CHAPTER III

CHINA AND THE NEOLIBERAL GLOBAL ECONOMY


The capitalist world-economy had become a global system by the late nineteenth century. The first half of the twentieth century saw the Great Depression and two world wars, demonstrating on an unprecedented scale how devastating capitalism could be to the humanity. With the survival of the capitalist system at stake, the ruling elites of the system were forced to make major concessions. After the Second World War, the capitalist world-economy was reorganized with a set of new institutions.

In the core states, governments actively used Keynesian macroeconomic policies to pursue high levels of employment and rapid economic growth. In many countries, governments used industrial policies or planning to influence the structure and rate of capital accumulation. Welfare state institutions were developed to redistribute income and promote class compromise. At the global level, the US hegemony was consolidated. The Marshall plan and the overseas investment of US corporations played a decisive role in the economic recovery of Western Europe and Japan.

Through the Yalta arrangement, the US allowed the Soviet Union to have its own “sphere of influence.” In exchange, the Soviet Union implicitly agreed to act as a “responsible” super power and abandoned the support of revolutionary communist movements outside its sphere of influence. Within the Soviet sphere of influence, the socialist states were able to pursue rapid industrialization through central planning and state ownership of the means of production. The US-Soviet rivalry also created a relatively favorable environment for the national development projects in the periphery and semi-periphery.

To accommodate the growing aspirations and mobilization abilities of the indigenous capitalists and middle classes in the periphery, and to further expand the market for the US corporations, the US also pushed for de-colonization of the periphery and offered financial and technical assistance to support “economic development.” In the 1950s and 1960s, the US took a relatively liberal attitude towards state-guided “import-substitution” development programs.

During the 1950s and 1960s, the capitalist world-economy experienced unprecedented rapid growth, widely known as the “golden age.” However, by the late 1960s new contradictions emerged. High levels of employment, welfare state institutions, and the depletion of the rural surplus labor force in the core states changed the balance of power between the capitalist classes and the working classes to the latter’s favor. Labor militancy grew throughout the core zone. The semi-peripheral states (such as Latin America, Eastern Europe, and Southern Europe) were under similar pressures from more militant working classes. Rapid expansion of the global economy over a sustained period had greatly increased the demand for oil and raw materials, leading to better terms of trade for the oil exporters and some peripheral states. The profit rate fell across the capitalist world-economy and revolutionary upsurges threatened to overthrow capitalist governments in many parts of the world.

In response, the capitalist classes organized a global counter-offensive. After a bloody coup that overthrew the democratically elected socialist government in 1973, the Chilean fascist government conducted the first monetarist experiment with devastating economic and social consequences. In China, after Mao Zedong’s death, the pro-capitalist forces took over political power. With Thatcher coming to power in 1979 and Regan in 1980, monetarism and other neoliberal policies prevailed in the US and the UK. In 1992, the establishment of the European Monetary Union based on Maastricht Treaty represented a major advance of the neoliberal project in Europe.

Monetarism was essentially a program to undermine the working class bargaining power by creating high unemployment under the excuse of fighting inflation. Other neoliberal policies included rolling back the welfare state, labor market “flexibility”, deregulation of product and financial markets, and trade liberalization. The core zone working classes have managed to fight a defensive battle (more effective in Western Europe than in the US) that has limited the damages of the neoliberal policies. It is in the semi-periphery where neoliberalism, under the programs of “structural adjustments” or “shock therapy”, was fully carried out and delivered the most devastating social consequences.

By the 1970s, both the import-substitution industrialization model and the “socialist industrialization” model were clearly in trouble. The semi-peripheral states attempted to prolong the phase of rapid accumulation by borrowing heavily the “petro-dollars” (referring to the oil export revenue deposited by the oil exporting countries in the western banks), a move that eventually led to the debt crisis in the 1980s. As the debt crisis broke out, International Monetary Fund and the World Bank imposed “structural adjustments” that involved a whole set of neoliberal policies (such as monetary and fiscal austerity, privatization, trade and financial liberalization) on Latin American and African countries. Similar policies were imposed on the former socialist states and Southeast Asian countries in the 1990s.

