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Prof. Sidney Gluck
Professor Emeritus (Specialising in Marxism)
New School of Social Research
Former President, New York Chapter
U.S.-China Peoples Friendship Association
China’s Study Of World Economic Cycles
Modern China has experienced a series of social upheavals since Sun Yat Sen’s democratic revolution and the demise of the Ming Dynasty. It emerged from centuries of feudal penury and the deleterious effects of imperialist occupation by Great Britain as well as extra territorial rights given to all other competing colonialists. The Communist Revolution under Mao Zedong’s leadership inherited a country devastated by civil war, which followed the split of the “KMT” and the Japanese occupation. The victory of the peasant and worker based Red Armies, which defeated Chiang Kai Shek and the Japanese, established a stable state power in a vastly primitive country where the only centers that touched modernization were in the Southeast coastal cities, Shanghai in particular, as well as the off shore territories of Hong Kong, Macau and Taiwan.
While the Soviet Union had helped build smokestack industry and China tackled poverty in the countryside by collectivization that brought relief and established an egalitarian rice-bowl economy, the break with the Soviet Union in 1957 removed Soviet influence and challenged China to find its own way to create a socialist society. The “Great Leap Forward,” an infantile attempt at economic planning, followed by the chaotic Cultural Revolution, stagnated development for the next twenty years. Nevertheless, the idealism of the Revolution survived but the economy was in shambles and in no way capable of providing for its own people.
It was Chou En Lai in 1975, his last year, who proposed a new direction for building Socialism based on China’s own experience and capabilities. Deng Xiaoping and a number of others, who had survived the political repression of the Cultural Revolution under Chou’s protection, created a new direction for economic development at a conference in 1978 to build a “Socialism with Chinese Characteristics.” This entailed a total economic and social reorganization, introducing market relations, releasing individual capabilities, restructuring means of production, separating management of state enterprises from responsibility for basic social services and introducing new technology and science and management techniques – all aimed to build the forces of production as a base for raising the country out of poverty.
Thus was launched, the People’s Republic of China economic modernization program an Opening to the West, to participate in building a new China that could take its place in economic world relations creating opportunities for East and West, but particularly to bring China into the modern world economic structure with all possible benefits to its own people and ultimately to become an example and an engine for alleviating under-development around the world.
This approach is quite different from the Soviet model of socialist society. The 1980s were marked by shifts in industrial production; especially reorganization of state owned enterprises and introduction of private enterprise, all intended to extend economic growth and create jobs (while reduction of overstaffing in the SOEs added to unemployment and joblessness as a special new problem).
Be that as it may, by 1992, Deng Xiaoping approached Jiang Zemin, mayor of Shanghai, and negotiated a shift in leadership, which brought the Shanghai group into central leadership and in charge of modernization. Shanghai was the most experienced area in financial dealings and management because it was a center of imperialist operation.
The world now knows of the exceptionally rapid and consistent rate of development of the economy in China. If one adds the growth rate of the last twelve years to that of the previous twelve (from 1980), the world has witnessed the longest uninterrupted growth at the highest growth rates in history. The objective of Jiang and Deng was to build up the Eastern and Southern coastal areas as industrial bases. These areas represented the most likely to retool, reorganize, begin modernization, extend it and develop relations to the outside world. Foreign capital was invited to build industry and distribution, augmenting job creation, but in all, unable to absorb the developing working class or to build up the agricultural Western regions at a rapid rate. What resulted was an incredible increase in income in the East and South doubling four to 6 times from the 1980s to 2002 while only pockets of areas among the peasants saw an increase in income and living standards, factors that the success had an effect on the living standards of the peasantry where poverty continued. Last year showed us indications of an increase, though in the overall picture, it has been a mixed bag with the increase only doubling a meager income for the peasantry. Affecting the situation, however, has been the income of migrant workers sending earnings (when they got paid) back home just as Chinese workers sent abroad helping their families.
