British economist Will Hutton’s new book The Writing on the Wall: China and the West in the 21st Century is a cold shower to those who think that country will be an ever-ending and ever-growing source of profits; is fundamentally capitalist; and has a fast diminishing Communist Party (CP) government control over the economy.
As useful background Hutton concisely outlines the skewed relationship between the US and China – the main prop of today’s world economic upturn. He shows the wasteful and environmental destructive nature of the Chinese economy. He is more realistic than most commentators about the low productivity of the economy and its bipolar character. Despite not being a socialist, Hutton acknowledges the huge economic progress due to the introduction of a central economic plan after the 1949 Revolution, despite the crimes of Mao and the CP. Today’s China could not have started from nothing in 1978, that is an industrial base, land reform and an educated and healthy population that all occurred thanks to the revolution.
However others have explained these processes. What makes this book so important is Hutton’s central thesis that while the Chinese CP government is nervously ‘riding the tiger’ of an economy that is rapidly growing since the market reforms of the late 1970s, the CP still has important control of banks, State Owned Enterprises (SOEs), and even the privatized SOEs (a term that he shows is doubtful in itself).
The booming US$2 trillion economy (average 9% growth over 25 years per capita incomes that have increased six times and 400 million people pulled out of poverty) is due to “the state (which) has channeled freakishly huge domestic savings into investment (Hutton shows that foreign direct investment makes up only 10% of China’s total investment) and because, over the last decade, the country has made itself the world’s largest assembler and manufacturing subcontractor by giving Hong Kong, Taiwanese and – increasingly – Western multinationals privileges for which no Chinese company could hope.”
The high savings was a result of ordinary people saving like nowhere else in the world. Why? As the Iron Rice bowl was smashed and the one child policy remained this made personal provision for old age a necessity through saving.
We have the strange situation where on the one hand the Australian Financial Review lectures China to spend more on public health and pensions (to free up savings for investment), while simultaneously keeping pressure on the Coalition and ALP in Australia to do the opposite.
It is too one-side, Hutton argues, to see the Chinese economy as simply capitalist – a la post-Stalinist Eastern Europe or the USSR. Instead he thinks the term ‘Leninist Corporatism’ is more precise (we might say ‘Stalinist Corporatism’).
He explains in relation to ex-SOEs: “Although Western commentators sometimes call ‘letting go’ privatization, it was no such thing, and the CP was careful not to call it that. Even when ‘let go’, management (in ex-SOEs) is still beholden to the CP, which continues to make senior appointments, and cash for investment is generated internally or borrowed from state-owned banks.”
Hutton gives useful figures to show that rather than an export of manufacturing production to China, there has been the use of the “cheap labour and a first-world infrastructure” by multinationals to turn China into the world’s ‘mass assembler’ of choice – a dependent part of the supply chain rather than a player in its own right”.
He shows that there has not been a linear pro-market direction for the Chinese economy over the past 25-odd years. Over and above the brief slow down in pro-market reforms that followed the 1989 Tiananmen Square massacre, the important events of 1993 are illuminated well by Hutton. A rapid, almost Eastern Europe/USSR-like capitalist economic eruption meant that, in 1993, inflation reached 21% and investment in state assets had doubled over the previous two years.
Depositors were withdrawing their money from state banks threatening a financial crisis. “There were more strikes in factories, and there was unrest in the rural areas, where incomes were not keeping pace with inflation”. The CP acted decisively to raise taxes to slow down the economy, reclaimed more power over the provinces and reorganized the financial and legal system which maintaining party control. Soon the “long slide in government revenues as a proportion of GDP – from about 30% in 1978 to 10.7% in 1995 – was reversed; in 2002 the proportion was 18.5%. A modest increase, but it was enough to avert the disintegration of the Chinese state.”
Hutton explains how “China’s approach to creating firms owned and backed by shareholders – the heart of any concept of capitalism – exemplifies the primacy of political control over private ownership. He details four strict classes of shares allowed in ex-SOEs the effect of which (according to a World Bank study if 1105 listed Chinese companies where it seemed the state had relinquished 90% of ownership), was once the labyrinth of the share structure had been unraveled the opposite was the case: the state had de facto control of 84% of the listed companies.”
“After more than a decade of stock market development this US$2 trillion economy has succeeded in creating fewer than 200 genuine private companies, whatever else this may mean, it is hardly a triumph of privatization.” No wonder Hutton declares: “China is neither a communist nor a capitalist economy.”
Recently the OECD participated in a survey of Chinese companies with turnovers in excess of US$600,000, which make up 35% of Chinese GDP, where it was shown that two-thirds were de facto under state control.
Hutton shows that as the government cuts social spending, the remaining SOEs play an important social role as a source of welfare for their workers. “The many provinces and cities with no social insurance system go to any lengths to sustain SOE employment in order to avert widespread social unrest. Better to have a basket-case SOE subsidized with state bank credits that employs people and provides their families with welfare than no employer at all.” No wonder that China has fallen from 42nd in 1998 to 57th in 2005 in the ranking of international competitiveness.
China has a “private sector like no other” according to Hutton. Low productivity in SOEs, corruption that has been estimated to equal over 14% of GDP between 1999 and 2001, spending on research and development only 0.6% of GDP, compared to 1.6% average in the OECD, a counterfeiter’s paradise, with between 15% and 20% of all well-known brands in China fake.”
So why, with all these problems, the massive growth rates? “The World Bank provides the answer. It estimates that between 1990-98 China’s high rates of investment added 6.4% to the annual growth rate; migration of workers from rural areas has added around 2.1%. The increase in the labour force brought the growth rate up to 9%. To put it another way, China’s growth is pretty much guaranteed by state-driven capital accumulation in the cities financed by state-owned banks using China’s vast pool of savings, together with migration from the land. The answer is as simple as that”.
As a liberal democrat, Will Hutton argues hard and somewhat wistfully for the need for ‘soft infrastructure’ for China (unions, independent judicial system, NGOs, free press, social security system etc) to provide the necessary checks and balances on capitalism and, also, the necessary freedom for people to think and invent that was crucial to the development of capitalism in the likes of US and Europe. This is at exactly the time ‘soft infrastructure’ is being slashed and burnt by neo-liberal governments in the West.
The impossibility of this type of development for China is shown elsewhere in this fascinating book when he explains: “China is caught in a gigantic dilemma. It cannot continue on the current model, which is beset by mountainous contradictions and which sooner or later will return to earth, provoked by either a banking crisis or simply a crisis of over-investment and excess supply, or some combination of both. This consequent social reaction will provoke a political crisis, with the risk that the party will resort to nationalism, and perhaps a military adventure in Taiwan, to keep the genie of protest bottled up”.
The alternative is: “the building of an institutional structure, a welfare system and (capitalist) property rights which China cannot possess and still remain consistent with one-party communist rule.Whatever route it takes, China faces convulsions.” “Only control over the armed forces and continued economic growth, stands between the CP and its own demise”.
Hutton’s book is a very useful antidote to a one-sided analysis of China’s drift towards capitalism.
His alternative of liberal capitalism reform is utopian in this era – such reforms will not be permitted by the CP and, if the CP is overthrown, the future will be national breakup, greater imperialist domination, and chaos or a rebuilding of society on democratic socialist lines. There is no middle road. The building of genuine socialist ideas and organisation in China is a key task the CWI wants to participate in.
By Stephen Jolly
The Writing on the Wall: China and the West in the 21st Century
By Will Hutton
Little, Brown 2006