Friday, March 23, 2012

Which way for China – part two

by Michael Roberts

The sacking of Bo Xilai, the controversial and maverick party secretary of the Chongqing municipality highlights the strategic split that exists at the top of the Chinese government about what direction to take the country over the next generation.  Mr Bo is the son of a revolutionary hero, one of the so-called ‘princelings’, the children of the elite families that rule one and half billion people.   Considered a “prince among princelings”, Bo Xilai is the son of Bo Yibo, one of the Eight Immortals, the group of senior revolutionary veterans who served as the backbone of Deng Xiaoping’s support in the 1980s.

It’s no coincidence that just days after Bo Xilai came under criticism, prominent Chinese academics were attacking him publicly, saying that his career and the entire Chongqing Model were finished   These attacks were from the ‘pro-capitalist roaders’ faction in the Chinese leadership.  This camp disliked Bo because they saw him as a demagogue supporting populist, statist economic policies.  They hinted at corruption, such as Bo’s son driving a red Ferrari – as if most of the princelings and especially the pro-capitalist wing did not do something similar.

What alarmed the top leaders and led to his downfall was partly Bo’s tactic of “mobilising the masses” in ways that explicitly invoked the Cultural Revolution.  That called up deep-seated fears that populist fervour might be used as a weapon against Bo’s rivals.  But Bo’s Chongqing Model also worried the pro-capitalist faction because they are concerned about the current move towards a larger role for the state sector to protect China from the impact of the slump in the capitalist world. The refrain of “guo jin min tui” (the state advances, the private sector retreats) has been the recent sound across China, not just in Chongqing.  Bo jumped on that bandwagon.

The sacking of Bo is a minor moment in the major debate within the leadership on whether China can continue to grow fast through investment in industry, infrastructure and more exports or it needs to switch to a consumer-led economy that imports more and supplies goods to a ‘rising middle-class’ like advanced capitalist economies supposedly do.  Mainstream economics (and their pro-capitalist supporters in China) reckons that this cannot be done without developing a more ‘market-based’ economy i.e. capitalism, because the ‘complexity’ of a consumer society can only work under capitalism and not under the ‘heavy-handed’ central planning of government and state industries.

Leading up to the National Peoples Congress, the pro-capitalist wing was loudly demanding a change of direction by the government.  This was highlighted by a World Bank report on China’s future (China 2030;, published in conjunction with China’s advisory body, the Development Research Center of China’s State Council.  The report argued that there would be an economic crisis in China unless state-run firms were scaled back.  China needed to implement ‘deep reforms’, selling off state-owned enterprises and/or making them operate more like commercial firms. According to the World Bank, China’s growth would decelerate rapidly once people reached a certain income level, a phenomenon that these economists call the “middle-income trap.”   The report said the answer to set up ‘asset-management firms’ to sell off state industries, overhaul local government finances and promote ‘competition and entrepreneurship’.

Two things struck me particularly about this report.  The first of its six strategic measures is the privatisation of the state.  This is put right up front. In contrast, there is no mention of the democratisation of the state, the ending of one-party rule; the ending of the suppression of individual rights and freedoms, allowing trade union rights etc.  What hypocrisy!  The World Bank authors want capitalism, but they don’t care about democracy.  The report is also totally blind.  It wants China to abandon its current economic model and publicly-controlled financial system, which brought it successfully through the world financial crisis, and instead adopt the very model that led the US and Europe into disaster.

But what is also interesting about the report is that it admits that the capitalist mode of production still does not dominate in China – indeed that is the problem according to the World Bank and its domestic supporters.  The report recognises that China’s incredible economic success over the last 30 years was based on an economy where growth was achieved through bureaucratic state planning and government control of investment.  China has raised 620 million people out of internationally defined poverty.  Its rate of economic growth may have been matched by emerging capitalist economies for a while back in the 19th century when they were ‘taking off’.  But no country has ever grown so fast and been so large (with 22% of the world’s population) – only India, with 16% of the world’s people, is close.  As John Ross has pointed out ( in 2010, 87 countries had a higher per capita GDP than China, but 83 were lower.  Back in the early 1980s, three-quarters of the world’s people were better off than the average Chinese.  Now only 31% are.  This is an achievement without precedent.