The neglect in improving earnings and living standards of workers and the peasantry has been broadly exposed by the eruption of demonstrations in the past two years- fifty eight thousand such in 2003. The change of regime, with the ascension of Hu Jintau and Wen Jibau, Fourth Generation Leaders of revolutionary China, inherited a sharp division in income gap, unemployment, lack of health care, social security etc. The state owned enterprises had been responsible for these services of which they were relieved in the process of reform. Serious questions arose as to the direction of a government established after a victory of a socialist revolution and the establishment of collective idealism and the degree to which it followed and encouraged private interests. Furthermore the influx of capital in private and joint ventures, while stimulating growth and creating jobs tendered to flow into particular sectors out of proportion to the economy as a whole. The developing of threatening characteristics of economic cycles that infects the West in free-market societies was expressed in newspapers around the world, such as the Wall Street Journal, New York Times, Financial Times and among China’s neighbors who were becoming dependant on trade with China for their own development to quote, “China’s bounding economy fuels both hope and concern.” One economist at a 2002 conference remarked, “When China accelerates, the world follows. When China slows down, the world will hurt, China is no longer just another emerging market economy.” Jean-Claud Trishet, President of the European Central Bank and Chairman of the Group of Ten-officials from the world’s ten richest industrial nations remarked, “Asia’s economy, being one of the major sources of global growth, is experiencing interregional trade, which is reflecting the domestic demand that is strongly accelerating and improving in various economies in Asia.” “Money has been flowing around so fast,” said a Mr. Tao at an international meeting, “that we are eventually looking at an investment fiasco.” These observations cause mutual concern not alone in the West but in China itself where they had to recognize that the untrammeled free-float of investment could lead to bubbles and busting.
We should note that China’s relative position in the world economy by 2002-2003 had reached a level of accomplishment epitomized by most modern office buildings and hotels in every major city, shopping centers on a massive scale, modern airports with full facilities for services and consumer satisfaction and consumption, a move from the common rice bowl to an extensive consumer choice. To quote the Independent of the United Kingdom in November 2003, “China is the biggest boom on earth. It is not just the fastest-growing economy in the world at this moment; its boom is the greatest that has ever occurred in the history of humankind. The world has never seen economic growth on this scale before. Some quarter of a billion people are racing from bare subsistence to middle-class comfort in less than two decades, the sort of transformation of living standards that took a century in Britain’s Industrial Revolution.” One must bear in mind, however, that modern development has taken place in only one quarter of China, directly affecting around 300-400 million out of its 1 billion, 300 million population with 800 million in the Western and Central regions lagging in uneven development while the East and Southern regions were moving rapidly into a Western style economic recession.
China had already become the world’s number one:
Country in demand for new oil resources
Producer of cement and steel in the world
Importer of scrap iron and iron ore, machinery and high tech communication, transportation, etc.
Creditor holding US bonds and now the primary area for flow of capital investment.
China is the number two importer next to the US and is rapidly becoming number one and she still remains the leader in personal savings of its population even in poverty stricken areas. This may look healthy on paper; but if the growth in the economy were to continue, as in all free markets in the West, everyone would soon become aware both outside and inside China, that a recession was in the making.
At this point, the new regime undertook a study in 2002 and 2003 of the world economy and its tendency for and its history of economic cycles, recessions and depressions. Interestingly, they found two kinds of trends, one, the development of relatively disproportionate investments. This resulted in relatively uneven overproduction, which could find no market because of underconsumption. The massive consumers did not have the income and the investors in new equipment did not need any, resulting in the cessation of economic activity and exchange. The other were cycles that resulted from technological revolutions where the increased investment in new means of production and further development of the forces of production gave impetus to the economic system spanning a series of cyclical crisis.
Clearly the new regime in China, in order to maintain stability in their own country, would have to put the legitimacy of their regime into question and open the possibility of steering the direction of the country away from the social considerations at the core of the revolution’s philosophy and result in another failure of efforts to move towards a socialist ideal. The government had to decide the degree to which it would exercise its capability of interjecting regulations and controls of the economic movements of capital and the overall balance of all sectors of the economy. They undertook a study which culminated in a conference on December 1, 2003, which brought together the government, the leaders of all ministries, the consultative assembly, leaders of the National Peoples Congress, and professionals and experts in various aspects of the economy, science, technology and planning. They came to the conference aware of the fact that the government income and right to allocation had aspects different from Western capitalist countries.
