An Analysis of China’s Capitalist Reform

China's fast GDP growth has depleted its natural resources and damaged its environment. Workers and peasants in China have suffered. Even the fortunes of the "middle class" will fall. The rapidly growing protests to plant closings, land grabbing, wage and benefit cuts, and corrupt and abusive government officials can only intensify.   

By Prof. Pao-yu Ching
Posted by Bulatlat

News reports on China have appeared frequently in the mainstream media in recent years. Many of these reports paint rosy pictures of China's economy, and others tell stories of demonstrations and protests in different parts of China. There have also been more reports on China's environmental disasters. But visitors touring China’s large cities are likely to be impressed by the endless blocks of modern new high-rise buildings, crowded restaurants and well-supplied stores. Some conclude that capitalism has worked for China, and Western capital and technology were what China needed to become a modern country. Others predict that China may soon become the next economic power to compete with the United States, the European Union, and Japan. China’s thrust toward capitalist “reform” is bringing the Chinese people to impoverishment, decades after they won a revolutionary struggle for socialism

The prediction that China is becoming an economic superpower is as much grounded in reality as the earlier predictions that the “Asian miracle” was going to make the 21^st century an “Asian century”. However, in the summer of 1997, before the 20^th century even ended, the bubble burst in Thailand, Malaysia, Indonesia, Singapore, and the Philippines. The crisis that began in Southeast Asia quickly spread to Korea, Hong Kong, Russia, Brazil and other countries in Asia and Latin America. Today, nine years later, people in Southeast Asia are still struggling to recover from the crisis. But their governments are telling them that they must make more sacrifices, because the global market is slowing and their new competitor, China, has the upper hand. The credibility of these forecasters is questionable, when their margin of error was as big as it was when the predicted prosperous Asian century quickly vanished after a short growth spurt in just one short decade. Now similar forecasts about China are pouring out of the same international securities firms and financial institutions.

That China’s economic growth in the past two decades has been impressive or even spectacular is not in question. China’s GDP continues to grow at around 9% or higher in real terms[1], and its exports growth rates have stayed around 30% for the past three years. China’s trade surplus continues to hit new records – it reached $102 billion in 2005 tripling the $32 billion in 2004. For the first 7 months in 2006 its trade surplus reached $75.95 billion, another 51.9% increase from the same period last year. Since 2002, China has surpassed the United States to become the largest recipient of foreign direct investment, and at the same time it has also exported capital. China is the world’s largest producer of more than 170 products, including steel, aluminum, cement, etc. The amount of energy it consumes is second only to the United States.

The fact that China has been able to achieve such rapid GDP growth in the past quarter of a century seems to confirm the development myth created by the dominant capitalist ideology. Global monopoly capital and the imperialist powers have used the “Asian miracle” earlier and the “China miracle” now as propaganda to perpetuate a myth about economic development. The myth is that when global capital hops from one country to another, it creates wealth for that country and develops its economy. All these countries need to do is to open their door to the pools of international capital and adopt the advanced technology transferred to them by the multinationals. Then, these less developed countries can expect miracles to happen by joining the international division of labor and exporting themselves into prosperity.

Monopoly capital needs this myth to justify imposing neo-liberal policies, which are so vital for its global expansion, on developing countries. When it comes to pushing doors to these countries open for monopoly capital, few countries have been left behind. Taking down all barriers for the expansion of the monopoly capital on a global scale is the coordinated work of international capital, the imperialist powers, and the international trade and financial institutions, namely, the International Monetary Fund (IMF), the World Bank (WB) and the World Trade Organization (WTO). Despite the fact that this strategy of development has spread crisis around the globe, the myth has persisted.

A critical analysis of China’s economic growth at this point in history is of great importance. A critical analysis of what has happened in China since the capitalist reform began in 1979 presents us the opportunity to dispel the myth about development perpetuated by global monopoly capital. Analyzing what has happened in China also gives us an opportunity to point out the difference between short-term GDP growth and long-term sustainable economic development. This paper argues that short-term GDP growth, rather than helping long-term economic development, actually deters it.

During the past two decades China has implemented reform policies that transformed its economy from a socialist economy based on self-reliance – to a capitalist economy is now well integrated into the world's capitalist system. On the surface, China's fast economic growth seems to confirm that the development strategy advocated by monopoly capital has worked. China has replaced the "Asian four little dragons" and became, in recent years, a model for other developing countries to emulate. But looking more carefully beneath the surface, points to a different conclusion. In this essay, an assessment of China's capitalist development and its impact, is based on the answers to the following questions:

How do we assess China's economy after it went through two decades of fast GDP growth? What has China's GDP growth meant to China's 1.3 billion people? How does this path of growth affect China's sustainable long-term development for the future? What is the chance for China to become a strong capitalist economic power? Is China headed toward an inevitable crisis? Why? What would be the potential impact of such a crisis? And what have been the forces that have been behind China's capitalist reform and its fast GDP growth? 

I. China's Capitalist Reform – An Overview

Deng Xiaoping seized power after Mao’s death and officially began his Reform

after the conclusion of the Third Plenary Session of the Eleventh Congress of the Chinese Communist Party in December of 1978. While in certain circles outside of China the debates about the nature (capitalist or socialist) of Deng's reform may continue, but the majority of people in China recognize the fundamental differences in their society before and after the 1979 reform. Most people know that they live in two fundamentally different societies, because they have experienced and are keenly aware the fundamental changes in the class relations between then and now. The Reform could not have proceeded the way it did had there not been that fundamental change.

Deng’s Reform program consists of "Gai-Ge" and "Kai-Fang". The two components of Reform can literally be translated to: reform and opening up. What it meant was that China was to develop capitalism and connect its economy to the world capitalist system. Deng and his supporters believed capitalism, even though the word “capitalism” was never used (instead the Reform was supposed to be "socialism with Chinese characters"), would be able to develop China's productive forces in order to catch up and surpass other economic super powers in the world.                

Deng's capitalist reform consisted of several parts, all of which belong to a well- integrated plan designed to deconstruct the socialist system built during the first 30 years of the People’s Republic. The capitalist reform aimed to fundamentally change the relations of production systematically by (1) dissolving the communes, thus breaking up the alliance between workers and peasants; (2) dismantling the State and collective ownership of the means of production and (later privatizing them) turning them into profit making institutions; and (3) labor reform which would turn labor power into commodity, which could be hired and fired at will by new factory management teams. The Reform was meant to open up China and connect it to the international capitalist system, by lowering import tariffs and eliminating import quotas to promote trade and by granting favorable treatment to welcome foreign investment capital.

Moreover, in order to deconstruct socialism and build capitalism, reformers had to change the superstructure as well. They rescinded from the Constitution, workers' right to strike and the basic rights of the masses[2] that were newly gained during the Cultural Revolution. Mass movements, which had been encouraged and organized by the government as a way to resolve problems and contradictions in society since the beginning of the new Republic, were banned. In order to show that the new regime had no tolerance for any mass action from below, they brutally crushed the demonstrations and protests in many cities in China during the spring of 1989 by opening fire on the unarmed students and workers in Tiananmen Square.

As described later in this paper, the reformers were able to change the basic class relations in China by passing legislation and imposing them on workers and peasants from above. Despite efforts made by workers and peasants to resist these reform programs, the Reform was able to accomplish all its aims as planned. Although there were occasional patriotic voices calling for caution when dealing with foreign capital, opening up China to foreign capital continued, and international trade expanded. By the time China joined the WTO at the end of 2001, China had opened itself up and taken down barriers for foreign capital to expand. Even a mainstream economist, Nicholas R. Lardy of the Brookings Institution, admitted, "By the time China entered the WTO it was already perhaps the most open of all developing countries." In the forward of his book he also said,"…under the pressure from industrialized countries, China has granted WTO members unprecedented authority to limit imports of Chinese products." (Lardy, vii)

However, while reformers succeeded in carrying out the capitalist reform as planned, the results turned out to be very different from what the reformers and their supporters had expected. What had been their expectations when the reform began?  What are the results? And why the results are so different? Some answers will be provided in this section and the rest will be given in the rest of this essay.

In the post-revolution China, there was no argument amongst its leaders that China needed to develop its economy to become a strong industrial modern nation, so China would never again have to suffer the aggression and humiliation inflicted by the foreign powers during the previous one hundred years. However, by the late 1950s, fierce arguments and struggles over how China should achieve economic development to become a strong and independent nation had begun within the Communist Party. There were two diametrically opposing ideologies within the Party on the course of China's development. To Mao Zedong and his supporters, the Chinese Communist Party was founded on the basis of Marxism and Leninism and its goal was to achieve first socialism and then communism in China. The CCP, as the vanguard of the proletariat, led and won the revolution with the support of workers and peasants based on the strong alliance between them. Therefore, China's economic development could only be socialist. Mao and his supporters also believed that the masses, once liberated from their oppression would release their tremendous potential and build a strong and independent China.

On the opposite side were Mao's opponents, Liu Shao-qi and his supporters. Liu strongly disagreed that socialism could develop China's productive forces to build a strong economy. Liu and his supporters, including Deng Xiao Ping, believed that China's productive forces would develop much faster, if it were to adopt the capitalist strategy of development. Fierce political struggle began in the late 1950s when China's economy reached a cross-road, searching for a clear direction to move forward. Mao won the struggle and proceeded to transform China's economy by State (and some urban collective) ownership of the means of production in industries and collective ownership of means of production in agriculture. In the process of the socialist construction, class relations in the new Chinese society were transformed. However, until Liu died, he never gave up his idea of developing China along the capitalist road, and class struggle continued after the transfers of ownership to the State and to the communes. The struggle of which way China was going to go turned fierce during the Cultural Revolution. Finally, after Mao died in 1976, Deng Xiao-ping had the opportunity to carry out the capitalist reform in 1979.

For the followers of Liu and later Deng, the process of socialist development was too slow, despite the fact that China had made great accomplishments in developing its industry and agriculture during the socialist period. From the early 1950s until the late 1970s China's industrial output grew at 9% a year. China was able to modernize its agriculture and its grain production grew at 3% a year (faster than the rate of population growth) during the same period to achieve self-sufficiency in food. Moreover, China was able to achieve a great degree of modernization in agriculture[3]. The most important achievement made during the socialist period was the tremendous improvement in the lives of the majority of Chinese people. The overwhelming majority of Chinese workers and peasants saw how their lives had been improved. They lived very secure lives with little worry of meeting the basic necessities of life – food, clothing, housing, health care, and education. China's healthcare system in both urban and rural areas during the socialist period was so widely praised that even the World Bank had to admit its accomplishment. Life expectancy nationwide doubled within a generation, from 35 to 68 years, due to better nutrition, better living conditions, and preventive health care.[4]

However, when Deng proposed his Reform in 1979, he had the support of many people in the Chinese Communist Party. These leaders believed that China could develop faster if it adopted a different strategy of development. They were impatient and felt that China did not seem to have much to show the world. There were not many modern high-rise buildings nor were there super highways in China's cities. Shanghai, the largest city in China, looked rather shabby compared to other modern cities in the US, Europe, or Japan. They also believed that China's isolation was self-imposed, in spite of the fact that, led by the United States, Western countries chose to isolate China politically, and that US had imposed trade embargo against China until the Vietnam War ended in the 1970s.

