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From The Socialist newspaper, 26 July 2007

The China Effect

WEATHER AND wallet permitting, the lure of summer holidays beckons, at least in the northern hemisphere. Serious contemplation of the world's economic state and its consequences for the lives of working-class people tends to be pushed into the background.

Peter Taaffe, Socialist Party general secretary

But this year, gathering storm clouds, economic even more than meteorological, cannot be ignored. The capitalist world economy, with the US and China powering it along, still appears to be going ahead. However the fallout from the 'slow-motion car crash' of the US housing market, indicated by the crisis in the 'sub-prime' mortgage business, poses severe dangers. Over 20% of mortgages lent to low-income 'bad payers' have already been defaulted. The original loans will never be paid back and more are expected to default. This in turn will have an effect on the banks, finance houses and their shareholders. Their enormous lending has resulted in a mountain of debt.

A consequence of this slowdown in the US housing market is that house-owners, reluctant to increase their debt, will cut US consumption. This will rebound against all countries dependent for growth on exports to the US.

"Never mind, the turbocharged Chinese economy will ride to world capitalism's rescue!" This is the, mainly unspoken, recent assumption of the representatives of capitalism. Such illusions also rub off on the workers' movement and particularly the tops of the trade unions.

China's effect has been twofold. The constant threat of job outsourcing to China, India and Eastern Europe, has been consciously used as a weapon to dragoon workers into accepting lower wage increases, worsening conditions and the whole neo-liberal mantra. At the same time, we are promised that China's growth will stretch into the future, thus ensuring that 'modern capitalism' can, unlike the past, escape recessions and slumps.

Now, an important book, The Dragon and the Elephant - China, India and the New World Order, by David Smith provides valuable information to seriously question these assumptions, which the socialist has challenged from the outset.

Marxists are the most realistic trend within the labour movement. We believe in telling the truth to working-class people, particularly about the objective situation they face. If capitalism is likely to experience significant long-term growth we would say so, not in order to accommodate to the capitalists' 'reality', but to undertake a serious long-term struggle against it.

In the earlier part of this century, a barrage of information was unleashed to demonstrate that capitalism was experiencing a 'super-cycle' comparable to the world economic upswing of 1950-75.

China would be at the heart of this process with its already impressive growth rate and its 'lucrative' domestic market. Some capitalist 'experts' expected this to continue with a "doubling of the world labour force" to three billion with huge exploitation and, thereby, super-profits for the capitalists flowing from this.

Richard Freeman of Harvard University and the National Bureau of Economic Research described an alleged "One Big Fact... In 2000 as a result of the collapse of communism, India's turn from autarky, China's shift to market capitalism, the global economy encompassed six billion people. Had China, India and the former Soviet empire stayed outside, the global economy would have had 3.3 billion people." As Smith adds: "The 'before' and 'after' picture was of a worldwide workforce of 1.46 billion in 2000, swollen to 2.93 billion as a result of China (760 million), India (440 million) and the ex-Soviet states (260 million)."

Unique growth?

CAPITALIST JOURNALS like The Economist trumpeted these facts to underline their system's long-term viability. China's growth was proclaimed as 'unique'. Moreover, they projected an ascending line - a linear growth - of Chinese economic expansion into the future. Within an expansion averaging between 8% and 9%, stretching over 23 years, China has undoubtedly had a major effect in prolonging the present upward cycle of world capitalism.

But this growth is not at all 'unique'. In fundamentals it is little different to the experience of the Asian 'Tigers' more than 20 years ago. Stimulated by land reform - removing the residual elements of feudalism - under US occupation and with favourable treatment, Japan averaged a growth rate of 8% between 1950 and 1980, sometimes reaching an annual rate of 13%. The economy doubled in size every six years and something similar occurred in Hong Kong, South Korea, Singapore and Taiwan.

Of course, in population terms China's scale dwarfs that of the 'Tigers'. While its economic transformation has been on a greater scale than even that wrought in post-1945 Japan it was fundamentally achieved in the same way - high investment from high domestic savings, which in China has been of the order of 30-40% of gross domestic product (GDP).

Domestic savings of over $1 trillion is capital accumulation on a grand scale. Again this was true of the Tigers. The American economist Paul Krugman, moreover, correctly accredits the growth in both cases "not to inspiration but perspiration". Large amounts of capital were deployed and large factories created. Some of the colossal labour reserves from the abundant rural population were drawn into the whirlpool of production.

