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Globalisation Meets Its Match: Lessons from China's Economic Transformation

The sustained and rapid growth of the Chinese economy in the last three decades has been in sharp contrast to the prolonged stagnation in most parts of the nonwestern world. The persistence of a mixed economic system despite market reforms further contradicts the orthodox doctrines of globalisation. This study argues that China's economic transformation has been mainly based on productivity improvement and is thus to a significant extent a real development. It has been achieved mainly through a process of "governing the market" by a set of structural-institutional factors that are China-specific but can be of general importance for late development worldwide.

CHINA SINCE 1978Economic & Political Weekly EPW december 27, 200897Globalisation Meets Its Match: Lessons from China’s Economic TransformationDic Lo, Yu Zhang1 The ‘China Anomaly’ in GlobalisationViewed from the perspective of globalisation, China’s experience of economic transformation over the past three decades appears to be anomalous – indeed paradoxical. The sustained and rapid growth of the Chinese economy has been in sharp contrast to the prolonged stagnation in most parts of the non-western world. The mixed economic system that has persisted despite market reforms further contradicts the orthodox doctrines of globalisa-tion, that is, the doctrines of market fundamentalism commonly known as the Washington Consensus.There is of course no shortage of defendants of the Washington Consensus who have attempted to interpret the Chinese experi-ence in a way that is consistent with the orthodox doctrines. There is a recurring proposition which states that China’s economic system is a mix of market-conforming and market-supplanting elements, that its developmental achievements can be ascribed to the conforming elements while its accumulated problems can be attributed to the supplanting elements, and that the problems tend to outweigh the achievements as the country’s economic transition proceeds from the allegedly easy phase to the difficult phase (The Economist 1998;IMF 2000;OECD 2005; World Bank 2002). Essentially, this proposition is based on the belief that eco-nomic development is dictated by principles of the market, and that the actual working of the world market is somehow natural or easy. This is the notion of the “natural path of development”, the ultimate promise of globalisation.It is interesting that this interpretation of the Chinese experience is shared by many in the critical, anti-globalisation camp. There is a widely held view in this camp that rather than fundamentally deviating from principles of the market, China has actually fol-lowed through capitalist transformation. Indeed, it is posited that China is following an extreme form of capitalist transformation, namely, neoliberalisation. What distinguishes these critical scholars from the orthodoxy is their terms of assessment. They often argue that China’s seemingly phenomenal performance is mainly based on “super-exploitation” of Chinese labour (and the natural environment), as well as on “under-cutting” the world working class as a whole (Hart-Landsberg and Burkett 2004; Harvey 2005; Walker and Buck 2007). That these writers une-quivocally deny that China’s sustained and rapid economic growth is real appears to reflect the belief that capitalism can never deliver development on a significant scale. This belief can be called the “natural path of underdevelopment”.The objective of this essay is mainly to take on the orthodox, market-fundamentalist discourse on China, while also attempting The sustained and rapid growth of the Chinese economy in the last three decades has been in sharp contrast to the prolonged stagnation in most parts of the non-western world. The persistence of a mixed economic system despite market reforms further contradicts the orthodox doctrines of globalisation. This study argues that China’s economic transformation has been mainly based on productivity improvement and is thus to a significant extent a real development. It has been achieved mainly through a process of “governing the market” by a set of structural-institutional factors that are China-specific but can be of general importance for late development worldwide.Dic Lo (diclo@soas.ac.uk) is with the School of Oriental and African Studies, University of London, and the Centre of Research in Comparative Political Economy, Renmin University of China. Yu Zhang (laoaozhang@yahoo.com.cn) is with the Renmin University of China.
CHINA SINCE 1978december 27, 2008 EPW Economic & Political Weekly100for Chinese people, particularly for urban residents, in the first half of the reform era. The degree of egalitarianism is thus diffi-cult to be gauged by conventional measures of income distribu-tion such as the Gini index. Perhaps much more appropriate measures would be social development indicators such as life expectancy at birth, the infant mortality rate, and the adult illit-eracy rate. It is well known that in these measures China’s per-formance in the late 1970s was very close to the average of all middle-income economies in the world, in spite of it being a low-income economy. In the early years of the 21st century, China’s performance in the social development indicators remained very close to the average of all middle-income economies. Overall, it would be appropriate to assert that for the main part of the reform era, China’s pattern of income distribution tended to be egalitarian by international standards – although it is also true that egalitarianism tended to wither along with market reform.It was the worsening pattern of income distribution under market reform that led to the fundamental shift of China’s growth path in the early 1990s. The leading role of consumption