Many supporters of the Reform thought that when China began the capitalist reform, it already had a rather strong industrial base, and by adopting State capitalism, China would have enough strength to fend off advances made by global monopoly capital. They believed that China could make use of foreign capital and foreign technology without subjecting itself to the domination of the industrial powers. They also thought that because foreign capital wanted to expand into China's huge market, China could negotiate acquiring foreign advanced technology in exchange for part of China's market. During the 1980s and the beginning of 1990s, the reformers made efforts to protect China's national interests, and for that reason the negotiations for China to join the GATT did not go smoothly.

By the mid-1990s and especially after the Asian crisis in 1997, the Chinese government had to give up many of the conditions it had insisted upon earlier and accepted the terms set by global monopoly capital. It meant that by the end of the 20^th century, international capital was too strong to let any developing country to develop capitalism independently. By this time the import substitution model of capitalist development in Latin America had already collapsed, and the bourgeoisie in developing countries, China included, realized that in their own interest, they had to cooperate with the global monopoly capital. In China the State had fallen into power groups all pursuing their own interests, grabbing whatever they could get their hands on. These power groups also realized that cooperating with foreign capital was (and still is) one of the most lucrative endeavors to accumulate wealth.

The grabbing of power and wealth by those in power can best be demonstrated by the reform of China's former State enterprises. The majority of corruption cases have been related to the reform of the State enterprises. The reform took several steps – the first was to transform the State enterprises into independent, profit seeking legal entities[5]. On October 20, 1985, the Twelfth Congress of the Central Committee of the Chinese Communist Party passed legislation entitled The Economic Structure Reform. This legislation reaffirmed the temporary regulation, which granted managers in State enterprises the autonomy to manage their own affairs[6]. It allowed individual enterprises to retain portions of their profits and to re-invest the profits as they saw fit. The managers were allowed to dispose of unused productive facilities by renting, leasing, or selling them. In addition, management was given the right to discipline and promote workers, and, under the broad guidelines, to dictate their own wage system. This legislation declared that the State would no longer intervene directly in the affairs of individual enterprises; the State would only influence production through indirect policies, such as price, taxes, and credit/loan policies. The passage of The Economic Structure Reform meant that even though the State still "legally owned" these enterprises, it relinquished the economic ownership of the means of production to the management; it fundamentally changed the meaning of State ownership of the means of production. Each enterprise thus became a separate entity, and management had considerable autonomy to run it like a business enterprise. The goal of each enterprise was no longer to fulfill an overall economic plan but to pursue its own profits.

Following the passage of the Economic Structure Reform the State began to contract out State enterprises to individuals or teams of managers. Who had the opportunity to contract these enterprises? Only those who were in positions of power or those who had close connections could obtained such contracts. After the enterprises were contracted out, the State took another step by "fang quan rang li" – meaning the State broadened the power it relinquished to management and gave management a bigger portion of the profits. Later, "li gai sui" was implemented, which meant the management no longer needed to hand in any portion of the profits. Instead, they paid the State taxes on the enterprise's earnings.

The contracts stipulated that managers would be rewarded based on their performance. However, the contracts often did not specify what kinds of responsibilities management needed to fulfill, and how they would be held accountable for their business decisions and operations. As it turned out these new managers of the "State" enterprise were all rewarded handsomely. The managers' performance was not judged on how efficiently they ran the enterprises, but by investment project and the size of the projects completed during their terms. The bigger the projects, the bigger were the rewards. Moreover, before there was time to evaluate whether these investment projects were viable and profitable, managers were often promoted to take on management positions of bigger enterprises, or to higher positions in the government. Therefore, management had strong incentive to invest in additional facilities or building new plants without serious concern for the consequences. As a result, overinvestment became a very serious problem. (See discussion in later section.)

Networking between high level government officials and management in the enterprises made it possible for both parties to acquire and accumulate wealth. It became apparent that many cases of corruption were related to the reform of former State enterprises. Contracted management often used fraudulent accounting to cover up illegal selling of assets and sharing of "profits" with government officials. The government officials who benefited from these deals had good reason to conceal where the "profits" came from. The frequent personnel transfers between government officials and management teams made it difficult to track down who was responsible for what. Actually, people were being transferred back and forth frequently, so they could avoid taking responsibility.

One of the schemes management teams used to acquire wealth was/is to separate the profitable parts of the enterprises and set them up as separate subsidiaries. They would then reap the "profits" from these "separate" companies. The management could also separate the non-profitable part(s) of the enterprises and declare them bankrupt. The separation of failed subsidiaries was another way to clear the management of their responsibilities.

Because making profits was the enterprise’s new goal, management then used efficiency as a means to increase profitability as an excuse to lay off half or more than half of the workers. They also used the opportunity to cut wages and benefits for the remaining workers. In the process of reforming the State enterprise permanent employment system was eventually destroyed and replaced by contract workers in order to for the management to have the flexibility to run a profitable business. 

Heavy losses in these former State enterprises continued, despite laying off large numbers of workers, because management kept investing in projects and making fraudulent deals. Then another phase of the reform came, called "bo gai dai". It meant that the State no longer appropriated funds to the enterprises. Instead enterprises would obtain loans from State banks for the funds they needed. This was implemented, because the State no longer had the financial resources to support the enterprises. Under this reform, managers obtained loans from banks, and they were supposed to be responsible for paying interest on loans and returning the principal when loans came due. However, "bo gai dai" did not solve the problem; the State simply shifted the problem to the State banks. For instance, an enterprise would borrow money from a bank for an investment project. Government officials as well as the management would be rewarded at the completion of these projects. However, before the project began to realize profits, there would be several round of management turnovers. Later, when problems became apparent due to wrong investment decisions, bad management, or large payoffs were siphoned off from the coffer of the enterprise, the management teams that were responsible were long gone. The loans were bad – delinquent on payment. One way or another management of these enterprises cooperated with government officials and all were able to obtain large amounts of wealth.

In the late 1990s when large quantities of loans were defaulted, and there was little hope that the principal or the interest would ever be repaid, the reform entered into another phase. This phase called "zhai zhuan gu", meant that the bad debts would be forgiven, so enterprises could issue stocks to get the funds they needed. It started in 1998 and was supposed to cancel all bad debts over three years, so the enterprises could get over their financial difficulties. The State paid out trillions of RMB to clear the bad debt, but no one was held responsible for the huge cost. The clearance of debts also cleared all the responsibilities of management and related government officials. In addition to the clearance of debt, the State also financed writing off bad assets from the enterprises' books. When enterprises got rid of their debts and worthless assets, they were able to borrow more and make more investments. Putting a brake on investment has proven very difficult, because people in power are getting rich from the continuous investing and building; the problem of overinvestment is a problem that has been built into the very structure of the "State" enterprise reform.

What is true with former State enterprises has also been true with infrastructure projects built by different levels of government. The upward mobility of government officials depends on accomplishment made during their terms. Such accomplishments are again based on the number of infrastructure and other projects built – the construction of highways, airports, large office buildings, exhibit centers, or even a whole new districts adjoining a city. 

A paper written by Bai Jing-fu, the vice-chair of a Research Center in the State Council,[7] gave a rather gloomy picture of the current state of China’s economy and reflected the problems accumulated during the 26 years of reform. He listed ten major contradictions that exist within it. Bai wrote this paper in November 2005, as the 10^th Five-year Plan (2000-2005) was coming to an end and the 11^th Five-year Plan (2006-2010) was about to begin. Due to the importance of Bai’s position, his paper had to be approved officially. Therefore, Bai’s assessments on the current state of China’s economy represent the views of at least some high-level government officials.[8]

According to Bai, China's economy is facing serious problems, despite high rates of GDP growth. China is very much dependent on continued foreign investment and the external market to sustain its high growth rates. China's development of advanced technology is disappointing. After spending tens of billions of dollars on foreign technology imports, China has not made much progress in upgrading its technology and is nowhere near a position to compete with foreign multinationals. In addition, China has to continue to assume its role as assigned by the multinationals in the international market. In other words, China has to continue exporting large volumes of low valued products at the expense of its low wage labor, its scarce and dwindling natural resources, and its deteriorating natural environment. Bai's report further indicated that the problems of dependence on foreign technology and foreign markets could not be easily corrected. His conclusion implied that the chance for China to become a strong and independent economic power is not promising.

Domestically, Bai explained that the economy has become increasingly uneven and unbalanced. The growth of GDP has generated increasingly smaller growth in employment. The unemployment in the countryside, according to Bai, means that between 2001 and 2010 there will be an estimated 106 million to 108 million additional people migrating to urban areas to seek work. High unemployment rates and highly unequal income distribution has resulted in slow growth of domestic consumer demand. In addition, investment has continued at a fast pace, despite the fact that excess capacity now exists in more than 75% of China's industries. 

Bai not only pointed out all the problems and contradictions in the economy, he also indicated that these problems and contradictions are getting worse instead of getting better. Bai did not offer any solutions. These problems and contradictions that Bai pointed out resulted from the Reform and they have become structural, thus, they cannot be resolved by simply making adjustments here and there. There have been growing numbers of publications in China expressing similar concerns for the problems raised by Bai, as well as other important problems in the Chinese economy.

In the following sections, when discussing the obvious problems in the China's economy, I offer my own explanations of why these problems are inherent to the development strategy of the capitalist reform. To a certain extent, Chinese policy makers chose this strategy when they embarked on the capitalist reform that began in the last 20 years of the 20^th century. However, their choices, like the choices of other developing countries, were rather limited. When the import substitution strategy of capitalist development in Latin America finally collapsed in the 1980s under the pressure of global monopoly capital and the imperialist states, developing countries which wanted to develop capitalism only had one choice: opening up their economies and breaking down all the barriers for global monopoly capital. It is not surprising that development under the conditions prescribed by international monopoly capital leads to a GDP growth based on a growing dependence on foreign investment, foreign technology, and external markets, rather than the development of an independent capitalist economy.

The Reform of the past 26 years and the way the Reform was carried out resulted in a very polarized society. There is a small rich and powerful group on top enjoying all the wealth and privileges the society offers. Roughly 20% is in the middle, consisting of mostly professionals, government employees, and small entrepreneurs. They can afford a comfortable standard of living, including spending on the growing availability of luxury goods. The majority of the people, including the unemployed and low wage urban workers and the majority of rural people, stay at the bottom. The corruption at the top is rampant but has spread through all different levels of governments. They rob public resources to enrich themselves and have abused their power. They make decisions that have stripped tens of millions of workers of their jobs and thrown them onto the streets, and at the same time reduced wages and cut off the benefits of remaining workers. They also occupy land in both urban and rural areas, often without the permission of the current occupants and with very little compensation. These decisions and actions have spurred increasing numbers of demonstration and protests – several hundred protests a day – through-out China.

In response to questions and concerns raised by many members in the Communist Party, including those in positions to formulate and implement policies, and also fearing a general uprising, China's current leaders – Party Chairman Hu Jintao and Premier Wen Jiabao – announced a new direction for future development. They proclaim that a scientific view of sustainable economic development should be adopted, and such development should be based on the needs of people as well as environmentally sound. They also call for a “harmonious society”, indicating that China's top leaders have realized the seriousness of the problems resulting from the development of the past twenty-six years, including a seriously polarized and divided society. The goals of capitalist reform were accomplished, but the results were not what had been expected. It is thus ironic that after twenty-six years of reform China has come to a full circle. Hu and Wen are now calling for China to return to a sustainable development that is based on the people. Wasn't that the kind of development China had had during socialism before the Reform began? If China stays on the same course of continuing capitalist economic growth, so narrowly defined by the international capital in today's global environment, how can China expect to accomplish the kind of people based sustainable development that Hu and Wen have proposed?