Before getting carried away with the 'unique' character of China's growth, it should be recalled that under the Maoist planned economy - albeit bureaucratically controlled by a Stalinist totalitarian regime - between 1952 and 1978 the Chinese economy grew fivefold. In one year under Mao, production increased by 19%.

Ironically, it was this planned economy, recognised both by Smith and by Will Hutton in his recent book The Writing on the Wall, that laid the basis for the current growth and played a vital role in China's development.

With the opening up to capitalism, the gains of the disintegrating planned economy provided a much better basis for the development of a capitalist structure than India, for instance. From 1952 to 1970, China's working class grew from roughly three million to 50 million. Moreover, the existence of the previous 'iron rice bowl' - low wages but lifetime employment, pensions and social services - meant there was a consciousness in China of the past advantages of a plan.

At the same time, one of the reasons why there is now a high amount of savings in China is because people have to pay for education, housing, etc, formerly supplied by the state. But the blind alley, occasioned by the existence of a Stalinist regime, evident in the 1970s, that China found itself in, led to a section of the Chinese bureaucracy opening the door to Chinese capitalism.

Mixed blessings

AT BEST this growth has brought mixed blessings to the Chinese masses; 46% of households have fridges, 94% colour TV sets, 12% personal computers, 28% air conditioners and 59% washing machines. There are also more than 400 million mobile phone users in China.

But against this must be set the colossal upheaval involved in dismantling large parts of the state-organised enterprises (SOEs). This has led to insecurity, unemployment, huge environmental damage and massive wealth disparities.

The law of combined and uneven development - the latest word in technique battened onto barbaric economic conditions - has been taken to unheard-of lengths in China's development over the last 25 years. There is an almost 15 to 1 per capita income difference between Shanghai and the poverty-stricken Guizhou province in the rural west.

Moreover, over half of China's population live in the conditions of Guizhou rather than Shanghai. Eight of China's 31 provinces comprising 40% of its population have provided three-quarters of China's growth.

Some estimates put open or disguised unemployment as high as 170 million workers or 23% of the labour force. Earnings are well below the advanced capitalist countries. In the Chinese food industry earnings are one-twentieth of those in the UK.

There has been massive internal migration within China, with the rural population pushed off the land, many of them by corrupt Communist Party bosses, who then sell land at knockdown prices to capitalist speculators. Smith quotes one Oxford University expert: "The opening-up of the Chinese economy in the 80s and 90s to outside influences and investment, its exposure to the forces of globalisation, was accompanied by an increase in the number of Chinese seeking opportunities elsewhere."

China needs to find between 15 million and 20 million new jobs every year just to absorb this 'surplus' labour force. This implies maintaining the present growth rate, something this and other recent books by supporters of a capitalist China in effect rule out.

Smith soberly declares on both China and India: "Since the early 1990s neither economy has experienced a serious downturn, sailing virtually unscathed through the Asian financial crisis of 1997-8. Long runs of economic growth like this become addictive, to the point where a recession or even a period of subdued activity would be painful, the economic equivalent of cold turkey." Before 1990, Japan, like China today, was described as immune to crises, destined to overtake the US, etc!

Special relations

CHINA'S AVERAGE living standards, however, show that it is still relatively poor. Despite exponential industrial growth, China's per capita gross national income (GNI) is just $1,740, while India's is a mere $720.

As Smith points out, China's average income "comes out at less than $5 a day. Compare that to the GNI per capita of nearly $66,000 in the world's richest country Luxembourg. In America it is nearly $44,000; in Britain $37,600."

Britons and Americans are between 20 and 25 times better off than the average Chinese person. Smith also says: "Tongans are better off, on average, than Chinese people, while the inhabitants of C™te d'Ivoire [Ivory Coast]... enjoy a better living standard than Indians. Can the world's two rising economic superpowers really be that poor?" But even adjusting for 'purchasing power parity' comparison, China's GNI per capita was still only $6,600 in 2005.

As to the future, when China is supposed to catch up with the West, Smith writes: "Even in 2030, according to the Chinese government's own estimates, 600 million people will still live in the country!"

India has even less prospect of rescuing its population from hunger than China: "The urbanisation of 700 million people of rural India through migration to the cities is impossible, and so is urbanisation of 600,000 villages where they live."