By the 1990s, it was clear that the neoliberal institutional structure had become dominant in the capitalist world-economy. “Globalization” has been an indispensable component of neoliberalism. Through greater and deeper integration of the peripheral and semi-peripheral economies into the capitalist world-economy in the form of trade and financial liberalization, capital in the core zone can be re-located to the periphery and semi-periphery where large reserves of cheap labor force are available and there is little political constraint on resources depletion and environmental degradation, thereby raising the global profit rate.

The “rise of China” and the “rise of India” need to be understood in this context. The neoliberal project has brought about devastating consequences to the working people in the world. But, politically and economically, it has also been very costly to the global capitalists. Without the opening up of China and India and their economic rise, neoliberalism could have proved to be too costly not only for the workers but also for the capitalists and ended up being very short-lived.

THE RISE OF CHINA AND THE TRIUMPH OF NEOLIBERALISM

Neoliberalism has been a strategic attempt of the global capitalist classes to reverse the historical gains of the world’s working classes, in order to lower the cost of wages and social spending and restore the profit rate. The neoliberal policies and institutions collectively constitute a strategy to undermine the bargaining power and organizational capacity of the working classes. But for this strategy to be successful, it requires not only the will and determination of the capitalist classes, but also certain objective conditions.

The neoliberal policies, by depriving working people of their economic and social rights, lowering their living standards, leading to surging inequality, and destroying the national economies in many countries, have seriously undermined the political legitimacy of global capitalism. The neoliberal policies have also led to economic stagnation and violent financial crises. For the capitalist classes, neoliberalism represents a very costly strategy in political and economic terms.

For neoliberalism to be sustained and successful, a new global environment needs to be created, in which the global balance of power can be turned to the favor of the capitalist classes for a prolonged period of time. Moreover, certain conditions need to be created to address some of the inherent contradictions of the neoliberal global economy. It is in this respect that China’s transition to capitalism and economic rise has played an important and indispensable role.

The Maoist revolutionary theory and practice played a major role in the global revolutionary upsurge in the 1960s. The counter-revolutionary coup in 1976, in which the pro-capitalist forces took over political power in China, thus represented a major defeat on the part of the international revolutionary forces. With the defeat of the Chinese revolution and other revolutionary challenges (France in 1968, Chile in 1973, and Portugal in 1975), the global political initiative passed into the hands of the system’s ruling elites, paving the way for the rise of neoliberalism.

After 1992, the Chinese ruling elites were ready to undertake mass privatization. Tens of millions of state sector workers were laid off. Those that remained employed were deprived of their traditional socialist rights, such as job security, medical insurance, access to housing, and guaranteed pensions. In the meantime, privatization in the rural areas has destroyed the rural public health care and education system, which had been very effective in the Maoist era to meet the rural population’s basic needs. Hundreds of millions of peasants have become migrant workers working under sweatshop conditions. The defeat of the urban working class and the creation of a massive surplus labor force laid down the foundation of China’s capitalist boom. By the early 2000s, China had become the world’s “workshop” or the center of the world manufacturing exports.

China’s economic rise has important global implications. First, China’s deeper incorporation into the capitalist world-economy has massively increased the size of the global reserve army of cheap labor force. In some industries, this allows the capitalists in the core states to directly lower their wages and other costs by relocating capital to China. But more important is the “threat effect.” That is, the capitalists in the core states could force the workers to accept lower wages and worse working conditions by threatening to move their factories or offices to cheap labor areas such as China, without actual movement of physical capital. China’s opening up to the global capitalist market makes the threat effect much more effective and credible.

Secondly, China’s low-cost manufacturing exports directly lower the prices of many industrial goods. To the extent unequal exchange takes place between China and the core states, part of the surplus value produced by the Chinese workers is transferred to the core states and helps to raise the profit rate for the capitalists in the core states.