II. The Impact of the Capitalist Reform on the Chinese economy, its People and Society

1. Imbalances between China's economy and the rest of the world

After more than two decades of high rates of export growth, especially during the five years since 2001, there are now serious imbalances between China's domestic economy and the rest of the world – especially its imbalances with the United States. By the end of June 2005, China accumulated $711 billion in foreign exchange reserves from its trade surpluses in the past years – then its reserves went up further to $769 billion at the end of October 2005[9]. The majority of the foreign exchange reserves are in foreign currencies (the majority is in US dollars), foreign stocks, bonds, and securities (mostly US government bonds and Treasury Bills), and other foreign assets, all of which is debt owed by foreign countries. Therefore, most of China’s trade surpluses from these past years were exchanged into foreign IOU’s and now sit as foreign exchange reserves in the Central Bank.

By the end of the third quarter of 2005, China became a net capital exporter. China received a total of $570 billion in foreign investment (capital imports), but had $769 billion in foreign exchange (capital exports)[10]. Due to the large capital exports of China and other Asian countries, Monique Morrissey and Dean Baker of the Center for Economic and Policy Research, concluded that by 2000, the developing countries as a whole, became a net capital exporter to developed countries.[11]

Putting it in another way, in the first half of 2005, China’s current account surplus (mostly from trade) jumped to 8.1 % of GDP, a nine times increase from the first six months of 2004[12]. This sudden jump of trade surplus means that in the first half of 2005, 8.1% of what China produced was not consumed domestically, nor was it invested in China, or spent by its government. The capital, which equals to 8.1% of GDP was simply exported (in net, after deducting imports) with nothing in return but more promissory notes to be paid sometime in the future. This is a serious imbalance between China and the rest of the world, especially the United States. China is still a poor country that needs capital for its own development and for the immediate needs of its people, such as clean water, basic health care, and basic education, but it is exporting capital, most of which goes to the United States, the richest country in the world, at an accelerating rate. Even though other economies, such as South Korea and Taiwan, have also exported capital, China's capital exports, both the absolute quantity and relative to GDP, is astonishing.

During the socialist period, a balance between China's economy and the external sector was maintained. China's debt owed to the Soviet Union during the 1950s for importing machinery and equipment and for financing the Korean War was quickly paid off. Therefore, China did not have to export large quantity of capital like most less developed countries have to in order to pay the interest on the debt they owe. This financial independence freed China from the domination of rich and powerful nations, as well as from international financial institutions. It was a very important part of self-reliant socialist development strategy. After twenty some years of Reform, China's current high rate of GDP growth depends on the large volumes of products it exports to the rest of the world, especially to the United States. However, the large volume of exports has to be financed by China's capital exports. More plainly put, it means that China has to continue loaning money to the US in order for the US to buy its products. Common sense should tell you that this is not a viable development strategy.       

2. High rates of GDP growth sustained by high rates of growth in investment and exports

Rapid export growth has become the major contributor to China's high GDP growth rates. According to Bai’s report, 5.7% (or 60%) of the 9.7% GDP growth rate in 2004 was due to increased demand in the external market[13]. This shows how much China is dependent on the fast growth in its exports to sustain the continuing high rates of growth in GDP.

Within China's domestic economy, there have been serious imbalances as well. China has maintained high rates of investment (foreign, domestic, and government) growth to boost its GDP. The estimated investment has been over 45% of GDP in recent years –an extremely high rate unseen in any developing or developed economies. On the other hand, consumption as percent of GDP has been low by any country’s standard: a mere 43.4% in 2003[14].

The large amounts of investment, both foreign and domestic, in manufacturing facilities and large amounts of government investment in infrastructure, together with the high rates of export growth, were the major sources of the aggregated demand that has been driving high rates of GDP growth.

Recent figures show that the government spent around 22% of GDP, but half of that figure was in fact government savings and was used for investment in building offices, residential housing, highways, airports and other infrastructure, much of which are currently under-used. The other half (only 11% of GDP) was spent on purchasing goods and services. (“The Frugal Giant,” The Economist, September 24^th –30^th, 2005, 12)

Government investment in buildings and infrastructure has been one major source of stimulus that helped maintain the high rates of GDP growth. Shanghai, the largest city in China, boasts of 450 large-scale projects completed in the past twenty years, including the development of Pudong area and the building of the second tallest tower in Asia[15]. In addition, there is a new light rail system, built by the Germans, that runs with few people on it, between the city and the Pudong airport.

But mega size projects have not been limited to large cities; many airports built in the last two decades are in much smaller cities and many of them lie unused[16]. The Economist reported another example of these mega construction projects in Henan. The provincial government is building a new district east of its capital, Zhengzhou, called Zhengdong. The report reads: "The towering half-finished buildings of its central business district encircle an artificial lake and an exhibition center that will be one of China's biggest when it opens later this year. Plans are afoot for a hexagonal pyramid-shaped hotel that would be nearly as tall as the Eiffel Tower. Broad highways are spreading across former farmland….. " (The Economist, January 7^th-23^rd 2006, 34)

Henan, is one of the several provinces in central China, which in recent years have experienced one of the worst economic crises in the country, when the majority of its former State enterprises went bankrupt. The building of Zhengdong is considered to be a "dragonhead" project that is supposed to lift Henan out of its current stagnation. The over-building of these kinds of mega projects has spread all over China. Moreover, there is no mechanism that can prevent the building of the Zhengdong and other similar projects. Even when there is serious water shortage in Henan, there the artificial lake in the Zhengdong district will have to be filled.

At the same time Hu and Wen are advocating sustainable people based development, they are in fact accelerating construction in infrastructure. A report from the current issue of The Economist, said that China has a plan to spend 2 trillion RMB on building railways and several new subway lines in Shanghai and 24,000 km (15,000 miles) of expressways by 2010. And in addition to the nine nuclear power stations it already has, China is planning to build another 21 nuclear power stations by 2020. (The Economist, April 8^th –24^th , 72-73)

3. Labor reform and the reserve army of the unemployed

Labor reform was part of the overall capitalist reform that began in 1979. The goal of labor reform was to turn labor power into commodity by dissolving workers' permanent employment status (breaking the iron rice bowl) in State enterprises. As part of the reform of State enterprises, new factory managers were gradually given more and more autonomy to run the factories, including the right to hire and fire workers and replace permanent workers with temporary workers.

Permanent employment was a fundamental right of workers in the State enterprises. It was the first step for workers in State ownership to assert their influence in managing factories. If the working class is to become the real masters of their socialist countries, they must start by being masters of the factories they work. In the transformation of relationship between those in management position and those being managed took place during and since the Cultural Revolution, guaranteed employment had to be a prerequisite.

During the socialist period workers were paid moderate wages, but the benefits they received covered them from cradle to grave. They paid a token sum, a few RBM for their housing and utilities, they had free medical care, and their families were also covered by the health care plan (with a small fee). They ate low cost food in the factory cafeterias and paid low prices for their rationed food, clothing, and other supplies. Childcare and education for their children were practically free[17]. There were few luxuries, but their lives were vastly improved during the 30 years of socialist reconstruction. Workers were able to save a small amount each month and use their savings over time to buy radio, bicycles, sewing machines, watches, and a few other luxury items. When they retired (men at 60 and women at 55), their monthly pension equaled 80% of their former wages with full medical and other benefits. As the production of communes increased, commune members received more cash from the work-points they earned, and they spent more on buying consumer goods supplied by the State sector. During the socialist period, the steady growth of the purchasing power of workers and peasants supported the steady expansion of China's light industries.

Under economic planning, prices were used to reflect the economic policy. During the socialist period, the goal of production was to meet the basic needs of the overwhelming majority of people; prices of basic necessities were set low, so workers and peasants could afford to buy them. In order to encourage mechanization of agriculture, prices of agricultural machinery were set low for communes to purchase. On the other hand, in order to conserve resources, prices of some "luxury" goods were set high. For example, people had to save several months to buy a watch – a high priced "luxury" item. Since "profit" or "loss" was the result of pricing policy, they did not reflect, nor were they used to judge, the performance of the enterprise. The "profits" of all enterprises that produced consumer "luxuries" went to the State, and the State used the funds to pay for all of the expenses in enterprises that sold products at low prices[18]. This is the true meaning of a State owned enterprise. At no time could an enterprise use the excuse of losing money to lay off workers, because wage funds (including benefits) came directly from the State, according to the number of workers and the wage scales plus benefits in that particular enterprise. That was how the State guaranteed permanent employment for workers in State enterprises. Over or under-production of certain products did occur at times, but they were corrected by making adjustments in planning.

When the Reform first began, workers in State enterprises resisted the efforts of the reformers to fundamentally change their status – but their resistance eventually failed. Since the early 1990s, China’s employment structure has undergone thorough and drastic changes. The new management in State enterprises got rid of workers' permanent employment status and laid off large number of workers. The percentage of workers in State owned units and urban collectives decreased from 84.3% in 1992 to 47.5% in 1999. Since employment in the private sector in 1999 only accounted for 8.5% of the total number of workers, it did not make up for the employment loss in other sectors. Therefore, in 1999 only 56% of workers were considered to be working in the formal sector of the economy, while the rest (44%) were in the so-called informal sector. (Hu, Table 1) Bai’s report (point 10) provides figures for the numbers of workers in both State owned units and urban collectives for the first six months of 2005. If we use Bai’s figures to update Hu’s figures in 1999, then in less than six years, employment in State owned units decreased another one third, from 99.88 million in 1999 to 66.38 million in the first six months of 2005. For urban collectives, employment decreased almost half, from 16.52 million to 8.67 million during the same six years. Therefore, from 1999 to 2005 even more workers flooded into the so-called informal sector or the large pool of the unemployed.

These laid-off workers try to find whatever odd jobs they could to support themselves, and many of them live on or under subsistence levels of income. They work as small vendors selling food or other low cost items on the street. Many others are also hired for a few hours or a few days at a time. The temporary and casual jobs pay below subsistence level wages, which usually amount to about less than half of the low paid regular workers in the formal sector. Successful food peddlers earn higher income but they need initial capital and may have to pay high rent for a small space to do business. They also take a big risk.

Officials are well aware the serious problem of unemployment. In 2000 I gathered information showing very high unemployment rates in some cities. For example, cities in the northeast, where China’s heavy industries were once located, saw unemployment rates skyrocket as a great number of former State owned industries were closed down, and large numbers of workers were permanently laid off. The unemployment rates for cities in Henan, Sichuan, Anhui and others in central China were also very high. The unemployment rates, if those who work in the informal sector were counted as unemployed, in cities in northeast and central China provinces were as high as 40% to 50%. Local people in these cities, said that more than 60% to 70% of the workers in former State owned industries had been laid off. These workers were either forced into early retirement or began working subsequently in the informal sector. Large number of women in towns and cities of these provinces migrated to Beijing and Shanghai to work as domestic workers for well to do families.

