Is China run by neocons?

Controversy surrounds Naomi Klein's interpretation of the China æmiracleÆ, but a recent World Bank report offers her support.
Naomi Klein, in her book ôThe Shock Doctrine: The rise of disaster capitalismö has caused a furore in her interpretation of the Chinese economic miracle (although the latter would certainly not be her choice of word).

Broadly speaking, she argues that the Tiananmen Massacre of 1989 was the æshockÆ enabling the government to impose æneoconÆ economic policies (which Klein describes as æthe elimination of the public sphere, total liberation for corporations, and skeletal social spendingÆ) on citizens traumatised and intimidated by the events of that bloody year.

ItÆs a charge that Klein believes compares with other applications of the æshock doctrineÆ in Latin America, South Korea in 1998, and the Eastern Bloc after the fall of Communism. The twist in ChinaÆs case is that itÆs the government that imposes the bitter medicine on its own population û not an outside agent, such as the IMF in Asia and Eastern Europe, or an occupying army in Iraq. That a countryÆs own government can be the instigator and beneficiary of such a process is not a contradiction to her idea that the new economic world order favours narrow elites running huge corporations.

In fact, Klein believes the traditional distinction between the public and private spheres is obsolete. ôIn every country where the Chicago School (by which Klein means the economist Milton Friedman and his neocon disciples amongst US and other politicians) policies have been applied, what has emerged is a powerful ruling alliance between a few very large corporations and a class of mostly wealthy politicians û with hazy and ever-shifting lines between the two groups. Far from freeing the market from the state (the dream of the traditional liberal) these political and corporate elites have simply merged, trading favours to secure the right to appropriate precious resources previously held in the public domain.ö

Klein is criticising something far more ancient than traditional liberalism (free trade and markets), namely an unfair (both of opportunity and of outcome) world of self-perpetuating elites reigning at the expense of the bulk of a disenfranchised population. Something pre-modern, in fact, which Western democracy was supposed to have solved.

That the paragraph applies to modern China, most China watchers would immediately agree. ItÆs part of the criticism that authors such as Jasper Becker, Joe Studwell and Gordon Chang have been heaping on China for years. The same people would say those flaws (a conflation of political and economic power without democracy) are prevalent across all of Asia, from Indonesia and the Philippines on the one extreme, to Hong Kong and Singapore on the other. Only Taiwan and South Korea could be classified as reasonably healthy democracies in the region, with Japan somewhat ambiguous given its record of 50 years of one-party rule.

KleinÆs book has had a great deal of abuse heaped upon it. But itÆs undeniably stimulating. Her take on Tiananmen may be wrong, according to many observers, because the actual outcome, for the urban population at least, was ultimately beneficial. The government realised that it could not afford to completely alienate its intellectuals and urban workers and shifted gears.

By 1992, more inclusive pro-growth policies were firmly back on track and urban China has flourished ever since, with a relatively full set of free or subsidised social security provisions, and rapidly rising incomes. In contrast, the countryside (which initially benefited from the reforms) has suffered from a traumatic roll-back of the social services that were lavished on the peasantry under the ideologically purer period of Mao. The unfashionable conclusion, then, might be that the Tiananmen uprising was a success of sorts and proves the efficacy of revolt.

So, does that mean KleinÆs conspiracy theory fall to pieces? Surprisingly, it doesnÆt. One economist, on being asked about the winners and losers in China says simply: ôUnder the Chinese economic model, in Marxist terms, Capital has benefited more than Labour."

Klein also gets support from a somewhat unlikely source in the same vein, namely a recent World Bank report on China û ironically, part of the US government/IMF complex Klein is attacking. The report is entitled æRebalancing ChinaÆs economy û modelling a policy packageÆ.

In dry, academic prose the report describes a situation where ChinaÆs modernisation follows much of the same pattern outlined by Klein.

The authors, Jianwu He and Louis Kuijs, describe an economic model which systematically favours a specific group of people: government functionaries, or the state, via the strength of the State Owned Enterprises (SOE). What emerges is a picture of a wonderfully profitable and self-sustaining machine, but one in which the benefits are unequally shared out.

The first myth punctured is that Chinese SOEs are anything like the æliving deadÆ or zombies that were described in many early works on China. In fact, SOEs have become central to ChinaÆs successful economic model and they are extremely efficient and profitable. They also donÆt pay dividends to the state, giving them scope to re-invest their profits growing at 30%-40% per year (of which one-third might come from real estate, the stockmarket and other investments, according to Morgan Stanley).

As a result, ôthe bulk of GDP growth since the early 1990s has come from explosive growth of industrial production. Industrial value added increased on average 12.6% per year during 1990 and 2006, and the share of industry in GDP rose from 42% in 1990 to almost 49% in 2006 in current prices.ö Between 2003 and 2006, industry contributed 60% to GDP growth, compared to a disastrously low 6% from agriculture and 34% from services.

So far, so good. The problem with heavy industry SOEs from a social point of view is that they are capital intensive, not labour intensive (although thatÆs good for European countries like Germany and Sweden that export the expensive machinery to China). Encouraged by negative real interest rates (even following several meaningless rate cuts) and high profits, SOE managers re-invest their funds in their plants rather than their people. The result was the enormous lay-offs the government carried out in the 1990s, numbering in the tens of millions.

This lack of labour intensity is a huge drawback (paradox) in a country of 1.3 billion people, of whom 700 million still live in the countryside. In fact, a better way of keeping the bulk of its population at an extremely low standard of living could hardly be imagined. ChinaÆs GDP per capita growth, on average (which is what counts in this case) is still only $2,000.

