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November
1, 2006
China and the Crisis of Overproduction
Chain
Gang Economics
By WALDEN BELLO
"The world is investing too little,"
according to one prominent economist. "The current situation
has its roots in a series of crises over the last decade that
were caused by excessive investment, such as the Japanese asset
bubble, the crises in Emerging Asia and Latin America, and most
recently, the IT bubble. Investment has fallen off sharply since,
with only very cautious recovery."
These are not the words of
a Marxist economist describing the crisis of overproduction but
those of Raghuram Rajan, the new chief economist of the International
Monetary Fund (IMF). His analysis, now over a year old, continues
to be accurate. Global overcapacity has made further investment
simply unprofitable, which significantly dampens global economic
growth. In Europe, for instance, GDP growth has averaged only
1.45% in the last few years. Global demand has not kept up with
global productive capacity. And if countries are not investing
in their economic futures, then growth will continue to stagnate
and possibly lead to a global recession.
China and the United States,
however, appear to be bucking the trend. But rather than signs
of health, growth in these two economies-and their ever more
symbiotic relationship with each other-may actually be indicators
of crisis. The centrality of the United States to both global
growth and global crisis is well known. What is new is China's
critical role. Once regarded as the greatest achievement of this
era of globalization, China's integration into the global economy
is, according to an excellent analysis by political economist
Ho-Fung Hung, emerging as a central cause of global capitalism's
crisis of overproduction.1
China and
the Crisis of Overproduction
China's 8-10% annual growth
rate has probably been the principal stimulus of growth in the
world economy in the last decade. Chinese imports, for instance,
helped to end Japan's decade-long stagnation in 2003. To satisfy
China's thirst for capital and technology-intensive goods, Japanese
exports shot up by a record 44%, or $60 billion. Indeed, China
became the main destination for Asia's exports, accounting for
31% while Japan's share dropped from 20% to 10%. China is now
the overwhelming driver of export growth in Taiwan and the Philippines,
and the majority buyer of products from Japan, South Korea, Malaysia,
and Australia.
At the same time, China became
a central contributor to the crisis of global overcapacity. Even
as investment declined sharply in many economies in response
to the surfeit of productive capacity, particularly in Japan
and other East Asian economies, it increased at a breakneck pace
in China. Investment in China was not just the obverse of disinvestment
elsewhere, although the shutting down of facilities and sloughing
off of labor was significant not only in Japan and the United
States but in the countries on China's periphery like the Philippines,
Thailand, and Malaysia. China was significantly beefing up its
industrial capacity and not simply absorbing capacity eliminated
elsewhere. At the same time, the ability of the Chinese market
to absorb its own industrial output was limited.
Agents of
Overinvestment
A major actor in overinvestment
was transnational capital. In the late 1980s and 90s, transnational
corporations (TNCs) saw China as the last frontier, the unlimited
market that could endlessly absorb investment and endlessly throw
off profitable returns. However, China's restrictive rules on
trade and investment forced TNCs to locate most of their production
processes in the country instead of outsourcing only selected
numbers of them. Analysts termed such TNC production activities
"excessive internalization." By playing according to
China's rules, TNCs ended up overinvesting in the country and
building up a manufacturing base that produced more than China
or even the rest of the world could consume.
By the turn of the millennium,
the dream of exploiting a limitless market had vanished. Foreign
companies headed for China not so much to sell to millions of
newly prosperous Chinese customers but rather to make China a
manufacturing base for global markets and take advantage of its
inexhaustible supply of cheap labor. Typical of companies that
found themselves in this quandary was Philips, the Dutch electronics
manufacturer. Philips operates 23 factories in China and produces
about $5 billion worth of goods, but two-thirds of their production
is exported to other countries.
The other set of actors promoting
overcapacity were local governments investing in and building
up key industries. While these efforts are often "well planned
and executed at the local level," notes Ho-Fung Hung, "the
totality of these efforts combined entail anarchic competition
among localities, resulting in uncoordinated construction of
redundant production capacity and infrastructure."
As a result, idle capacity
in such key sectors as steel, automobile, cement, aluminum, and
real estate has been soaring since the mid-1990s, with estimates
that over 75% of China's industries are currently plagued by
overcapacity and that fixed asset investments in industries already
experiencing overinvestment account for 40-50% of China's GDP
growth in 2005. China's State Development and Reform Commission
projects that the automobile industry will produce double what
the market can absorb by 2010. The impact on profitability is
not to be underestimated if we are to believe government statistics:
at the end of 2005, Hung points out, the average annual profit
growth rate of all major enterprises had plunged by half and
the total deficit of losing enterprises had increased sharply
by 57.6%.
The Low-Wage
Strategy
The Chinese government can
mitigate excess capacity by expanding people's purchasing power
via a policy of income and asset redistribution. Doing so would
probably mean slower growth but more domestic and global stability.
This is what China's so-called New Left intellectuals and policy
analysts have been advising. China's authorities, however, have
apparently chosen to continue the old strategy of dominating
world markets by exploiting the country's cheap labor. Although
China's population is 1.3 billion, 700 million people-or over
half-live in the countryside and earn an average of just $285
a year, according to some estimates. This reserve army of rural
poor has enabled manufacturers, both foreign and local, to keep
wages down.
Aside from the potentially
destabilizing political effects of regressive income distribution,
this low-wage strategy, as Hung points out, "impedes the
growth of consumption relative to the phenomenal economic expansion
and great leap of investment." In other words, the global
crisis of overproduction will worsen as China continues to dump
its industrial production on global markets constrained by slow
growth.
Vicious
Cycle
Chinese production and American
consumption are like the proverbial prisoners who seek to break
free from one another but can't because they're chained together.
This relationship is increasingly taking the form of a vicious
cycle. On the one hand, China's breakneck growth has increasingly
depended on the ability of American consumers to continue their
consumption of much of the output of China's production brought
about by excessive investment. On the other hand, America's high
consumption rate depends on Beijing's lending the U.S. private
and public sectors a significant portion of the trillion-plus
dollars it has accumulated over the last decade from its yawning
trade surplus with Washington.
This chain-gang relationship,
says the IMF's Rajan, is "unsustainable." Both the
United States and the IMF have decried what they call "global
macroeconomic imbalances" and called on China to revalue
the renminbi to reduce its trade surplus with the United States.
Yet China can't really abandon its cheap currency policy. Along
with cheap labor, cheap currency is part of China's successful
formula of export-oriented production. And the United States
really can't afford to be too tough on China since it depends
on that open line of credit to Beijing to continue feeding the
middle-class spending that sustains its own economic growth.
The IMF ascribes this state
of affairs to "macroeconomic imbalances." But it's
really a crisis of overproduction. Thanks to Chinese factories
and American consumers, the crisis is likely to get worse.
Walden Bello is executive director of Focus on
the Global South and professor of sociology at the University
of the Philippines. This article is based on work done for the
Nautilus Institute's China Project.
End Notes
1. Ho-Fung Hung, "Rise
of China and the Global Overaccumulation Crisis," paper
presented at the Global Division of the Annual Meeting of the
Society for the Study of Social Problems," August 10-12,
2005, Montreal, Canada. A revised version of this paper will
soon be published in a leading international relations journal.
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