Through rounds of restructuring, China's enterprises have not only been able to lay off large numbers of workers – they have also been able to cut wages and benefits for the remaining workers. Despite high rates of GDP growth, wages have stayed pretty much unchanged. Workers in large profitable enterprises in large cities earn the highest wages, and their wages could be around 1,500 to 2,000 RMB ($1 = 8 RMB) a month, but they represent a very small portion of the total work force. Other workers in the formal sector, including those workers in export industries located in coastal cities earn much less –between 800 to a little over 1,000 RMB a month. Most other workers in cities in northeast and central China, where there are high rates of unemployment, earn about 600-800 RMB a month and workers who do odd jobs in the informal sector are only paid 300-400 RMB a month. Some of the employed are covered by the new insurance system and have to pay a health insurance premium[19] and contribute to their retirement from their gross income.

The effect of China’s economic growth on job creation was low and has decreased even further in recent years, despite the fact that China has been exporting labor-intensive products. According to Bai’s report, during the early years of the Reform, every 1% GDP growth brought a 0.4% employment gain – but in 2000 the rate dropped to 0.1%. (See Bai’s report point 10) Based on the numbers of job lost in the State and urban collective enterprises as stated above, and the fact that GDP growth has had less impact on job creation, there is reason to believe that the unemployment situation is likely to become worse.

4. Rural reform and backwardness in the agricultural sector

The biggest challenge in Chinese agriculture was/is the lack of arable land. China has one seventh of world's arable land, but has to feed a quarter of the world's population. Therefore, preserving and improving agricultural land should be one of the most important tasks for Chinese agriculture. During the commune years (1958 – 1978), Chinese peasants worked very hard on land improvement projects. However, since the 1979 Reform large areas of farmland have been lost and continue to be lost to industrial use, tourism, residential and commercial housing, desertification, and other development. 

Under the former commune system, each person received a grain quota from his/her production team, even if he/she was too young, too old, or too sick to work. The communes used ”welfare funds” taken out each year from their total revenue to provide their members low cost health care and low cost education[20]. The "welfare funds" also paid other expenses for the needy families. The State also allocated funds to pay for education (teachers' salaries and school construction), as well as the training of teachers and healthcare workers.

From 1958 until 1978, China was able to modernize its agriculture in many parts of China's countryside. After pooling their land together, commune members used the winter months to do intensive and extensive agricultural land improvement projects. They took out "accumulation funds" from their annual revenue to invest in land improvement projects, machinery, and equipment. Peasants leveled the land and filled small creeks with soil, so later they could use machinery to till large tracts land. Peasants built irrigation and drainage systems and power stations, so farmland could be irrigated by electricity. (Hsu and Ching, 28-34) Chinese peasants worked hard on farmland construction projects by extending their workdays to the winter month; the number of days they worked in a year increased from 119 days in the mid-1950s to 250 days in the mid-1979s (Rawski, 7-8). In addition to the efforts made by the peasants themselves, the State appropriated funds to invest in large-scale irrigation projects.

The results of the peasants’ hard work were very impressive. Machine cultivated land increased from 2.4% in 1957, to 42.4% in 1979, irrigated land area increased from 24.4% of all land area in 1957 to 45.2% in 1979. During the same period, machine irrigated land (as percent of total irrigated land) increased from 4.4% to 56.3%. In 1957 there were 544 electric stations – by 1979 that number had increased to 83,244. During the same period, numbers of large and medium size tractors increased 45 times, agricultural combines increased 12 times, and small tractors increased from 0 to 1.67 million. (Hsu and Ching, 40) There were countless other improvements, including agricultural research to improve seeds strains, using large quantity of organic fertilizer to enrich the land, planting trees to fend off desertification, and multi-cropping, and much work was done to preserve forestland and increase production.

With the exception of some very poor communes, most peoples' lives in rural China improved immensely. The great improvement made on the fertility of land increased grain yields per each mu of land. The newly built irrigation and drainage systems made it possible for peasants, for the first time in their lives, to look forward to a future when their production would no longer be totally dependent on the weather. Mechanization made it possible for many peasants to be finally freed from much of the most back breaking work in the fields.

China was able to increase grain production from 181 million tons in 1952 at the end of the recovery period to 285 million tons in 1977. With the exception of 1959-1961, grain production increased on the average by more than 3%, which was higher than the average population growth during the same period. The rate of growth was higher than China's historical record and the records of most developing countries. (Groen and Kilpatrick, 1978, 619) By the end of the 1970s China was able to achieve self-sufficiency in food. Between 1975 and 1977 China imported an average around 4 million tons of grain per year, a small fraction of its total production, and it also exported grain and other agricultural products as well. (Groen and Kilpatrick, 1978, 640)

In 1979 Deng’s agricultural Reform took several steps to break up the communes, and by 1984 land was redistributed to individual peasant households. China’s grain production increased rapidly during the first few years of the Reform, when the government increased the purchasing price for grain by 20% with another 50% bonus for above quota grain purchases. Grain production[21] increased 22.5% between 1979 and 1984. During these earlier years, agricultural machinery and other agricultural infrastructures, bought and built during the commune years, were still functional. The fertilizer plants built earlier increased fertilizer supply. Later the irrigation and drainage systems and other land work began to fall apart due to lack of maintenance. Agricultural machinery bought earlier by production brigade and commune aged, and individual peasant households had no money to invest in new ones.

Moreover, in some areas, for example, the Yangtze Delta, where land has been subdivided into small strips, it is no longer possible to use agricultural machinery. These and many other peasants went back to old ways of farming their land, each with a simple farm tool, as they had done before collectivization. No wonder peasants say, “We worked so hard for thirty years to build up our farmland, but overnight we returned to pre-Liberation days.”

In central and northwest China, where individual land plots average around one mu, major crops (wheat and corn) are still harvested by combines. Private individuals invest in combines and then hire drivers to harvest crops from farm to farm, charging 40 –45 RMB per mu. Combine owners can earn as much tens of thousands RMB during the harvest season, and after costs are deducted, make quite a large profit. A documentary made in 2003 called “The Iron Reapers”, showed many poor peasants work as hand reapers during the harvesting season in areas that are hard to reach by combine. These peasants compete with the machines by lowering their price to 35 RMB per mu. The film showed four men leaving home by long distance bus with their reapers to harvest wheat. Each man working a 12 hours day in the hot sun harvested an average of 1.5 mu land and earned about 45 RMB for the grueling back-breaking work. Some days they did not get work, so after the whole harvesting season, each man came home with less than 200 RMB. (Iron Reapers, a documentary, 2003)

From 1984 to 1996, a period of twelve years, grain production increased by only 20.4%, (Wu, Appendix Table A-1) then it fell from 1998 for four consecutive years, from 392 million tons in 1998 to 322 million tons in 2003. The gap between total grain demand and grain production was about 40 million tons a year, and most of the shortage came out of the grain reserves. Lester Brown, the environmentalist, who has paid close attention to China's grain production, attributed the sharp decline in grain production, in addition to other reasons, to the decrease in grain-harvested areas from 90 million hectares in 1998 to 76 million hectares in 2003[22]. However, he neglected to point out that continuing increases in farm input prices since the early 1990s and the sharp drops in government grain purchase prices in 1998 and 1999 were important reasons for farmers to abandon their land. (Tan, 101-102)

Quite a few agricultural specialists in China have spoken openly about the so-called “san – nong” problems, or the three related agricultural problems: agriculture, rural villages, and peasants. They point out similar problems as Brown in regards to grain production. Lu Xue-yi, a well-known author, stated these problems in his recent book:

The first problem is the massive loss of farmland. Since 1981 land loss has averaged 5-7 million mu a year (1 mu = 0.067 hectare). The second is the deterioration of land fertility. In 1976 land area that used organic fertilizer was 150 million mu and by 1987 land area that used organic fertilizer decreased by 60%. The third problem is, after 1980, there has been loss of irrigated land; before 1980, irrigated land area had increased by 8 to 10 million mu a year but after 1980 no additional irrigation was built and the old system lost its function due to lack of maintenance. The irrigated land area has since continued to decrease. The fourth problem is dated agricultural instruments. Between 1980 and 1986, machine farmed land decreased 11.1%. The fifth problem is the loss of more than 100 million mu of natural forest, the loss of 1 billion mu of pasture land, and increasing desertification. (Lu, 5-6)

Chinese agriculture will continue deteriorate, because it desperately needs more investment. The central government has promised more investment, but it is far from adequate. The modernization of agriculture during the commune years came to a halt when the Reform redistributed land to individual peasant households. As stated above, individual peasants lack the ability to invest in large agricultural instruments. Moreover, with the collapse of the communes, labor can no longer be organized as it was by the former brigades and communes to work on intensive and extensive land improvement projects. This explains partially the large number of unemployed and under-employed peasants in the countryside.

The sharp drop in grain production between 1998 and 2003 was the impetus for the government’s emergency increase in the agriculture budget. The government used an additional $3 billion in 2004 for a 25% increase to support the price for wheat and rice and for improving agricultural infrastructure. (Earth Policy Institute, Eco-Economy update, March 10, 2004) Grain production went up both in 2004 and in 2005, reaching the output level of 1998. But the basic problems in agriculture are far from over. The government also eliminated agricultural taxes in order to boost peasants' income. However, without taxes the local governments have no way to support themselves. Therefore, they will probably have to increase fees charged to the peasants.

There are several hundreds millions peasants who still rely on farming as their main source of income. These peasants have had a very hard time making ends meet. Many peasants have either lost or abandoned their land and many more have suffered from natural disasters. As mentioned earlier, a large and growing number of peasants migrate to cities to work and send whatever they can from their meager wages home, so their families can live.

Small-scale farming that relies mainly on labor means low labor productivity and low peasant income. Since work on land improvement projects stopped, the productivity of the land also has declined. Peasant income has been further squeezed by unstable and often falling output prices and rising input prices, and higher taxes/fees. Many rural families have to rely on money sent home by migrant workers. The recent efforts made by the central government to raise purchase prices and cut taxes will help to a certain degree, but these measures will not solve the problems of small scale farming: low labor productivity and lack of long-term investment to modernize agriculture. When the income of peasants, who still make up the vast majority of China’s population, is not improving, there is little hope for China’s domestic market to expand. Therefore, the imbalances in China's domestic economy due to over-investment and weak consumer demand are likely to continue.

