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Lagniappe
Chain-Gang
Economics
By
Walden
Bello
"The
world is investing too little," according to one prominent
economist. "The current situation has its roots in a series
of crises over the last decade that were caused by excessive
investment, such as the Japanese asset bubble, the crises in
Emerging Asia and Latin America, and most recently, the IT bubble.
Investment has fallen off sharply since, with only very cautious
recovery."
These
are not the words of a Marxist economist describing the crisis
of overproduction but those of Raghuram Rajan, the new chief
economist of the International Monetary Fund (IMF). His analysis,
now over a year old, continues to be accurate. Global overcapacity
has made further investment simply unprofitable, which significantly
dampens global economic growth. In Europe, for instance, GDP
growth has averaged only 1.45% in the last few years. Global
demand has not kept up with global productive capacity. And
if countries are not investing in their economic futures, then
growth will continue to stagnate and possibly lead to a global
recession.
China
and the United States, however, appear to be bucking the trend.
But rather than signs of health, growth in these two economies-and
their ever more symbiotic relationship with each other-may actually
be indicators of crisis. The centrality of the United States
to both global growth and global crisis is well known. What
is new is China's critical role. Once regarded as the greatest
achievement of this era of globalization, China's integration
into the global economy is, according to an excellent analysis
by political economist Ho-Fung Hung, emerging as a central cause
of global capitalism's crisis of overproduction.1
China
and the Crisis of Overproduction
China's
8-10% annual growth rate has probably been the principal stimulus
of growth in the world economy in the last decade. Chinese imports,
for instance, helped to end Japan's decade-long stagnation in
2003. To satisfy China's thirst for capital and technology-intensive
goods, Japanese exports shot up by a record 44%, or $60 billion.
Indeed, China became the main destination for Asia's exports,
accounting for 31% while Japan's share dropped from 20% to 10%.
China is now the overwhelming driver of export growth in Taiwan
and the Philippines, and the majority buyer of products from
Japan, South Korea, Malaysia, and Australia.
At
the same time, China became a central contributor to the crisis
of global overcapacity. Even as investment declined sharply
in many economies in response to the surfeit of productive capacity,
particularly in Japan and other East Asian economies, it increased
at a breakneck pace in China. Investment in China was not just
the obverse of disinvestment elsewhere, although the shutting
down of facilities and sloughing off of labor was significant
not only in Japan and the United States but in the countries
on China's periphery like the Philippines, Thailand, and Malaysia.
China was significantly beefing up its industrial capacity and
not simply absorbing capacity eliminated elsewhere. At the same
time, the ability of the Chinese market to absorb its own industrial
output was limited.
Agents of Overinvestment
A
major actor in overinvestment was transnational capital. In
the late 1980s and 90s, transnational corporations (TNCs) saw
China as the last frontier, the unlimited market that could
endlessly absorb investment and endlessly throw off profitable
returns. However, China's restrictive rules on trade and investment
forced TNCs to locate most of their production processes in
the country instead of outsourcing only selected numbers of
them. Analysts termed such TNC production activities "excessive
internalization." By playing according to China's rules,
TNCs ended up overinvesting in the country and building up a
manufacturing base that produced more than China or even the
rest of the world could consume.
By
the turn of the millennium, the dream of exploiting a limitless
market had vanished. Foreign companies headed for China not
so much to sell to millions of newly prosperous Chinese customers
but rather to make China a manufacturing base for global markets
and take advantage of its inexhaustible supply of cheap labor.
Typical of companies that found themselves in this quandary
was Philips, the Dutch electronics manufacturer. Philips operates
23 factories in China and produces about $5 billion worth of
goods, but two-thirds of their production is exported to other
countries.
The
other set of actors promoting overcapacity were local governments
investing in and building up key industries. While these efforts
are often "well planned and executed at the local level,"
notes Ho-Fung Hung, "the totality of these efforts combined
© entail anarchic competition among localities, resulting
in uncoordinated construction of redundant production capacity
and infrastructure."
As
a result, idle capacity in such key sectors as steel, automobile,
cement, aluminum, and real estate has been soaring since the
mid-1990s, with estimates that over 75% of China's industries
are currently plagued by overcapacity and that fixed asset investments
in industries already experiencing overinvestment account for
40-50% of China's GDP growth in 2005. China's State Development
and Reform Commission projects that the automobile industry
will produce double what the market can absorb by 2010. The
impact on profitability is not to be underestimated if we are
to believe government statistics: at the end of 2005, Hung points
out, the average annual profit growth rate of all major enterprises
had plunged by half and the total deficit of losing enterprises
had increased sharply by 57.6%.
The Low-Wage Strategy
The
Chinese government can mitigate excess capacity by expanding
people's purchasing power via a policy of income and asset redistribution.
Doing so would probably mean slower growth but more domestic
and global stability. This is what China's so-called New Left
intellectuals and policy analysts have been advising. China's
authorities, however, have apparently chosen to continue the
old strategy of dominating world markets by exploiting the country's
cheap labor. Although China's population is 1.3 billion, 700
million people-or over half-live in the countryside and earn
an average of just $285 a year, according to some estimates.
This reserve army of rural poor has enabled manufacturers, both
foreign and local, to keep wages down.
Aside from the potentially destabilizing political effects of
regressive income distribution, this low-wage strategy, as Hung
points out, "impedes the growth of consumption relative
to the phenomenal economic expansion and great leap of investment."
In other words, the global crisis of overproduction will worsen
as China continues to dump its industrial production on global
markets constrained by slow growth.
Vicious Cycle
Chinese
production and American consumption are like the proverbial
prisoners who seek to break free from one another but can't
because they're chained together. This relationship is increasingly
taking the form of a vicious cycle. On the one hand, China's
breakneck growth has increasingly depended on the ability of
American consumers to continue their consumption of much of
the output of China's production brought about by excessive
investment. On the other hand, America's high consumption rate
depends on Beijing's lending the U.S. private and public sectors
a significant portion of the trillion-plus dollars it has accumulated
over the last decade from its yawning trade surplus with Washington.
This
chain-gang relationship, says the IMF's Rajan, is "unsustainable."
Both the United States and the IMF have decried what they call
"global macroeconomic imbalances" and called on China
to revalue the renminbi to reduce its trade surplus with the
United States. Yet China can't really abandon its cheap currency
policy. Along with cheap labor, cheap currency is part of China's
successful formula of export-oriented production. And the United
States really can't afford to be too tough on China since it
depends on that open line of credit to Beijing to continue feeding
the middle-class spending that sustains its own economic growth.
The
IMF ascribes this state of affairs to "macroeconomic imbalances."
But it's really a crisis of overproduction. Thanks to Chinese
factories and American consumers, the crisis is likely to get
worse.
End Notes
1. Ho-Fung Hung, "Rise of China and the Global Overaccumulation
Crisis," paper presented at the Global Division of the
Annual Meeting of the Society for the Study of Social Problems,"
August 10-12, 2005, Montreal, Canada. A revised version of this
paper will soon be published in a leading international relations
journal.
Walden
Bello
is executive director of Focus on the Global South and professor
of sociology at the University of the Philippines and FPIF columnist.
This article is based on work done for the Nautilus Institute’s
China Project.
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