has been taken over by investment in sustaining economic growth on the demand side. And the contribution of the effect of labour transfer to economic growth – that is, the improvement in allocative effi-ciency as a source of productivity growth – has tended to weaken. What has been of increasing importance is dynamic increasing returns within industry. Conceptually, in the relevant theoretical literature, there is a well developed proposition which states that the sustainability on the demand side of a growth path based on “producing investment goods for producing investment goods” is determined by the pace of product innovations. It is through product innovations that the variety of investment goods contin-uously expands, and that the law of diminishing demand ceases to apply. The sources, and pace, of product innovations in Chi-nese economic growth, particularly since the early 1990s, are important issues requiring study. Nevertheless, one point seems clear: in addition to domestic generation, a very important source of product innovations is continuous, large-scale importing of foreign technology. It is in this particular respect that external dynamics has played a crucial role in China’s overall economic transformation.4 Gradual Marketisation, Neoliberalisation and the Quest for AlternativesThe logical starting point in the nexus of causal relationships underpinning China’s economic transformation in the first half of the reform era, as depicted in the preceding section, is the existence of an egalitarian pattern of income distribution. This pattern of income distribution has been, in turn, based on China’s political economy. For a major part of the reform era, especially its first half, the economy has been dominated by public ownership, and within the publicly-owned sector, egalitarianism in distribution has been the norm. In 1992, state-owned and collectively-owned enterprises combined to account for 86% of the output of Chinese industry as a whole. By the turn of the century, the share still remained at 64%.All these notwithstanding, it is not true that China has always shunned the policy doctrines of the Washington Consensus throughout the reform era. There was a high tide of neoliberali-sation in China in the middle of the 1990s. This mainly took the form of the 1993-95 financial liberalisation and the 1995-97 enterprise downsizing drive. There were also policy measures adopted during this period for working towards the targets of liberalising external finance and balancing the state budget by the turn of the century.The 1995-97 downsizing drive in state (and collective) enter-prises had far-reaching implications. Initiated by the state lead-ership with the objective of transforming large and medium enterprises into modern corporations and small-scale enterprises into shareholding cooperatives, the drive was seized upon by local authorities at different levels to simply sell-off state assets while unilaterally defecting on the state’s obligation of job secu-rity for the workers (and passing the liabilities of the sold enter-prises on to state banks and ultimately to the central government). Consequently, unemployment surged, consumption expansion slowed down and investment growth stagnated. Together with the worsening external environment caused by the 1997-98 east Asian financial crisis, all these plunged China into a state of defla-tion at the macro level, and there was worsening financial per-formance of enterprises at the micro level, in the closing years of the century.Against this background, there emerged a fundamental policy reversal in 1998. The Chinese leadership turned to four major categories of anti-crisis policies between 1998 and 2002. First, it launched several Keynesian-type fiscal packages for expanding investment demand, which were financed by debt issuing of unprecedented scales. Second, it implemented a range of welfare-state policies aimed at reversing the trend of stagnant consump-tion expansion. Third, it adopted policy measures to revitalise the state sector, with the objective of improving the financial con-ditions of state-owned enterprises and the balance sheets of state banks. Fourth, it adopted a cautious approach to reform-ing the regime of external transactions – in particular, the lead-ership has in effect shelved the target of liberalising the coun-try’s capital account. As an anti-crisis strategy, these policies embodied the idea of helping enterprises as well as the govern-ment to “grow out of indebtedness”. The robust growth of the Chinese economy in the crisis-prone years of 1998-2002, as well as the substantial decrease in the indebtedness (as ratios of GDP) of state finance, state banks, and state-owned enterprises, indicates that the adoption of these market-supplanting policies was justified.Meanwhile, albeit intended to be short-term anti-crisis meas-ures, these policies turned out to be consistent with the long-term social and economic development strategy of China’s state leadership in the new century. This strategy, known as “constructing a harmonious society”, emphasises the need to reverse the trend of increasing social polarisation under market reforms. And one central aspect of social polarisation to be dealt with is the trend of secular decline of labour compensa-tion as a share of national output. Although the economic growth process has not been mainly based on cheap labour or “super-exploitation”, it is true thatlabourcompensationhas experienced very sluggish growth in the reform era. This is
CHINA SINCE 1978

evident in Figure 4, which shows that, up until the turn of the century, the growth of the real urban wage rate (the formal sector of the Chinese economy) lagged far behind that of per capita real GDP. Conversely, the reverse of the comparison in recent years reflects deliberate state efforts to improve labour compensation.