5. The failure of healthcare reform and its impact on the lives of workers and peasants

In addition to unemployment, unsteady jobs and low-income, workers and peasants lost their protection from illness. Large numbers of working people do not have any preventive health care, and when they get sick they cannot afford to go to the doctors. China’s health care system during the socialist period was widely praised. A recent newspaper report said, “For 30 years after the Communist Revolution in 1949, China relied on a socialized health-care system managed by collective farms and factory communities and staffed by legions of lightly trained so-called barefoot doctors. It was threadbare but functional, and life expectancy nationwide doubled within a generation, from 35 to 68 years.[23]” (“Debt, Lines are Symptoms of China’s Frail Health Care,” Detroit Free Press, October 5, 2005) Even the World Bank praised the “barefoot doctor” saying for $3.00, each commune member enjoyed the equivalent health care that would be worth of several hundred dollars in other countries. (Sun, 106)

But now, after 20 some years of health care reform, China's health care system is in crisis. Even a top government think tank in China recently admitted that medical reform started in the early 1980s was a failure[24]. (The Economists, November 19^th- 25^th, 2005, 29) The whole network of preventive health care built up during the socialist period was totally eliminated. The majority of urban and town residents now do not have health insurance, because, as I stated earlier, almost all laid off workers from former State owned factories lost their health benefits. The free market approach to health care reform made the prices of doctor visits, medicine, and hospitalization skyrocket. People cannot afford the high cost of medicine, let alone hospitalization for serious illnesses. An operation can cost 40,000 to 50,000 RMB, which is five to seven times that of the annual income of better-paid workers. No medical treatment is given, including in emergency cases, unless the patients and their families can make total cash payment in advance, resulting in the deaths of countless treatable people literally at the hospitals steps

As for peasants in the countryside, the situation is even worse. After the break up of the commune system some 20 years ago, former commune members lost their health and other benefits that had carried them through hard times. According to the Status of Rural China – 2003 –2004, the participation rates for peasants in any kind of insurance are very low. In 2002 the participation rate for rural population in old age insurance was 7.7% but only 1.4% of the insured actually received an old age pension. The percentage of people who received a minimum living expense relief was only 0.5%.[25] Only about 5% of rural residents participate in cooperative health insurance. In 2002, 170 million people were affected by natural disaster, but only 9.4 million, about 5%, received any kind of disaster relief. (Li, 63) The absence of any preventive medicine has meant that infectious diseases, such as tuberculosis and schistosomiasis (snail fever), which had been eliminated in the 1950s, have returned in full force[26]. In addition, new infectious diseases, such as HIV/AIDS and SARS have caused suffering for tens of million people, not only from the effects of the disease, but also from government’s denials and cover-ups, and the low priority government has place on public health. Moreover, people in rural areas have suffered disproportionably from diseases caused by environment pollution.

In China today, there are still many tens of millions of people who do not have clean water and/or adequate nutrition, which are basic requirements for better health. They also have lost access to any preventative health care. Under the capitalist reform, health care now become a commodity, which can only be bought by the small minority who can afford to pay.

At the same time workers and peasants lost their health insurance, they have been increasingly subjected to hazardous and toxic working conditions. Many high tech firms relocated to China to take advantage of the low wages of Chinese workers and also to escape regulations in their home countries limiting worker exposure to toxic materials.[27] Hundreds of thousands of young Chinese workers, mostly women, have flocked to the Pearl River Delta, and in the last few years to the city of Kun-shan near Shanghai, to work in electronics factories that assemble computers and other electronic products for the world's major tech companies.[28]. These workers work long hours with little or no protection from exposure to high toxin levels. Moreover, Chinese workers also work to extract toxin metals from hazardous electronic waste exported by the United States. The United States has refused to adopt the international rule of the 1994 Basel Convention, which banned exportation of hazardous waste from developed countries to poor countries. In the small city of Guiyu, environmentalists found 100,000 people dismantling discarded electronics without any protection from the highly toxic waste materials. According to a study released in California in August 2005, high levels of toxic metals were found in 70 samples collected from industrial waste, river sediment, soil and groundwater around Guiyu, as well as in the suburbs of New Delhi where workers also work with imported electronic wastes. (“American Electronic Waste Contaminates China and India,” by Terence Chea, Associated Press, San Francisco, August 17, 2005)

Even the mainstream press in the West has been alarmed by the numbers of coal miner deaths in mine accidents in China – known as the deadliest mines in the world. According to an online report (China.org.cn) 6,434 coal miners died in accidents in 2003. China produced 1.7 billion tons of coal and the report calculated that for every million ton of coal produced, 4 miners died. In contrast, the fatality rate (per million ton of coal) for Russian miners was .34 and for developed countries was 0.4, about one tenth of China's fatality rate.

While the majority of Chinese are denied medical care at the same time they are increasingly exposed to health risks, foreign healthcare corporations have rushed to China to meet the high quality healthcare demand by China's super rich. A Wall Street Journal article reported that health care providers such as China Healthcare Holdings of Hong Kong and Chindex International Inc. of Bethesda, Maryland, have already invested in China’s big cities like Beijing and Shanghai to provide health care for the well to do – among them was a young lawyer in Beijing with an annual income of $250,000 (or about two million RMB) and other high ranking executives. Pictures accompanying the report showed the new health facility in Beijing, which looks more like an upscale hotel than a health clinic. (Wall Street Journal, August 18, 2005, B-1)

6. The education reform has deepened the class division

During the socialist transition, the goal was to reduce the three great differences: the difference between physical and mental labor, the difference between industry and agriculture, and the difference between city and countryside. Education reform during the socialist period, especially since the Cultural Revolution, played a big role in the reduction of all three differences.

The major goal in education during the socialist period was to fundamentally transform the traditional conception of education in Chinese society. In the many thousands of years of feudalism, education was equated to book learning and reserved for the very privileged few. Learned scholars went through a series of civil servant examinations to be selected to serve the imperial lord. Those who passed the examinations brought glory to their families, which were the gentries of the landlord class. The learned elites despised physical labor of any kind. When Western modern universities first opened in China, students who took chemistry class brought their servants to wash test tubes in the laboratory for them. This concept of education and how education elevates one’s social status was deeply ingrained in peoples' mind over thousands of years of feudalism. 

This traditional concept of education is diametrically opposed to in the needs and ideas of a socialist society. In a socialist society, where the three great differences have to be eventually eliminated, knowledge, know-how and skills not only have to be related to the struggle for production, but also have to be disseminated to the vast majority of masses.

Education reform before the Cultural Revolution was not successful in making major changes in the education system, because students for higher education were still selected by entrance examinations. More attention was paid to spread education to youth in worker and peasant families and the universities not only did not charge tuition but also gave stipends to cover students' living expenses. However, as long as entrance examination decided who got in the universities, youth in worker and peasant families clearly had a disadvantage when competing with youth in intellectual families. It was not until the Cultural Revolution the education went through an overhaul that eliminated the entrance examination as the way to select students for higher education. High school graduates were required to go to the factories or go to the countryside to work for two years or more. Their work place would later decide whether to recommend them to go to college.

During the Cultural Revolution when the campaign for the educated youth and even college teachers to go to the countryside was in full force, peasants were able to receive an infusion of knowledge, and intellectuals were able to relate their book knowledge to solve the practical problems in production. The major task of spreading education in the countryside was made possible by the central government shouldering the costs. The central government paid the construction cost of schools and the teachers' salaries. The goal was to have an elementary school in each production brigade (the size of a village), a junior high school in each commune and a high school in each county. With the exception of the very poor areas, those goals were reached in most areas by the end of the 1970s.

The capitalist reform that began in the 1980s moved China's education toward exactly the opposite direction. As the communes collapsed, the State also stopped financing education in the countryside. In the more well to do villages where sideline business in manufacturing and commerce flourished, they built their own private schools. In villages where agricultural production increased in the mid-1980s, they were able to maintain their schools. But when the increases in grain production slowed in the 1990s and then declined in the late 1990s, villages had trouble maintaining their schools. Teachers' salaries went unpaid and schoolhouses fell apart. Moreover, since city intellectuals were no longer encouraged to go to the countryside and educated youth from the countryside do not go back to their own villages, it has become difficult to find teachers and has resulted in the decline of teachers' quality. The gap of education between city/town and the countryside, which had begun to shrink during the 1960s and 1970s has now widened.

In today's Chinese society education again becomes a necessary means in elevating one's social status and increase one's income. The education reform increased the number of colleges and universities and well as expanding the enrollment of the existing schools. The costs of college education went up to 40,000 to 50,000 RMB for the four years -- an equivalent to several years of better paid workers' income. Parents will do everything possible to get their children to colleges, but in today's job market with the exception of graduates from the most prestigious universities college graduates are having a hard time landing jobs.

7. Polarization of Chinese society, stagnated consumer demand, and the potential crisis of overproduction

More and more people outside China are noticing the polarization of Chinese society. Bai quoted UN’s statistics that the current income share of the lowest 20% of China’s population is only 4.7%, and 50% for those in the highest 20%. The Gini index for China’s income distribution is 0.45. In the past among all the developing countries, China had the most equal income distribution. So what have been the changes in the capitalist reform that resulted in this extreme inequality? Large lay-offs, low wages, and lack of benefits for workers from restructuring State enterprises, and low income for peasants are the main reasons for the extremely lopsided numbers at the bottom. On the higher end of the income distribution are high-ranking government officials, private businesspeople, and some high salaried professionals. The official statistics do not even reflect the real income inequality, because much of the income of the very rich, most of which was obtained illegally, is not reported.

Since 80% of the population, more than one billion people, received only 50% of the total income, many of them can barely make ends meet – and they do not have money to spend on the large volumes of consumer goods that have been flooding the Chinese market. The result is a stagnated domestic consumer market. According to Bai's report, consumption was only about 44% of the total GDP in 2004. This means 80% of the people who produced most of nation's output only consumed not much over 25% of the total output.[29]. The slow growth in personal consumption explains that why the contribution of domestic consumption toward the growth of GDP fell drastically from 73% in 2000 to 48% in 2001, 40% in 2002 and a mere 38% in 2004. The stagnated consumption has caused over-capacity in the majority of industries that produce consumer goods.

The high rates of investment and the lack of growth in domestic consumption have resulted in over-capacity, first in consumer goods industries, and lately in producer goods industries as well. Even though the problem of over-capacity (over-supply) is normal for any capitalist economy, the scale and magnitude of over-capacity in manufacturing and in the over-built infrastructure went unchecked for a prolonged period in China, making the problem much more severe. In China's post-reform political structure, profits are often made and rewards are often received at the time of investment, before there is any proof that the investment is viable or will yield a positive return.

The 2003 China’s Industrial Development Report stated that as early as 1995, a general survey of industries showed that over 40% overcapacity of productive facilities existed in more than half of all industries. For example, the capacity utilization rates for color televisions, washing machines, bicycles and air-conditioners was only 46.1%, 43.4%, 54.5%, and 20% respectively. (27) Bai’s wrote in his report (point 2), that a more recent survey of 600 major consumer products showed similar problems. Predictions in the report indicate that for the second half of 2005, only 172 (28.7% of total) products would be basically balanced in supply and demand. In the other 428 (71.3% of total) product categories, supply would exceed demand. In other words, in the majority of consumer good categories, there would be many more goods than the total demand.

Before 2003 there were shortages in some of the producer goods industries, such as steel, cement, and energy. Now those shortages have disappeared. The high profits for steel production doubled its investment since 2003. During the first nine months of 2005, demand for steel went up only 19%, but supply went up 27%. As a result, the price of steel decreased sharply from March (2005) on. However, investment in steel continued to go up another 28% in the first nine months of 2005. Similar developments occurred in the cement industry and even in the energy industry including coal and electricity. A New York Times article in 2004 said that 90% of all industries in China had over-capacity. (New York Times, July 4, 2004, 30)

The Chinese authority now belatedly realizes that China’s economy is seriously imbalanced. (See Bai’s point 9) Even many economists on the Right, who advocate for the neo-liberal strategy of free market development, have had to admit that a crash seems inevitable, and that it may happen mid-way through the 11^th five-year plan that begins in 2006. However, within the framework of China's course of development, these imbalances are structural and cannot be corrected by simply making adjustment here and there.

8. Dependence on foreign technology and foreign markets

As I explained earlier, opening up China's economy to the rest of the world has always been an integral part of the Reform. The reformers were inspired by the "success" of the export growth strategy of the so-called four little tigers (or dragons), the model of development of South Korea, Taiwan, Hong Kong and Singapore. The reformers believed that China could do better than these small economies due to its economic foundation and its size. Initially China's strategy was to use foreign capital and foreign technology to produce products for exports to other less developed countries; the reformers believed that it would be a win-win situation for both China and foreign capital. They thought that foreign technology would help upgrade the technologies of domestic firms. 

