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
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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.

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 21st century an “Asian century”. However, in the summer of 1997, before the 20th 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 20th 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 10th Five-year Plan (2000-2005) was coming to an end and the 11th 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 20th 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 24th –30th, 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 7th-23rd 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 8th –24th , 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.

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