Even if China slows down as the World Bank predicts, it will still add over $21trn to its GDP before the end of the decade and reach the size of the US economy by then.  Even though China’s consumption as a share of GDP is very low by capitalist standards (anywhere between 35-45% of GDP, depending on how you measure it, compared to 65-75% in mature capitalist economies), it will add another $10trn in annual consumption by 2020, equivalent to the size of America’s annual consumption.  These figures come from the World Bank report itself.

This has been achieved without the capitalist mode of production being dominant.  China’s “socialism with Chinese characteristics” is a weird beast.  Of course, it is not ‘socialism’ by any Marxist definition or by any benchmark of democratic workers control.  And there has been a significant expansion of privately-owned companies, both foreign and domestic over the last 30 years, with the establishment of a stock market and other financial institutions.  But the vast majority of employment and investment is undertaken by publicly-owned companies or by institutions that are under the direction and control of the Communist party. The biggest part of China’s world-beating industry is not foreign-owned multinationals, but Chinese state owned enterprises.

A recent report by the US-China Economic and Security Review Commission (26.10.11) called An analysis of state- owned enterprises and state capitalism in China provides a balanced and objective review ( “The state owned and controlled portion of the Chinese economy is large.  Based on reasonable assumptions, it appears that the visible state sector – SOEs and entities directly controlled by SOEs, accounted for more than 40% of China’s non-agricultural GDP.  If the contributions of indirectly controlled entities, urban collectives and public TVEs are considered, the share of GDP owned and controlled by the state is approximately 50%.”  The major banks are state-owned and their lending and deposit policies are directed by the government (much to the chagrin of China’s central bank and other pro-capitalist elements).  There is no free flow of foreign capital into and out of China.  Capital controls are imposed and enforced and the currency’s value is manipulated to set economic targets (much to the annoyance of the US Congress).

At the same time,the single party state machine infiltrates all levels of industry and activity in China.  According to a report by Joseph Fang and others (, there are party organisations within every corporation that employs more than three communist party members. Each party organisation elects a party secretary. It is the party secretary who is the lynchpin of the alternative management system of each enterprise. This extends party control beyond the SOEs, partly privatised corporations and village or local government-owned enterprises into the private sector or “new economic organisations” as these are called.  In 1999, only 3% of these had party cells.  Now the figure is nearly 13%.  As the paper puts it: “The Chinese Communist Party (CCP), by controlling the career advancement of all senior personnel in all regulatory agencies, all state-owned enterprises (SOEs), and virtually all major financial institutions state-owned enterprises (SOEs) and senior Party positions in all but the smallest non-SOE enterprises, retains sole possession of Lenin’s Commanding Heights.

The reality is that almost all Chinese companies employing more than 100 people have an internal party cell-based control system.   This is no relic of the Maoist era.  It is the current structure set up specifically to maintain party control of the economy.  As the Fang report says: “The CCP Organization Department manag(es) all senior promotions throughout all major banks, regulators, government ministries and agencies, SOEs, and even many officially designated non-SOE enterprises. The Party promotes people through banks,regulatory agencies, enterprises, governments, and Party organs, handling much of the national economy in one huge human resources management chart. An ambitious young cadre might begin in a government ministry, join middle management in an SOE bank, accept a senior Party position in a listed enterprise, accept promotion into a top regulatory position, accept appointment as a mayor or provincial governor, become CEO of a different SOE bank, and perhaps ultimately rise into upper echelons of the central government or CCP — all by the grace of the CCP OD.”

This does not look like the normal relationship of state owned companies or agencies in mature capitalist economies, where the newly nationalised banks in the UK or the now publicly owned General Motors in the US are owned and controlled at ‘arms length’.  In other words, the taxpayer funds them, while they operate purely on the profit motive.  In contrast, Chinese banks have targets for lending and investment set by the government which they must meet, whatever the impact on profits.

The law of value does operate in China, mainly through foreign trade and capital inflows, as well as through domestic markets for goods, services and funds.  In so far as it does, profitability becomes key to investment and growth.  So what has happened to China’s profitability in the last 30 years?  There have been various attempts to estimate the rate of profit in China.  I did so in my book, The Great Recession, chapter 12.  There are other studies that reach slightly different conclusions than I did (Zhang Yu and Zhao Feng, 2006,; and Mylene Gaulard, 2010, ).