From 1999 to 2003, over a period of merely four years, China imported $75 billion worth of foreign technology – but the technological innovation and development of domestic firms since the beginning of the Reform has not improved significantly. In addition to technology imports, China has also imported most of the machines and equipment used to produce exports, as well as certain raw materials, components, and parts. (Bai’s point 8)

However, the original intent of using imported technology to upgrade domestic technological capacity was not realized. The 2003 China’s Industrial Development Report said that the development of the past decade (and more), especially in the past three years, resulted in very serious structural problems in China's industry. On the one hand, manufacturing has grown at very fast rates. Yet the foundation of the industry that produces machinery and equipment has remained very weak. The Report further stated, "The capacity utilization of the industry that makes machinery and equipment stays at only 50% on the average. The high demand for high tech and specialized machinery and equipment could only be met by imports." The report’s footnotes gave some examples: 80% of the machinery and equipment in the synthetic fiber industry, 70% of the machinery and digital control equipment in the petrochemical and passenger car industry have to be imported. (The 2003 China’s Industrial Development Report, 28)

In addition to the imported machinery and equipment, China has also had to import specific technology, components, and parts for the products it produces and exports. Even though China is number one in steel production, the same report said that the domestic contents for certain kinds of steel are low: it is 65% for a special kind of sheet steel and only 15% for stainless steel. It also said that China has a strong capacity to produce high quality consumer durables, but such production depends on the imports of intermediate components and certain specific materials. (Ibid. 27)

According to Bai, the reason for the problem related to the dissemination of imported technology was lack of funding. He said that in Japan and Korea, for each $1 spent on imported technology $5 to $8 was spent in the spreading and absorbing such technology domestically. China has only spent $0.07 for each $1 of imported technology. He said, therefore, China's ability to disseminate foreign technology is very weak.

However, the small expenditures allocated for spreading and absorbing foreign technology are only small part of a much bigger problem. The 2003 China’s Industrial Development Report also admitted that the positive impact of foreign technology on domestic industries has been very limited. (Ibid., 56) The report said that in order to maintain their superior position in advanced technology, the multinationals, have not exported their most current technology to China, and the technology they have exported to China is under strict controls to prevent dissemination. Both Bai’s report (point 8) and the 2003 China’s Industrial Development Report (56) concluded that foreign technology has helped very little in terms of domestic technological development. They also acknowledged that China’s over dependence on foreign technology is not likely to change in the future.

There has been no central comprehensive plan or specific standard with regard to importing foreign technology or accepting foreign investment. The small expenditures on technology dissemination are the result of not having an overall plan. The acceptance of foreign investment and the adoption has been done in an ad hoc manner. Multinational corporations often approach local officials to present their investment plans, which contain elaborate photos of "advanced" technology. Since the local officials have reaped big benefits and rewards by the number and amounts of foreign investment they are able to attract, they would be more than willing to offer the foreign investment tax concessions, upgrading the physical infrastructure, simplifying administrative procedures and providing the foreign businesses with a low wage and disciplined workforce, and they also would look the other way when it came to environmental regulations.

Under the self-reliance development strategy of the socialist period, China also imported technology from advanced capitalist countries. In a paper written by Alexander Eckstein, who was an expert in China's socialist economy, he said, "Complete-plant imports from Japan, Western Europe, and to some extent the United States are making a major contribution to the expansion of production capacity in the chemical fertilizer, petrochemical, and iron and steel industries, as well as in power generation and commercial aviation, in the 1970s." (Eckstein, 107) China benefited from the imported technology, because it was able to use it to upgrade its own. In the past after a complete-plant was imported, China was able to build a copy of the plant in a fairly short time. Under self-reliance socialist development, machine-building industry was regarded as the foundation of industrialization and was given high priority in making policy decisions and planning.

However, since the Reform began there has been little planning or even coordinated efforts to use the imported technology to upgrade China's own technology. Other capitalist States, such as South Korea, have done far better in assisting its domestic capital in their efforts to upgrade technology. China's record of technology imports shows a complete failure, even if judged by the standard of the performance of a capitalist State, which often sets certain priorities and acts as a coordinator.

9. China Has Served as the Processing Center for the Multinationals

Monopoly capital not only controls the technology it exports to China, it also control the price of such technology, the price of capital equipment, the prices of components and parts, as well as the price of the finished products that China exports. Foreign invested enterprises control about 60% to 70% of China's export value. Lower export prices mean higher profits for the multinationals when goods are sold in the retail market abroad[30]. One such example is China's exports of toys. According to Dong Tao, an economist at UBS in Hong Kong that a Barbie doll imported from China costs $20 in the United States, but China only get about 35 cents of that. (New York Times, February 9, 2006)

In the same New York Times article Yasheng Huang, associate professor of the Sloan School of Management at the Massachusetts Institute of Technology said that goods that marked "made in China" are mostly made elsewhere – by multinational companies in Japan, South Korea, Taiwan and the United States. These multinationals moved to China to complete the final assembly of their products as part of their vast "global production networks". He added, "the controls and therefore profits of these operations firmly rest with foreign firms."

China’s role in the international division of labor dictated by global monopoly capital is not different from many other developing countries. China has been and will continue to be a processing center and as a processing center its assigned role is to produce (mostly assembly) low cost and low quality products. The 2003 China’s Industrial Development Report stated that China’s industrial product exports have increased in volume but decreased in value. China’s terms of trade for industrial products decreased 14% between 1993 and 2000. (Ibid, 87) This problem is very similar to that of other less developed countries. Thus, the earlier optimism and belief of the reformers and their supporters that China was on its way to become a strong independent capitalist country has not been and will not be achieved.

Before China joined the WTO, Han De-qiang, a well-known author, wrote a book that documented that by 2000 foreign firms had already taken over many industries in China. Han said that those industries with the least protection were taken over by foreign corporations first, and the examples he gave were the soft drink industry, the beer industry, the detergent, the bicycle, the clothing, the paper industry, etc. He also said that the foreign corporations were positioning themselves to take over many others. (Han, 40-56)

The conditions China negotiated in order to join the WTO in 2001, are not favorable to China. Even some liberal economists believe that in order to gain accession, China gave up too much for its own good[31]. The full effect of the privileges that the multinationals obtained through China’s accession, have not yet been felt in China. But China actually began its reforms much earlier to prepare itself for WTO membership. From 1982 to 2001, China lowered its import duty for industrial products from 56% to 15% and eliminated its import quota on many import items. Also, before China joined the WTO it already eliminated import duties on machinery and equipment of foreign direct investments in China, and beginning in 1997, eliminated import duties on scientific instruments imported for scientific research. In 2000 it included computer software as part of growing list of duty free items. Therefore, by 2000 less than 40% of its imports were subjected to any tariffs. (Lardy, 36)

When China joined the WTO, it agreed that, with the exceptions of a few items, it would continue to lower its import tariff on industrial products from 15% to 8.9% by 2004. The 8.9% import tariff is much lower than many other developing countries. For example the import tariffs for industrial products of the four large countries - Argentina, Brazil, India, and Indonesia, are 30.9%, 27%, 32.4% and 36.9%, respectively. China also agreed to lower its import tariff on agricultural products from 23% to 15%, which would be lower than that of Japan. When China joined the WTO, it already made the decision to give up the highly protected industries, such as the automobile. Not only did China agree to lower its import tariffs, it also agreed to “bind all tariffs” once they became effective. Even the US Trade Representative commented, “Very few countries have done this.” (Lardy, 79)

In the service trade China agreed to open its domestic service sector markets, including telecommunications, education, entertainment, banking, insurance, security and other financial trading, and other fields in consulting, such as legal, accounting, and management. It also agreed to let foreign engineering, architecture, urban planning, medical, and computer specialist firms to open businesses in China. Before China joined the WTO, foreign banks were only allowed to conduct their business in certain cities. They were also only permitted to deal with business customers, and only in foreign currencies – not in RMB. After 2005 China has to eliminate the restrictions on foreign bank locations, and in 2007 foreign banks will be allowed to do business in RMB. By 2008 foreign banks will be allowed to accept personal deposits and make personal loans. After 2010, foreign banks will enjoy national treatment as domestic banks. Foreign financial institutions have positioned themselves to compete aggressively for market share in China’s financial market. As more and more foreign banks continue to buy shares of Chinese banks, the future outlook is not good for China’s fragile financial sector.                

10. The harsh reality of working people and their struggle

The majority of workers and peasants in China today are facing many difficulties in most aspects of their lives. As the employment structure in China underwent a thorough overhaul, and the percentage of workers in the formal sector was drastically reduced. Tens of millions of workers were practically being thrown out of their work place and lost all of their benefits, including their health insurance and accumulated pensions. Many of these former workers were also owed back wages. For workers who still have jobs, their wages have been reduced and benefits cut. All of the protections Chinese workers enjoyed during the socialist period were eliminated. The lack of benefits has further caused the deterioration of living standards for a great number of China's working population, many of whom are living subsisting or under-subsisting levels of living.

Life for many peasants in the countryside is poor and precarious. For peasants whose main income depends on growing crops, their incomes are low and have little hope for a better future. Many have been forced to leave their homes to work in cities doing the hardest, dirtiest and most dangerous jobs, so they can send money home to support their families. These migrant workers live and work in the city but have no city resident permits and are often abused by their employers and harassed by police. If they have their children with them, the children are not allowed to attend city schools.

In addition to all the suffering, hardship, injuries, and even deaths that Chinese workers and peasants have endured in their work place and in their daily life, they have also been harshly treated and abused by government officials, especially by local bureaucrats in the countryside and the police in cities. These lower level officials have direct authority over the people and the majority of them are corrupt. They are also the ones who evict peasants from their land and evict urban residents from factories and homes. There have been large-scale protests over land and home evictions and issues related to taking land without adequate compensation, plant closings, owed wages, exorbitant tax collection, corruption, and other injustices. The officially published number of reported protests of over 100 people totaled 200 to 300 a day, or 74,000 for the year of 2004 – and there were many unreported cases. One of the latest protests happened in a fishing village, Dongzhou, near Hong Kong on December 10, 2005. Residents in Dongzhou were protesting against the building of a power plant, which occupied land for which the peasants were not compensated. Residents of the village also feared pollution from the plant would damage the environment and thus endanger their livelihood as fishermen. The police open fired into the crowd and shot 20 people dead[32]. (New York Times, December 10, 2005)

Moreover, perhaps it is even more important that workers in China also lost the dignity and the respect they had in the past. In the past they were referred to as the “masters” of the country, but now their status in the society has sunk to the lowest level since before Liberation. Older unemployed workers are often outraged when the State enterprises that they built with many decades of hard work are squandered away by the powerful and privileged few. They feel a very strong sense of injustice. A former model worker in his seventies recalled how he and his co-workers used to volunteer overtime on Sundays by secretly hopping the factory walls to increase production. There was no overtime pay or any bonuses, but the overwhelming majority of workers put forth their best efforts. He and others like him are infuriated by how the reformers claimed that the State enterprises were inefficient due to lax and lazy workers as a way to institute labor reform and throw the workers out on the street.

