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; http://www.worldbank.org/en/news/2012/02/27/china-2030-executive-summary),
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 (http://ablog.typepad.com/keytrendsinglobalisation/2012/02/chinas-achievement.html) 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 (http://www.uscc.gov/pressreleases/2011/11_10_26pr.pdf): “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 (http://www.nber.org/papers/w17687),
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, www.seruc.com/bgl/paper%202006/Zhao-Zhang.pdf; and Mylene Gaulard, 2010, http://gesd.free.fr/m6gaulard.pdf ).
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 institute.org) 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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