Of course, in the Chinese cities a caste of millionaires has grown up; 'conspicuous consumption', now the watchword in Moscow, London and New York, applies to Shanghai, Beijing and elsewhere. But the existence of a small class of super-rich is not an accurate measure of an economy's real overall development or of its potential to rescue an ailing system.

Russia had significant industrial growth prior to 1914 and the same ostentatious display of greed and wealth by the capitalist and landlord elite, as in both China and India today. As in China today, this was sharply differentiated from the lot of the mass of workers and peasants.

China is not the new 'Klondike' that will rescue world capitalism. Rather than acting as a lifeline, it could be an incubus for world capitalism and the trigger for a crisis in the next period.

The spectacular growth cannot continue without bringing it into a head-on collision with the US. Today, these two countries - one the citadel of world capitalism, the other with a growing capitalist sector alongside the remnants of the Maoist system - are the twin pillars of world capitalism.

But at the same time the contradictions in the situation, the underlying conflict in interests between them, will result in collisions, which will have colossal world repercussions.

The supply of cheap Chinese products - true, two-thirds of them made in foreign-owned factories in China, many of them US-owned - have flooded the US market and resulted in an $800 billion trade deficit (7% of GDP) for the US. US capitalism is therefore exerting pressure for China to be reined in.

Some warn that unless it is, the US could face an "economic 9/11". The flood of cheap commodities into the US and elsewhere has helped to keep down inflation, while the 'threat of outsourcing' is used as a stick with which to beat the working class and hold down wages. Also, the stockpiling of monetary paper - US dollars, bonds, treasury notes, etc. - has helped to plug the US trade deficit.

Protectionist pressures

BUT HOW long can this go on? US capitalist economists correctly warn that, on the basis of the present arrangements, the US deficit will grow exponentially. This would be accompanied by foreign capital continuing to come in and buy up US assets. If it remains unchecked, it could result in up to 50% of them being owned by non-Americans.

Long before this however, protectionist pressures presently exerted from all sides in the US - Democrat presidential candidates Hillary Clinton and Barack Obama are the latest - have demanded restrictive measures against China.

Accompanying this economic threat is the undoubted growth of China's military prowess, particularly its navy, which will challenge the US in the vital arena of the Pacific in particular.

Faced with ferocious internal pressures, the Chinese dictatorial regime could seek to ventilate them in adventures abroad. This could result in a serious military clash, over Taiwan for instance.

The industrial growth of China, and to an extent India, has unleashed massive internal social upheavals and contradictions, leading to revolution which can be provoked on any number of issues. In no country in the world do pollution and environmental catastrophe exist on so great a scale as in China today.

Smith's book is filled with the details of bureaucratically imposed gargantuan economic projects. Alongside the unplanned process of urbanisation are pollution and environmental damage which dwarfs that of 19th-century British capitalism with its 'dark satanic mills'.

There is no hope for the multi-millioned working class, as with the Indian masses, on the basis of a return to 'wild' capitalism. This is already clear to them as their unprecedented mass resistance to the greedy new bosses, with their slave labour and corruption, has shown.

We were told not long ago that India and China were the new economic giants that would rescue world capitalism. China would, according to dreamy capitalist pundits, provide 'one billion consumers'.

Smith, providing a 'healthy dose of scepticism', poses the question, "How big are the truly competitive parts of the Chinese and Indian economies? China's contribution to world GDP in 2005 was about a sixth of that of America.

"Allowing China a little extra because of the undervaluation of the renminbi and other factors, that suggests we should think of this as a 'productive' economy of no more than 100 million people, compared with America's 300 million.

"In India, which accounts for less than 2% of the world economy, compared with more than 28% for the United States, a generous estimate would be a productive economy of 30 to 40 million people."

On these figures neither the Chinese nor the Indian economy provides a lifeline, now or in the foreseeable future, for world capitalism. If the American market with its vast consumer base should go into freefall, neither India nor China, never mind Europe or Japan could step into the breech.

Moreover, China itself, through a massive crisis of overinvestment, is linked to the disguised but undoubted banking catastrophe which looms, which could itself be the trigger for a world economic crisis.

The unrecognised actor in the drama which is China today is the masses. Alongside the 87,000 'mass incidents' there have been 300,000 'industrial conflicts' which, try as they might, the dictatorial Chinese regime cannot keep hidden.

Rather than China rescuing world capitalism, it could be the very factor which, by precipitating a revolution in China, could unleash the colossal forces against capitalist globalisation and neo-liberalism that exist in the world today.

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In The Socialist 26 July 2007:

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