The 150 million migrant workers from the countryside never experienced the lives of workers in the State enterprises during the socialist period. Therefore, they had little to compare their current conditions with. However, they are the ones who have suffered the brunt of the exploitation and have the least protection of any kind. They are also the workers who are producing most of the goods for export and will be the first to be laid off when exports begin to slow down.

The legacy of socialism has instilled a strong sense of justice and fairness in Chinese society. Even after 26 years of Reform while a few people got very rich, ordinary Chinese people are holding on what they believe. They can tell you endless cases of how people accumulated tremendous wealth, simply because they have the power or are connected to power. They can tell you how much money you have to pay to buy various government positions, and how long it takes to get a full return for your money. With such glaring abuse of power and gross injustice, working people in China can only consider Hu's and Wen's calling for a "harmonious society" empty rhetoric to cover up an increasingly divided, chaotic and conflict ridden society.   

III.  Capitalist reform and its impact on China's long-term development

The production of large quantities goods – of which a large part has been marked for export – at rapid rates has caused China’s natural resources to be rapidly depleted and has caused serious damage to China’s environment. As a country China, is not endowed with abundant natural resources, and its natural environment is very fragile. The devastating impact of fast GDP growth and large volume exports on natural resources and the environment have been aggravated by China’s inefficient use of these resources, and the fact that its government has neglected its responsibility of legislating and enforcing environmental laws and regulations. Moreover, under the policy of speeding up GDP growth by any means necessary, all levels of governments have focused single mindedly on investing in buildings and infrastructure, wasting tremendous amounts of resources. These governments, central, provincial and local have not been willing to spend any of the necessary resources to clean up China’s polluted rivers, ground, and air[33].

1. China's dwindling natural resources

When it comes to the problem of China’s scarce resources, water shortage is the first on the list. China's water resource has always been scarce. The average water available per person is only 2,200 cubic meters, a quarter of the world's average. Also, the distribution of water is very uneven; the shortages are most acute in northwestern provinces.

The high growth of industrial production and urbanization has increased water use, taking water away from agriculture and rural residents. According to the Ministry of Water Resources, factories and urban residents used 34% of the total water supply in 2004, up from 25% in 1998. (Bloomberg.com, February 22, 2006) Earlier projections showed residential demand for water will increase from 31 billion tons in 1995 to 134 billion tons in 2030, and industrial water demand will increase from 52 billion tons to 269 billion tons during the same period. (Worldwatch Institute, News release, April 22, 1998.) There is simply not enough water in China to go around.

The water shortage has already had serious effects on agricultural production, and has kept many rural residents from improving their standard of living. In 1994 farmers in a region near Beijing were not allowed to use their regular source of water supply from the reservoirs for irrigation, because the city's fast growing need for water was given a higher priority. In the late 1990s, 300 of China's 617 cities faced water shortages. (Ibid.) and it is much worse by now. When confronted with water shortages, cities are likely to restrict water uses for agriculture in nearby region, and further depriving the rural population the opportunity to improve their lives. Unless the problem of increasing water shortage can be reversed, the more recent government's plan to improve the lives of rural population will remain an unrealized dream. The following examples only highlight the seriousness of the problem.

The Yellow River, the second largest river in China, which had provided water for Chinese people and its agriculture in central China for thousands of years. Today heavy water consumption upstream has exhausted the Yellow River’s water supply and caused water shortages for the 170 million people in this region who are dependent on its water. Even though there were instances before the 1990s that the Yellow River ran dry before reaching the sea, the problem has become increasingly worse since 1990. In 1997, the Yellow River ran dry for a record breaking 226 days. (Yi, 1, 12) Yi Hui-min, author of The Warning of Yellow River, stated that the exhausted water supply, the problem of river pollution, and increasing occurrences of flooding were spreading nationwide. In 1998 both the Yangtze River in the south and Song Hua River in the North had the worst floods in 100 years. In 1999, the Yangtze River flooded again rendered 600,000 people homeless. (Yi, 1)

Not only is water supply from rivers dwindling, China is also losing ground water at a fast rate from overuse. The ground water level of many cities is approaching a dangerously low level. For example, ground water in Beijing has decreased very rapidly; according to the Ministry of Water Resources, Beijing's water tables for ground water have dropped 1.5 to 2 meters a year. The Ministry said that lower water tables will not only further aggravate shortage, it will also lower the quality of water and increase the risk of earthquakes and landslides. ("China's Water Shortage to Hit Danger Limit in 2030" People's Daily Online: http://english.peopledaily.com.cn/) The heavy loss of groundwater has also speeded up desertification in the northwest. According to the director of Gansu's Desert Control Research Institute, Ji Yongfu, overuse of groundwater and overgrazing have caused the desert to advance at a rate of about 2,000 square kilometers a year. (Bloomberg.com, February 22, 2006)

The rapid production of large volumes of industrial products for export is responsible for the rapid depletion of China's natural resources. The problem of resource depletion has been made more serious because of the inefficient use of the resources. The Ministry of Water Resources pointed out that since China only recycles 20-30 percent of its industrial water, per industrial output water consumption is five to ten times higher that that of the industrialized countries. (Ibid.)

As the rate of export growth has accelerated since the late 1990s, China's oil consumption has also increased rapidly. According to Bai's report (point 5) China's oil consumption increased 100% from 1990 to 2001. By 2005 China’s oil consumption surpassed Japan and became the second largest oil consumer in the world, second only to the United States. China's domestic oil production has not been enough to meet its oil demand – thus oil imports doubled in merely five years, from 1998 to 2003, and increased another 40% in the first half of 2004. (Time Asia, October 18, 2004) In 2005 China consumed 300 million tons of crude oil, 123 million tons of which were imported.

China high level of energy consumption and to produce high volumes of products has been aggravated, like the usage of water and other natural resources, by its inefficient energy usage. According to Bai’s report (point 5), for every dollar of GDP increase, China’s energy use is 4.3 times that of the US, 7.7 times of that of Germany and France, and 11.5 times that of Japan.

Bai also reported that between 1990 and 2001, China's consumption of natural gas increased 92%, steel 143%, cooper 189%, aluminum 380%, and zinc 311%. He concluded that China has reached the limits of this kind of rapid but inefficient economic growth.

China still relies on its own coal reserves as the main source of its energy consumption, but its coal reserves have been rapidly depleted. (You, 13) If China continues its current strategy of pursuing fast GDP growth, it must acquire a bigger share of the world’s oil, natural gas, iron ore, lumber, and other natural resources. However, China is not in a strong position to compete with the United States, European, and Japan for these natural resources.

Therefore, in order to continue exporting large volume of exports to sustain high rates of GDP growth, China has been using up its resources at accelerated rate.  Large quantities of resources, including large areas of farmland, have also been used to build excess infrastructure – airports, office towers, super highways, exhibition halls, as well as for the many luxury mansions for the rich. The massive consumption of China's natural resources is the complete opposite to the policy of conserving resources during the socialist period; during the socialist period, conserving resources, not the profit, was one of the standards used to judge the performance of the State enterprises.

2. China's environmental crisis

Environmental pollution became a serious problem beginning in the 1980s and became increasingly worse in the mid-1990s. Environmental experts in China have given different estimates on the loss of production due to environmental disasters. The World Bank has said that China is in an environmental crisis and in recent years an estimated 8% to 12% of China’s annual production was lost due to the crisis. (Bai's point 5) Water pollution has brought tremendous loss to agricultural production and has caused serious illness for people who live around it – mostly peasants in rural areas.

In Liukuaizhuang, a village of 6,000 people near the city of Tianjin, water pollution drove the cancer rate to 25 times the national average in 2004, the government-run People's Daily reported last year. In addition, the chemical plant accident that has caused the contamination of the Song-hua River caught attention in international news. And a tributary of the Yangtze River, China's longest river, was polluted last month after a zinc smelter spilled cadmium into the water, a toxic metal that can cause neurological disorders and cancer.

While the effects of these large-scale accidents are horrific, the impact of smaller scale but constant dumping of industrial wastes into rivers and ground are even more devastating. According to the Water Ministry, most of China's rivers are seriously polluted and contaminated by toxins. According to a report published by the Water Resources Ministry - The China's Water Resources 2000 – of all the water in China's rivers, a total length of 114,000 kilometers, only 28.9% is better quality (ranked class I and II), and 29.8% is a lesser quality (ranked class III). 16.1% of water in rivers is dangerous for human to touch (Class IV) and the rest, or 25.2% of all water in rivers is too polluted to use for any purpose (Class V).

Air pollution is just as serious in many of China's major cities as indicated by the rapid increases in respiratory diseases. Last Spring Beijing and other northern cities in China was hit by one of the largest sand storms from the Mongolian desert. Since the fast advance of desertification, above a rate of about 2,000 square kilometers a year, sand storms have become increasingly worse, affecting cities in Korea, Japan and even Taiwan. Sandstorm is also a major cause for respiratory disease.  

The over-consumption of the natural resources and the deterioration of China's natural environment are the direct results of China's mindless strategy of high GDP growth. In order to promote export growth and to support high consumption of China's new rich, China's government has used subsidies to keep the prices of these resources low. For example, the government subsidizes energy uses, so the prices of certain exporting products can be kept low, and that low gasoline price encourages the purchases of automobiles. The strategy of high GDP growth is depleting China's natural resources and causing its environmental crisis, making China's future long-term sustainable development even more difficult. Before long-term sustainable development can even take place, large expenditures are needed to clean up the environment and restore ecological balance.

IV. The external forces behind China's capitalist reform and rapid GDP growth

The first three sections of this essay focus on an analysis of how the changes in the basic class relations have pushed the capitalist Reform forward. However, the forces that behind China's Reform are both internal and external, and the two are closely connected. From the very beginning, the reformers wanted to find ways to connect China’s development to the world capitalist system: the “kai fang” (opening up) part of the Reform. The question was only how to make the connection, how much to concede, and how fast to proceed. There were those within Deng’s camp who wanted a strong independent China, and were unwilling to subject China to the domination of foreign economic powers. They called for more caution. Therefore, the negotiations for China to join GATT and later the WTO took fifteen difficult years.  

The questions relating to how to connect China's economy to the world and at what pace, however, were not entirely up to China’s authorities. China's capitalist Reform happened to coincide with major changes that were occurring in the world capitalist system. Placing China's Reform in the international context, we find that there were significant external forces, not only pushing China's capitalist reform and rapid GDP growth but also China's economic integration into the world capitalist system. When identifying the external forces in the world capitalist system, the economic crisis that began in the early 1970s stands out. As the crisis grew increasingly worse in the 1980s and 1990s, global monopoly capital restructured the domestic and international political and economic order by pushing forward neo-liberal reforms. These neo-liberal reform policies, both domestic and international, initiated in the early 1980s have had significant effects on the rapid expansion of monopoly capital on a global scale.

The problem of over-capacity in the world’s productive system appeared in the late 1960s and early 1970s, after almost two decades of continued investment during the rapid growth period following WWII. Like earlier economic crisis, the post-war crisis beginning in the 1970s required political intervention. British Prime Minister Thatcher and US president Reagan led the Western world in an overall restructuring of the post-war political and economic order. They implemented policies in their own countries that dismantled social welfare programs, took strong measures against unions and restructured the labor market, de-regulated industries and pushed to privatize public industries. These neo-liberal policies of eliminating barriers to profit making were quickly expanded internationally, which facilitated relocating capital to less developed countries. These closely coordinated policies benefited capital by taking advantage of cheap labor abroad and weakening labor's bargaining power at home.