I found that there were three cycles of profitability.  Between 1978-90, there was an upswing as capitalist production expanded through the Deng reforms and the opening up of foreign trade.  But from 1990 to the end of that decade, there was a decline, as over-investment gathered pace and other economies, particularly in the emerging world went through a series of crises (Mexico 1994, Asia 1997-8, Latin America 1998-01).  The falling rate of profit then was accompanied by slowing in the rate of GDP growth.  Then from about 1999 onwards, there has been a rise in profitability, which also saw a significant rise in the rate of economic growth (as the world too expanded at a credit-fuelled pace).  A more recent study by the Fung Global Institute (www.fungglobal shows that profit margins in industry rose steadily from 1999 as unit labour costs stayed flat, confirming my work (see below).

We may be reaching a peak in profitability again, heralding slower growth over the next decade, as world capitalism struggles big time.

So the Chinese economy is affected by the law of value.  That’s not really surprising.  You can’t ‘build socialism in one country’ (and if a country is under an autocracy, by definition).  Globalisation and the law of value in world markets feed through to the Chinese economy.  But the impact is ‘distorted’, ‘curbed’ and blocked by bureaucratic ‘interference’ from the state and the party structure to the point that it cannot yet dominate and direct the trajectory of the Chinese economy. Market forces and the law of value remain pernicious, however.   Inequality of wealth and income under China’s ‘socialism with Chinese characteristics’ has never been so bad.  It was one of the issues that Bo Xilai made much of.   He put it thus: “As Chairman Mao said as he was building the nation, the goal of our building a socialist society is to make sure everyone has a job to do and food to eat, that everybody is wealthy together. If only a few people are rich, then we’ll slide into capitalism. We’ve failed. If a new capitalist class is created then we’ll really have turned onto a wrong road.” 

China’s Gini coefficient, an index of income ineqaulity, according to Sun Liping, a professor at Beijing’s Tsinghua University, has risen from 0.30 in 1978 when the Communist Party began to open the economy to market force 0.46.  Indeed, China’s Gini coefficient has risen more than any other Asian economy in the last two decades.  The rise in inequality is partly the result of the urbanisation of the economy as rural peasants move to the cities.  Urban wages in the sweatshops and factories are increasingly leaving peasant incomes behind (not that those urban wages are anything to write home about when workers assembling Apple i-pads are paid under $2 an hour).  But it is also partly the result of the elite controlling the levers of power and making themselves fat, while allowing some Chinese billionaires to flourish.

By the end of this decade, China’s GDP will be higher than that of the US, although average living standards, even in the urban and coastal belts, will be only one-third of that of Americans.  But as living standards rise and China gets older (by 2025, the workforce will stop rising and retirees will rise sharply), the Chinese people will want to obtain the material benefits of a modern economy.  That does not mean just cars, hi-tech gadgets and fashion as mainstream economics emphasises.  It also means decent pensions, proper transport and infrastructure, health services and education – the so-called public goods.

Is mainstream economics right to argue that people’s needs and aspirations can only be met by a capitalist economy?  The evidence of the Great Recession and the ensuing long depression suggest otherwise.  If the capitalist road is adopted and the law of value becomes dominant, it will expose the Chinese people to chronic economic instability (booms and slumps), insecurity of employment and income and greater inequalities.  On the other hand, if the surplus created by the Chinese people remains under the control of an elite backed by an army and police and ruling without dissent, then the needs and aspirations of a more affluent and educated population will not be met.

A socialist or capitalist road?  Well, the elite is united in opposing socialist democracy as any Marxist would understand it.  But they are divided on which way to sustain their power.  The people have yet to play a role.  They have been fighting local battles over the environment, their villages and their jobs and wages.  But they have not yet been battling for more democracy or economic power.  The middle classes are still backing the regime.  In a spring 2010 survey by the Pew Research Center’s Global Attitudes Project, 87% of Chinese said they were satisfied with the way things were going in their country.  In another poll taken last November, creating a “democratic political system with Chinese characteristics” was supported by 50% of those interviewed, but only 15% wanted a ‘Western-style democracy’.   Indeed, nearly 70% were against the “total Westernisation” (whatever that might mean) and 69% opted for the ‘social stability‘.

But the key to continued growth and more equality will be democracy.  China needs to move from ‘socialism (i.e. a planned economy) with Chinese characteristics (i.e. autocracy and corruption)’ to a China with socialist foundations (democratic planning and equality).

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