While SOEs donÆt pay dividends to the state, they do pay corporate tax and have a knock-on effect on growth. This boosts the governmentÆs revenues û indeed, these revenues have soared over the past few years. However, the government has not taken these increased revenues to accelerate spending on health, education, orphanages, pensions and so on. Instead, the government uses the extra tax revenue to splurge on laying the physical framework for industrial growth. Thus: öGovernment spending has been geared to investment in physical infrastructure instead of current spending on areas like health and education.ö

To those who mention investments in the interior of the country, one can only say that the bulk of the funds appear to go to the physical infrastructure projects emphasised in the report.

To spell it out: the government is flush with funds (the budget would be the envy of many Western governments, and the country has low international debt and huge forex reserves) but itÆs focusing on building bridges and airports for industrial use rather than schools and hospitals. Western economists, scrambling for a benign explanation, sometimes explain this as the bureaucracy lacking the resources to spend the money wisely. ItÆs hard to know how seriously to take this argument. For their part, the authors wryly comment that investment in infrastructure does not, in itself, improve peopleÆs livelihood.

According to the report, this focus on infrastructure is crucial to the success of the SOEs, however disadvantageous to the poor. ôHeavy investment in infrastructure supports industrialisation. The infrastructure pays off in terms of more growth, and indirectly, more government revenue. That is why the high government investment in infrastructure can continue and become part of the pattern of growth,ö writes the author. Of the annual 8.4% growth in total factor productivity (or efficiency) growth between 1993 and 2005, the authors estimate that 5.3% came from the contribution of infrastructure. Just 0.2% came from improvements in human capital.

If you have good returns from lots of machines and few workers, itÆs clear that the firm itself will benefit most from the resulting profits. ôIn industry a relatively large share of total income tends to go to capital in the form of interest and profits, instead of wages to labour,ö the report duly concludes, pointing out that wages declined from 53% of GDP in 1998 to 41.4% in 2005, even as profits and tax revenues have soared.

Ah, but who is going to buy all the tradable goods churned out by those expensive factories? Well, itÆs the West and anybody else who can afford them. ChinaÆs domestic demand (the sum of domestic spending minus net exports) is puny compared to its vast supply. (The quarterly report in September by the World Bank says that ChinaÆs contribution to world demand is less than three-quarters of its contribution to world GDP. ThatÆs to say, ChinaÆs supply outstrips its consumption by an unusually wide margin.) And the reason that China canÆt buy what it produces is because itÆs too poor û too great a share of the profits not going to the worker, and not enough workers compared to the number of desperately poor peasants.

As the report states unequivocally: ôIndustry creates fewer jobs than services. 85% of the growth in industry has come from increased labour productivity instead of new employment.ö Indeed, industrial employment grew at an astonishingly low 1.6% per year between 1993 and 2005 û that is, even after the effect of the massive layoffs of the recent past has tapered off, new employment is between one-tenth and one-fifth of GDP growth. Overall urban employment growth was not much better, slowing from 5.4% between 1978 and 1992 to under 3% between 1993 and 2005.

That brings us to the second group of major beneficiaries, namely the West, but especially the US. ChinaÆs deflationary impact has forced down prices across a wide range of products, enabling Western workers disenfranchised by globalisation to maintain a certain standard of living û and thus prevent a stronger challenge to the æhollowing outÆ phenomenon memorably described in James KyngeÆs book, China Shakes the World. Not forgetting that half of ChinaÆs exports are produced by foreign firms exporting back to their own countries at much lower cost and much higher profit.

The West is crucial to the Chinese model because its wealthy citizens make up for the demand the Chinese government is unwilling to stimulate domestically. Remember, a more balanced economy would detract from the resources and profits respectively invested and derived from the heavy industry model. ItÆs also almost poetically beautiful that such a model avoids any serious inflationary build-up: the high investment levels actually increase capacity.

This means, quite simply, (as the report describes) that China can grow and grow without facing the bottlenecks, inflation and current account deficits which would occur in a more balanced growth path. Thus, profits keep growing, like a perpetual motion machine, to be shared or reinvested within the state sector. The losers are both the rural Chinese kept out of employment and the Western workers who lose their jobs when their factories relocate. You could argue that what they get in return is plentiful debt. Whether this is a good thing if it's not backed by sufficient income is no longer a moot point.

The authors of the report thus contradict the idea that millions of peasants are pouring out of the countryside and taking up residence in the cities. Not only are there no jobs to be had but ômigration has been slowed down by the Hukou sysem (internal passport), discriminating regulations against migrant workers, non-portable labour, (as well as discrimination in terms of) social benefits and land tenure policies." The result is a massive æreserve army of the unemployedÆ, as Marx would say, who spend their time drifting (but unable to settle) between building sites from one end of China to the other.

But what about services? For all the scorn heaped on æMcJobsÆ in the West, they have one huge advantage: service industries are more labour intensive. Unfortunately, services have not received government support in the same way as industry.

One reason is simple: when the government pushed the industrial export model, it was pushing a sector in which it had an overwhelming dominance. In contrast, the service sector is relatively new. It also has many clever private-sector rivals, as in real estate, tourism, high-tech and Internet-related services. Thus, there was more of a risk of developing an independent private sector by providing a level playing field. The labour intensity also means lower profits.

The first consequence is that services are less encouraged than the industry. The second, related consequence is that domestic consumption remains weak, because the population is poor û since the service jobs in the cities are not there for migrating farmers to move to. This creates a sort of dismal negative feedback loop.

So there you have it. KleinÆs ideas are not as far-out as one might think at first glance. Perhaps, on reflection, itÆs not so surprising that the globalisation of business and trade should be joined by the globalisation of greed.
¬ Haymarket Media Limited. All rights reserved.