During the last twenty years of the 20^th century, uneven development among the imperialist countries also became more prominent. In the early 1980s the yearly surplus of around $50 billion in the Japan’s current account mirrored the deficit of the same magnitude in the current account of the United States. Japan needed the external markets to compensate for its inadequate domestic demand to give some relief to the pressures of excess capacity in virtually all of its industries. During the 1980s, Japan’s economy continued to growth at much higher rates than that of the US and European countries, but its growth rates were sustained by maintaining trade surpluses with other industrial powers. The economy of the United States continued to rely on external savings by importing more than it was exporting. On the other hand, it also continued to provide a market for the world's surplus products. Thus, the fragile balance, or rather the imbalance, of the world’s capitalist system was maintained by the US spending beyond its means and by borrowing, mostly from Japan. 

Japan’s economic stagnation began in the early 1990s and lasted for 16 years, reminding many of the 12 years of the Great Depression in the United States and other industrial countries in the 1930s. Japan’s long-term stagnation brought questions and doubt to the faith policy makers had in Keynesian fiscal and monetary policies, which were widely practiced during the prosperous post-war years. The Japanese government’s massive public works projects and its central bank’s zero interest rate policy failed to stimulate its total demand to revive its economy. At the same time the German economy, which was the strongest industrial power in post-war Europe also lost its steam. Its unemployment rate soared and persisted at around 10% or higher. Nor have the economic performances of the rest of the European Union been that promising.

When in the 1980s global monopoly capital expanded world-wide under the neo-liberal restructuring of the political and economic world order, the problem of over-capacity then spread from advanced developed countries to many less developed countries. After the crisis in Latin America in the 1980s and the Asian crisis at the end of the 1990s, foreign capital was ready to quickly move into China on a large scale. Those in power in China had already made significant reforms for China to be integrated into the world economy. The Asian crisis that began in the summer of 1997 gave the authorities in China the final push. They realized the powerful role of global monopoly capital and the international financial and trade organizations, and that if China were to continue its capitalist development it had little choice but to open itself up. At the same time China's Reform stalled as GDP growth first began to slow in 1997, and further slowed to merely 0.4% in 1998, –11.4% in 1999, and a mere 1.3% in 2000. Chinese authorities conceded to the strong demands of monopoly capital and the imperialist states, and at the end of 2001, China's accession to the World Trade Organization became a reality. Then, foreign investment started pouring in and the so-called miracle took off. 

When surplus capital hopped from one country to the next, it littered these countries with more productive facilities, and thus sowing the seeds for potential crisis. As monopoly capital expanded globally, crisis also has spread all over the world. The so-called Latin American debt crisis and the Asian financial crisis were in fact the crisis of the world capitalist system being shifted from the center of imperialist powers to those less developed regions.

In the late 1990s when the Asian crisis began, the problem of overcapacity (which had persisted from the early 1970s) worsened. The automobile industry is a good example of the seriousness of the problem. The Wall Street Journal reported on August 25, 1997 that the worldwide capacity of car production reached 70 million vehicles – 32% more than consumers were buying. An 1998 article in The Economist said that Japanese car makers had the capacity to produce 14 million cars, but far less than half that number could be sold on the domestic market. The same article, stated, “Europe is as much plagued by over-capacity as Japan. Car production there is growing by 4% a year but demand by only 1.5%.” (The Economist, March 21, 1998, p. 71)

The United States is the biggest car market in the world. In 1997 car sales in the US were about 15 million a year – but it was not growing. However, both Toyota and Honda had plans to increase their capacity in North America (US and Canada) in the following years, by building additional plants and expanding existing ones. (Wall Street Journal, September 24, 1997, p. A-1) Before the collapse of the South Korean economy, Korean car companies (Hyundai, Daewoo, Kia and Sangyong) built far more cars than were sold on the domestic market. South Korean and Japanese automobile companies were also building factories in India, Indonesia, and Turkey. When Samsung was just about to launch its new car production - a joint venture with Nissan (Japan), the Korean economy collapsed. Soon after, GM and Ford bought shares in the bankrupt Korean car companies to continue production in Korea and elsewhere. Before Brazil went into crisis in 1998, GM, VW, Ford and Fiat had invested large sums of money to expand their auto productive facilities there, followed by seven new companies also making large investments in Brazil. These new automobile investments in Brazil were excess capacity to begin with, and they only exacerbated the problem of overproduction after Brazil fell into crisis.

The overcapacity problem in the automobile industry extended to other auto related industries and other non-auto related industries as well. Therefore, by the late 1990s global monopoly capital was desperate to find a place to expand. China seemed to be the logical place to go, because there was a large industrial base already built, and it had a large supply of experienced industrial workers, guaranteeing low wages. China’s new regime had been pushing hard for capitalist Reform and since the mid-1980s and had earnestly begun negotiating accession to GATT and then WTO. The reformers also put in new laws that would give foreign investment preferential treatment. The brutal repression of student and worker protests in spring 1989 showed Deng’s regime would not tolerate any political dissent; it showed that it would not hesitate to use force to crush dissent when necessary, in order to continue the capitalist Reform without any disruption. The regime understood that for the foreign and domestic capitalists to commit their investments, political “stability” was a pre-condition.   

V. Conclusion

One of the purposes of writing this essay is to challenge the myth about a development model propagated by imperialist ideology. This development model says that when monopoly capital enters a less developing country, it brings advanced technology and access to the international market; if the country simply opens up its economy, it can develop its economy quickly, thus lifting many people out of poverty. This myth continues to exist, in despite the fact that history, especially in the past twenty some years, has proven that this development model brought misery to the people, even during the short span of economic "boom" – and then the "boom" inevitably turned into crisis. At the time of the crisis, monopoly capital, assisted by its individual imperialist states and the international financial and trade institutions (the IMF, WB and WTO), forced these countries to accept the Structural Adjustment Programs (SAPs), which caused enormous suffering of the people and subverted the economic sovereignty of these countries. Under the SAPs, developing countries have to pay several times the amount of money they borrowed and also have to go through further “liberalization” and de-regulation in order to facilitate the entrance and further expansion of global monopoly capital. Then when working people have to further tighten their belts to salvage their ruined economy, monopoly capital is already on its way to occupy more places elsewhere. Despite these undeniable facts, this myth of development persists and has been used by monopoly capital as weapon to open up more economies.      

As this essay has shown, the capitalist Reform in China succeeded in dismantling the class relations of socialist China in spite of resistance from workers and peasants. The Reform has opened up China up and welcomed monopoly capital in. During the last eight years, China’s capitalist Reform was also able to achieve high growth rates for exports and for GDP. However, fast GDP growth has not brought better lives for the majority of Chinese people. Instead many have suffered unemployment, low wages, loss of land, and loss of benefits. The lives of tens of millions of people have deteriorated and become more precarious during the so-called economic miracle. This essay has also shown that the capitalist Reform resulted in many imbalances, both within China's economy and between it and the rest of the world. China has not and will not become a strong capitalist country. Moreover, fast GDP growth has accelerated the depletion of China's natural resources, the shrinking of China's arable land and has created many serious environmental crises.

During the earlier phases of the Reform, before the real impact was felt, many believed that the Reform would help develop China's productive forces – but in the last fifteen years fewer and fewer people still think so. People increasingly question what the Reform has meant to them. Many say the reform of State enterprises only brought unemployment and cuts in pay and benefits. The rural reform only drove one hundred and fifty million people to the cities to find work. The reform of the health care system only raised the price of medical care, so people no longer can afford to visit doctors or to buy medicine. The education reform has raised tuition, so people cannot afford to go to school. The overwhelming majority of Chinese people no longer believe that China is still a socialist country. With the exception of a small minority who have benefited from the Reform, people no longer have trust in the Communist Party to represent and protect their interests. China's current leaders – Party Chairman Hu Jintao and Premier Wen Jiabao are very much aware of and actually acknowledged some of the overwhelming problems – economic, social, and political – that exist now in China. They recognize that the negative impact of capitalist Reform on the majority of the working population, the long-term damaging impact on China's natural resources and environment, and how it has polarized Chinese society. With the numbers and the sizes of protests increasing, they are too keenly aware the political crisis they are facing.

Therefore, on the one hand, Hu and Wen have tried to project the image of being benevolent rulers who care about the people. They have proposed a "scientific view" of people-based and environmentally friendly sustainable development, and want China to be a “harmonious society”. However, at the same time they have made pledges to carry the Reform forward - as if capitalist reform in the way that it has been carried out and sustainable economic development are compatible. Hu and Wen's proclamations and promises are far removed from China's reality and cannot be realized.

The development in China in the past 26 years clearly shows that the lofty goals set in the beginning of the Reform have not been accomplished. However, I would like to reiterate that the choices the Chinese authorities had after they had made the decision to develop capitalism were rather limited. I think we can certainly speculate that if Chinese decision makers followed a different set of policies or had avoided certain mistakes, the outcome might have been different than what they are now. However, the difference would only be a matter of degree –not fundamental. In other words, within today's world capitalist system, any developing country, that wants to develop a capitalist economy has to fill its role in the world capitalist system as it is dictated by global monopoly capital. Hundreds of billions of dollars have poured into China, because China has provided investors with cheap skilled and unskilled labor, lax environment regulations, favorable tax laws, and a potential market. The cooperation of those in power in China and international monopoly capital has been based on their mutual interests. Their cooperation has enabled multinationals to accumulate capital and high ranked Chinese officials to accumulate wealth, while leaving tens of millions of Chinese people behind.  

Marx said that capital has to continue destroying the productive forces in order to keep capital accumulation going. History has proved him right: witness the total destruction of productive forces during the Great Depression and subsequently the continuing destruction of productive forces during each economic crisis. In a world of imperialism, however, and especially in the last 30 years as the crisis of capitalism has deepened, the speed of this destruction has accelerated, as international monopoly capital spread its excess productive forces all over the world. When more surplus capital is again generated from these investments, capital again needs other places to expand. Consequently the useful life of these productive forces has become shorter, and they have to be destroyed at faster and faster rate to accommodate the need for the capital expansion. In the process of doing so, vast amounts of natural resources are wasted, because these productive facilities, which were excess to begin with, have to be destroyed in a hurry, as crisis is occurring at shorter intervals. In the process of building and phasing out productive facilities, global monopoly capital makes it profits. However, in the same process, all the activities in the once booming factory towns, special exporting zones and seaports cease to exist as the capital moves on to other locations. Developing countries are thus left with less natural resources (for example, over-harvested forests, exhausted water supply, and dwindling oil reserves) and large quantities of industrial waste. When clean products are exported, the pollutants from producing these products and the unused productive facilities are left behind causing irreversible damages to the environment.

This essay showed that China's capitalist Reform has created serious internal imbalances in the Chinese economy and between it and the rest of the world. These imbalances are not avoidable, when a less developed country adopts capitalism in today's world economy dominated by monopoly capital. China's fast GDP growth has depleted its natural resources and damaged its environment, thus will make long-term development in the future much more difficult. Workers and peasants in China have suffered even during the years of high GDP growth. When these imbalances eventually lead to an economic crisis, their suffering will grow worse. Even the fortunes of the "middle class", 15% to 20% of the total population, will fall. Therefore, the rapidly growing protests to plant closings, land grabbing, wage and benefit cuts, and corrupt and abusive government officials can only intensify. Posted by Bulatlat

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