Figure 4: Annual Growth Rate of Per Capita Real GDP and Real Urban Wage Rate

(5-year Moving Average, %) 14

12 A

10

8

6

4 B

2

0 1981 1984 1987 1990 1993 1996 1999 2002 A = per capita real GDP; B = urban real wage rate. Sources: National Bureau of Statistics, China Statistical Yearbook 2006; China Statistical Abstract 2007.

These include enhancing labour rights protection, working towards the target of establishing collective bargaining in all enterprises, enforcing the stipulation of setting up unions in all enterprises, and enforcing a new employment contract law – all breaking with the previous laissez-faire approach towards labour. The persistence of the capital-deepening path of economic growth has also helped to improve labour compensation.

These labour-enhancing policies are consistent with the prevailing capital-deepening economic growth path, and thus appear to have a solid material underpinning. The same applies to the broader policies for income redistribution, social welfare provision, and the attempts to reconstruct a government-funded healthcare system for society as a whole, including the rural population. Nevertheless, given that China has by now already deeply integrated itself into the world market, it will be a challenge on an unprecedented scale to move against the currents of globalisation in the pursuit of “constructing a harmonious society”.

5 The Impact of China’s Transformation on Globalisation

Central to the globalisation of our times has been a process of financialisation, that is, the rapidly rising predominance of speculative financial activities in the world economy. As Robert Wade (2006) has observed, financialisation implies financial interests dissociating themselves from real investment and the productive process in general. There is thus an intrinsic contradiction in financialisation: the speculative pursuits of profitability tend to crowd out productive activities, thus undermining the sources of profitability. Financialisation is intrinsically unsustainable.

But financialisation has actually been sustained, at least until recently. The reason, as David Harvey (2005) has argued, is mainly the “cheapening” of productive inputs worldwide. It is in this connection that national and international policies associated with neoliberalism can be seen as essential to the current round of globalisation. These policies facilitate the cheapening of productive inputs, labour in particular, and their

Economic & Political Weekly EPW december 27, 2008

incorporation into the system of capitalism. Institutionally, as Harvey has further argued, financialisation necessarily requires flexible production: logical to the rising mobility of capital is the inclination towards minimising fixed investment and maximising profits via absolute surplus-value production. A central tenet of neoliberalism is creating flexible institutions in the form of the casualisation of employment, which is made possible via the creation of an “unlimited supply of labour” and the elimination of arrangements that could undermine the flexible working of the labour market, such as unionisation and legislative protection of labour. This appears to be what has actually occurred to date.

Nevertheless, this neoliberal tenet has no prior claim to superiority even in the sense of underpinning the kind of flexible production that is needed for surviving competition in the world market. In line with the literature on techno-economic paradigms (Lo and Smyth 2004), it could be posited that the behavioural flexibility of the productive system could arise from two different, contrasting types of institutional arrangements. One is casualisation, that is, “flexible institutions, flexible behaviour”, which is based on the principles of a detailed division of labour and de-skilling of work. The other arrangement is rigid, or long-termoriented institutions, constructed on the basis of the social division of labour – that is, “rigid institutions, flexible behaviour”, where behavioural flexibility arises from collective learning and horizontal coordination. Theoretically, there is no reason to believe that one of the two types of arrangements is more competitive than the other. In reality, however, the triumph of neoliberalism, in conjunction with the drive of financialisation, has resulted in the predominance of the “flexible institutions, flexible behaviour” model across the world. This has been so despite the observation that, on historical record, the alternative “rigid institutions, flexible behaviour” model embodies a much higher degree of solidarity, egalitarianism and social justice, and the argument that this model is less prone to produce systemic demand deficiency that could undermine economic growth (Dore 2002).

In this context, China’s development experience and policy efforts since the turn of the century deserve special attention. It could be asserted that a main aspect of globalisation is the expansion of the world labour market associated with the incorporation of China into the system. According to the International Monetary Fund (2007), weighing countries’ labour force by their export-to-GDP ratio, the effective global labour supply quadrupled between 1980 and 2005, with east Asia contributing about half the increase. And, over this period, there has been an accelerating trend of massive relocation of industry and jobs from the rest of east Asia to China. At the end of 2005, China’s share of the world total of workers producing for the global market reached 25%. No wonder, in addition to its growth performance (and rising financial strength), the conditions of labour employment, compensation and work standards in China have increasingly become matters of worldwide concern.

