By Kirk Kardashian, September 2012
Published Aug 18, 2011
Last August, after weeks of political theater worthy of a Greek tragedy—or perhaps the Jerry Springer Show—the world learned that the U.S. would not default on its debts, at least for the time being. Yet it is widely acknowledged that the deal to raise the debt ceiling, while cutting spending by $2.4 trillion over the next 10 years, does almost nothing to address the country's weak economic growth, unsustainable budget deficits, and dangerous federal debt levels.
For Richard D’Aveni, the Bakala Professor of Strategy at Tuck, the lesson is that no combination of spending cuts and tax increases is going solve the deeper problem with the U.S. economy—namely that China has changed the rules of the global marketplace but the U.S. hasn’t changed the way it does business. It’s this idea that forms the thesis of his new book, Strategic Capitalism: The new economic strategy for winning the capitalist cold war.
The last significant period of American economic growth, D’Aveni argues, began in 1981 when President Reagan reduced government spending, taxes, money supply, and regulation—policies otherwise known as Reaganomics. These measures worked for a while, increasing both government and private-sector revenues, but they lost steam as China became a bigger and bigger force in the global economy.
Why did the rise of China render Reaganomics obsolete? Mostly, says D’Aveni, because China is not following the international legal precepts—free trade, labor rights, and the rule of law—developed after World War Two.
For instance, D’Aveni points out that China has joined the World Trade Organization but refuses to abide by its regulations, putting up barriers that prevent other countries from importing their goods into its markets. Furthermore, he says, China’s own laws encourage foreign companies to set up plants there and export products or sell domestically, but put heavy disincentives on repatriating corporate profits to corporations’ home countries. Instead, the money stays in China and further fuels its economic growth. “They’ve gotten access to the rest of the world,” D’Aveni asserts, “but they haven’t truly reciprocated.”
More broadly, China is able to keep its costs of production extremely low through strategic manipulation of various economic levers. One example is its effort to keep its currency artificially weak. Normally, when a country’s economy gets stronger its currency becomes more valuable. If this were to happen in China, it would make Chinese goods more expensive to foreign consumers, thereby putting a brake on Chinese exports and growth. Another example is workers’ rights: a natural consequence of successful trade is an increase in wages, which also acts as a brake on growth. But China has a nearly endless pool of labor—most of the population is no richer than it was in the 1980s—and tightly limits union power, so when labor costs rise in coastal cities, corporations can move inland and access a whole new set of cheap workers. “It’ll be decades before they absorb all of that labor,” says D’Aveni.
Then there’s China’s unofficial subsidization of key industries (largely through a lack of environmental regulation), its companies’ regular theft of intellectual property (witness the fake Apple stores), and its global campaign to buy resource extraction facilities and then sell those resources to Chinese corporations at a deep discount from market rates.
“They’re basically destroying the world economic order of open markets,” D’Aveni says, “and we can’t stop them.”
What the U.S. can do, however, is out-compete them.
How? Through what D’Aveni calls “strategic capitalism,” a wholesale rethinking of how the U.S. runs its economy.
First, says D’Aveni, the U.S. needs to reinvent free-market capitalism using a turn-around strategy, a process corporations undertake when in crisis. D’Aveni explored this strategy in his doctoral dissertation and explains that it has a few basic elements: financial restructuring, quick reduction of overhead and costs, focus on growth areas, and selective asset divestiture. How to translate those actions from the corporate arena to that of nations will be a main focus of his new book.
Second, the U.S. must become more aggressive in fighting what D’Aveni calls the “capitalist cold war,” a pitched battle between the rules-based western economy and China’s asymmetrical brand of commerce. “Just as China has done things that have undermined our form of capitalism,” D’Aveni says, “we must do the same back to them. We have to play hardball.” What this means is embracing “hypercompetition” (the subject of D’Aveni’s first book)—the constant disruption of the marketplace with innovation and strategic maneuvering.
Finally, D’Aveni advises that the U.S. must engage in a new form of capitalist diplomacy using “strategic supremacy,” which is also the title of his third book. Here the goal is to form global alliances through spheres of influence, something that may require reconstituting the world economic system defined by NATO and the United Nations, European Union, G8, and the International Monetary Fund. “We need some way to rein in China’s behavior so that it becomes more integrated into the global marketplace,” he says.
A key component of D’Aveni’s prescription for national resurgence is a “transformational leader, like Reagan or FDR,” he says, “but we’re missing that.” And while D’Aveni acknowledges that reinventing capitalism won’t be easy, he insists that the consequences are dire. “Success in that process,” he says, “could be the difference between America’s third act and the end of the play.”