Table 3.1 gives an example of how the value added of a manufacture product (a talking model of globe for children’s study) made in China was distributed in the global commodity chain. In this example, China received 10.5 percent of the total value added. Hong Kong, a geographic area that plays an intermediate or “comprador” role in the capitalist world-economy, received 26.3 percent of the total value added. The US, the hegemonic core state, received 63.2 percent of the total value added. Similarly, Andy Xie, who was the Morgan Stanley chief economist of Asia, estimated that for each US dollar that China exported to the US, businesses in Hong Kong or Taiwan took 20 cents, and the US brand owners and distributors received the bulk of the benefits as the product sold for 4-5 US dollars at the retail level in the US (Xie 2003).

[Table 3.1 is about here]

Thirdly, as China’s share in the world GDP rises, China has directly contributed to the acceleration of global economic growth and in recent years has become a major engine of the global economy. Fourthly, in recent years China has accumulated huge foreign exchange reserves. By investing most of the foreign exchange reserves (by some estimate, about 70 percent) in the US dollar assets, China has played a central role in financing the US current account deficits (Setser 2007). The widening US current account deficits have in turn played an essential role in stabilizing the neoliberal global economy (a country’s current account balance equals exports less imports plus net incomes from abroad—it is a broad measure of trade balance).

STRUCTURAL CONTRADICTIONS OF NEOLIBERALISM

During the 1980s and 1990s, the US and many other countries used contractionary fiscal and monetary policies to fight inflation, leading to high unemployment and falling real wages. Trade liberalization and free flows of capital have allowed capital to move to countries with cheap labor, giving capital stronger bargaining power vis-a-vis labor. Labor’s position has been further undermined by cuts of social spending, aggressive restructuring and downsizing of corporations, declines of unions, and labor market “reforms.” All of these developments have tended to shift income and wealth from labor to capital and depress mass consumption (Crotty 2000; Greenhill 2003; Pettifor 2003).

The neoliberal “structural adjustments” and “shock therapies” had devastating impacts on many peripheral and semi-peripheral countries. Between 1990 and 2002, 54 countries out of a total of 166 countries for which data were available suffered from absolute declines in per capita income. The ratio of the income of the richest 20 percent of the world population to that of the poorest 20 percent rose to 75:1 towards the end of the last century. The surge of world inequality and the collapse of many peripheral and semi-peripheral economies have undermined the global effective demand (Green 1995; Kotz 1997; Chossudovsky 1998; United Nations 2000 and 2002).

Real interest rate stayed at very high levels throughout the 1980s and 1990s, shifting income and wealth from the debtors to the creditors, and from industrial capital to financial capital, depressing real productive investment. Productive investment has been further undermined by the uncertainty arising from the violent fluctuation of exchange rates and frequent financial crises (Felix 2001).

Public sector spending plays an indispensable role for macroeconomic stability in a modern capitalist economy. However, with financial liberalization, national economies have often been under the threat of massive capital flight. In the 1980s and 1990s, many governments were forced to pursue contractionary fiscal and monetary policies in order to secure the confidence of financial capital (Crotty 2000; Rodrik 2003).

Thus, the neoliberal policies and institutions have imposed serious constraints on all the major components of the global effective demand—mass consumption, productive investment, and public spending. With insufficient domestic demand, many countries have attempted to pursue export-led growth by creating a low-wage, low-tax, de-regulated environment for foreign and domestic businesses. This has in turn led to a general “race to the bottom” in wage rates, tax rates, social spending, as well as social and environmental regulations (Crotty, Epstein, and Kelly 1998).

Under conditions of liberalized financial markets and high mobility of capital, countries running balance of payment deficits would be under strong pressure to correct the deficits through deflationary macroeconomic policies (except for those whose currencies are accepted as international reserve currencies). On the other hand, many other countries would try to insulate themselves from large adverse capital flows and financial turbulence by generating trade surpluses and accumulating foreign exchange reserves. Under these conditions, if there were not a sufficiently large economy being able and willing to absorb the surpluses from the rest of the world, the attempts by many countries to generate surpluses or reduce deficits would lead to a general collapse of the global effective demand and send the global economy into a downward sinking spiral (Eatwell and Taylor 2000; D’arista 2003).