Making Sense of China

I visited China for two weeks earlier this month, at the invitation of the Capital University of Economics and Business in Beijing.  I gave a series of lectures on economics and labour relations to several classes of bright, eager, and surprisingly free-speaking graduate students.

China’s economy has been growing at about 10% per year for over a decade, and the economy could pass the U.S. in total size (when measured at PPP, anyway) in another decade or so.  Now that I’ve been there to lecture on economics, no doubt this spectacular growth record will suddenly grind to a halt! 🙂

There’s no doubt China’s economic power is fundamentally changing the world economic system.  Canada is relatively removed from China’s impacts, yet we’ve felt the effects of the Chinese juggernaut in many and complex ways: a $30 billion trade deficit (that’s wiped out over 100,000 Canadian manufacturing jobs); soaring energy and mineral prices that have generated massive profits for resource companies and driven our currency higher; a shift in investment location that is further eroding Canada’s net FDI performance, and is undermining the relevance of the NAFTA.

On balance, I think China’s growth has had negative net impacts for most Canadians.  There are obviously some positives, however.  China’s rapid expansion has added to global demand (though its quarter-trillion-dollar trade surplus undermines global demand).  It has also lifted well over 100 million people out of absolute poverty.  That’s a lot more than could ever be said for the “Washington Consensus.”

China’s cities are bursting at the seams.  They aren’t pretty: crowded, new buildings everywhere, terrible smog.  But they’re better than cities almost anywhere else in the Third World.  That in itself is an incredible achievement.  And with an estimated “surplus” agricultural population of 700 million getting ready to urbanize, China’s city-building skills will be tested badly in the decades to come.

The economy is a puzzling mixture of private and public (GDP is currently split about 50-50 between the business and state sectors).  The main dynamism is clearly coming from the private sector — booming investments by both multinationals drooling at both China’s potentially huge market and its ultra-cheap labour, and by new domestic companies (some of them privatized state firms, others new companies built from the ground up).  I am told that it is the Chinese firms — not the multinationals — which are most rapacious in terms of exploiting workers and consumers alike.  I believe this assessment.

At the same time, the state still possesses many powerful tools and levers which are shaping this explosion of private activity in what I would consider generally positive ways.  Foreign investment comes in with all kinds of strings attached: technology transfer, compulsory joint ventures, export commitments, non-competition agreements to protect domestic firms.  (In the case of Wal-Mart, the FDI was even made contingent on the company recognizing the union for its workers!  Now that’s a performance requirement I’d like to see more of!)

The government is deliberately targeting key industries (including auto, aerospace, biotech, and high-end electronics and telecommunications), and even championing particular firms which are expected to become globally competitive brands in the years ahead.  (That sounds like “picking winners” to me.  I thought that didn’t work — unless, of course, you run a mutual fund.)  It actively manages financial flows: regulating the exchange rate and credit creation.  While I was there, for example, the central bank tightened compulsory reserve requirements on the commercial banks (most of which still have partial state ownership as another means of exerting influence) in order to rein in credit creation.  This is the kind of thing Western central banks abandoned ages ago, at cost of further amplifying the private credit cycle.

Labour rights and freedoms are a pressing issue.  Even in China, I do not believe that a rising GDP will automatically or proportionately translate into rising living standards without a conscious, deliberate effort to make it happen.  This will require pro-active redistributional policies (including social policies like unemployment insurance and pensions), as well as free unions and collective bargaining.  They have a long way to go: currently unions are mostly token and politically controlled.  The Japanese ideology of a compliant “partnership” approach to labour relations is being actively promoted.  On the other hand, hundreds of strikes occur every year, and even in China (what Francis Wheen calls a “Market-Leninist” state) working people will fight for their rights, including safety and a fairer share of the wealth they produce.  Right now the Chinese parliament has begun to debate a new labour law; it will be interesting to see how this debate unfolds.  Global business lobbyists have weighed in heavily against the proposed reforms (which would include modest improvements in labour standards); so much for global corporations being an agent of democratization and progress.  The Communist Party itself seems to be feeling increasing pressure to respond to the obvious contradiction between still-official socialist ideology and the reality of expanding capitalism and growing income disparity (China has a much more unequal distribution of income than most countries, including its Asian neighbours — largely because of the massive gap in living standards between cities and countries).  In my view, Western unions and progressives should engage actively with their Chinese contacts as this process unfolds, to pass on the lessons we have learned from our experience with capitalism.

My greatest worry for China stems from the evident lack of a critical understanding of capitalism and its limits.  Most people seem to equate the West and multinational corporations with modernity, prosperity, and freedom.  After decades of failed top-down socialism, I suppoes I can empathize (not sympathize) with this sentiment.  But it is naive, to say the least, and I fear it will lead to socially destructive mistakes in the other direction.  Already the Chinese are giving foreign companies a much longer leash, and a much larger economic role, than was the case in the successful industrializations of either Japan or South Korea.  And dealing with just the most obvious symptoms of rampant capitalism (such as growing income inequality), without understanding and ultimately reining in the underlying power imbalances that create those symptoms, is not likely to change much in the long term.

I wonder if progressive economists in the West might consider ways to try to engage their Chinese colleagues in discussion of some of these issues — in order to explain and promote modern heterodox ideas, and support space for Chinese economists to look beyond the orthodox prescriptions they continue to receive from the IMF, the ADB, and the other institutions of the global status quo.  (Fortunately for those 100 million Chinese who are no longer living in absolute poverty, those prescriptions have been mostly ignored so far.)

3 comments

  • Good commentary, but where’s your gender analysis? What about the expansion of unpaid care labour, Prof. Stanford? Can your structural model account for that? Tee Hee.

  • Jim,
    I forwarded your analysis to Paul Bowles of UNBC, who has written numerous papers on the Chinese economy, including a couple of recent ones on currency issues.

    Paul tells me that the two of you will meet at a heterodox economics conference in Australia next month.

    It makes we wonder whether we should put together something on China for the PEF sessions at the CEA meetings in Halifax next year.

    Cheers,
    Brian

  • That’s a good idea Brian. One theme worth exploring is the impact of China on the structure of our economy – struggling manufacturing/booming energy/metals sectors – and what kind of trade and economic development policies are needed to address the huge Canada/China (all Asia) trade imbalance (imbalance in terms of both the huge and growing deficit, and in term sof the composition of trade.)

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