Because of its significant and rising position in the world economy, China’s attempt to construct an alternative model of development is bound to make a systemic impact on the future

CHINA SINCE 1978december 27, 2008 EPW Economic & Political Weekly102direction of globalisation. As noted, the worldwide cheapening of labour over the past quarter century, particularly since the early 1990s, has been, in a very significant measure, associated with the incorporation of China’s labour force into the world market. Now that there have emerged strong state and societal efforts in China to resist the cheapening drive, some funda-mental adjustments in world development are likely to occur. Whatever the precise nature of the adjustments, the triumph of neoliberalism is likely to be less complete in the future than in the previous quarter century. Real development worldwide has a stake in the success or otherwise of China’s attempt to construct an alternative to neoliberalism.6 Concluding RemarksThe Chinese experience of economic transformation over the past three decades offers important lessons for late development under globalisation. In hindsight, the country appears to have undergone a transition from labour-intensive industrialisation and economic growth to an alternative, capital-deepening path. In both the phases, its developmental achievements cannot be reduced to the orthodox policy doctrines of globalisation – that is, the market fundamentalism of the Washington Consensus, or neoliberalism. In particular, the capital-deepening growth path has emerged and persisted in connection with a range of structural-institutional factors that are market-supplanting in nature. It is the interaction between these factors and the prevailing growth path that appears to constitute a promising, alternative model of late development.Put another way, since the turn of the century, China’s state and society have focused their efforts on “constructing a harmo-nious society”. These efforts represent a quest for a model of development that deviates fundamentally from neoliberalism. In particular, state development policies and institutional reforms in recent years have tended to target labour compensa-tion-enhancing economic growth, rather than growth based on “cheap labour”. This essay argues that the new development model does represent a more feasible and desirable pursuit than neoliberalism. The essay concludes with a discussion on the impact of this new Chinese development model on the future direction of globalisation.ReferencesDore, Ronald (2002): “Stock Market Capitalism and Its Diffusion”, New Political Economy,7 (1),The Economist (1998), 24-30, October.Hart-Landsberg, M and P Burkett (2004):China and Socialism: Market Reforms and Class Struggle, a special issue ofMonthly Review, July-August.Harvey, D (2005): A Brief History of Neoliberalism (Oxford: Oxford University Press).IMF (2000):World Economic Outlook (WashingtonDC: International Monetary Fund), October. – (2007): World Economic Outlook (Washington DC: International Monetary Fund), April.Lo, D (2006): “Making Sense of China’s Economic Transformation”, Economics DepartmentWorking Paper No 148, School of Oriental and African Studies, University of London, http://www.soas.ac.uk/economics/research/workingpapers/.Lo, D and G Li (2006): “China’s Economic Growth, 1978-2005: Structural Change and Institutional Attributes”, Economics Department Working Paper No 150, School of Oriental and African Studies, University of London, http://www.soas.ac.uk/economics/research/workingpapers/.Lo, D and R Smyth (2004): “Towards a Re-interpreta-tion of the Economics of Feasible Socialism”, Cambridge Journal of Economics,28 (6): 791-808.OECD (2005):Economic Survey of China 2005, Paris: Organisation for Economic Cooperation and Development, September, http://www.oecd.org/ document/21/0, 2340,en_2649_201185_35331797_1_1_1_1,00.html.Wade, R (2006): “Choking the South”, New Left Review,No 38.Walker, R and D Buck (2007): “The Chinese Road: Cities in the Transition to Capitalism”, New Left Review,No 46.World Bank (2002): Transition – The First Ten Years: Analysis and Lessons for Eastern Europe and the Former Soviet Union (Washington DC: World Bank).SAMEEKSHA TRUST BOOKS1857Essays from Economic and Political WeeklyA compilation of essays that were first published in the EPW in a special issue in May 2007. Held together with an introduction by Sekhar Bandyopadhyay, the essays – that range in theme and subject from historiography and military engagements, to the dalit viranganas idealised in traditional songs and the “unconventional protagonists” in mutiny novels – converge on one common goal: to enrich the existing national debates on the 1857 Uprising.The volume has 18 essays by well known historians who include Biswamoy Pati, Dipesh Chakrabarty, Peter Robb and Michael Fisher.The articles are grouped under five sections:‘Then and Now’,‘Sepoys and Soldiers’,‘The Margins’,‘Fictional Representations’ and ‘The Arts and 1857’.Pp viii + 364 2008 Rs 295Available fromOrient Blackswan Pvt LtdMumbai Chennai New Delhi Kolkata Bangalore Bhubaneshwar Ernakulam Guwahati Jaipur LucknowPatna Chandigarh Hyderabad Contact: info@orientblackswan.com

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