation.

It is little wonder then while our country’s inflation has declined to 3% and the dollar remains strong, Turkey’s inflation has surged to almost 60% and its currency has lost around a third of its value.

It must be only a matter of time before Erdogan has his day of economic reckoning.

All this is to say that before grumbling about our economy’s performance, we should be grateful that despite all its imperfections, our democratic and free-market economic system allows our country to continue to be the high-tech innovative envy of the world that offers its citizens a continually rising standard of living.

American Enterprise Institute senior fellow Desmond Lachman was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging-market economic strategist at Salomon Smith Barney.

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