The capital formations in China included private investment to a great extent small and medium enterprise run by Chinese nationalists as well as foreign investments and joint ventures. Above all, the modernization program had already separated management of state owned enterprises from government responsibilities and put the government ownership shares in the hands of a responsible commission. The SOEs represent 30% of industry and control 76% of all basic heavy industry. Up to a few years ago state owned enterprises were losing money, the modernization and improved management had resulted in a considerable increase in profit accumulation available to the government for reinvestment, especially in areas, which do not attract private capital but are necessary for a balanced economic growth. Furthermore joint ventures were yielding a considerable income. The fees for land use where corruption did not exist added further to available capital, all this plus the excise taxes from imports and exports, corporate and personal taxes, and the recouping of capital diverted by corruption. This gave the state the levers to intercede in capital flows bases upon a macroeconomic plan for regulations and control of capital investments as well as the appropriation of capital funds away from concentration on economic growth in the East and the South and shifted the emphasis of capital utilization towards the building of an agrarian economy in the West that could parallel the experience in the East.
The conference represented a massive Board of Directors for the economy planning the use and investment of all the forces of production in its capability, the human labor force, farm, factory and service as well as the capital investment in plant technology and science. The further development of the Forces of Production by modernizing means of production to the highest possible technological level and training the work force to the highest level of knowledge and labor application makes China the workshop of the world. It does so without the harshness of economic recessions experienced in the history of Western regimes in which the forces of production are split among private owners and exploited masses with the objective of maximization of profit and accumulation. This has led to the poverty stricken world we live in today. The Chinese experience of exercising government capabilities for planning market relations and regulating them is a contribution which establishes a set of mechanisms to turn around what had become a historic trend towards increased poverty.
“The economic cycle is an important phenomenon in the operation of the world economy,” the governmental report indicated, “It refers to the fluctuating processes of liveliness, prosperity, stagnation and recession alternately occurring in the economic activities in the whole world.”
Furthermore it was noted:
“The cyclical characteristic of the world economy is determined by many complex causes. Fundamentally speaking, it is a movement of contradictions between productive forces and production relations. Meanwhile, it is closely related to the cycles of science and technology from discovery, invention, conversion, and application and then to elimination and renewal, the cycles of fixed assets to be upgraded and updated and the cycles of the world market to be expanded and contracted.”
Moreover the experts stated that:
“The theory of long waves was first put forth by a Russian economist, Kondratieff, in his thesis entitled, “The Long-Term Waves in Economic Life.” As far as the long cycles or long waves in the world economy are concerned some experts believe that the development of the world economy has so far undergone three relatively complete long cycles. The period from 1945 to now belongs to the third long cycle. And at present, the world economy is moving from the falling stage of the third long cycles to the rising stage of the fourth long cycle. The new technological revolutions, industrial structure readjustments, marketing reforms, educational reforms, and more in the whole world in these years are all heralding the imminent arrival of a new upsurge of a long world-economic cycle.”
*Additional quotes, see note number 1.
At the conference of December 1, 2003, which was chaired by the countries top leaders and involved all ministerial heads, the National People’s Congress and experts in technology, science, finance, management and planning, the leaders, seeking a steady course for the economy threatened with a recession, acting as the general Board of Directors of the entire economy, decided to exercise the state capability and use its assets, accumulation, and power to regulate and create mechanisms of control on a nationwide economic plan for stable growth. They embark on efforts to change the shares of China’s new wealth with the whole population. This meant a turn from the trend in the previous administration to overlook the needs of the working population and looking away from the income gap that was second only to the United States’. The conference decided on eight objectives:
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- Higher incomes for farmers
- Adjusting the composition of the economy
- Strengthened co-ordination among regions
- Create jobs and improve social security
- Encourage private consumption
- Continue the ongoing fiscal and banking policies
- Reform the economic system and rectify the market disorder
- Promote foreign trade and the uses of foreign investment, and give special emphasis to overall social development.
Besides tightening banking policy (available in any capitalist country by varying interest rates), specific directives pointed to slowing investment in overextended industries such as steel, cement, automobiles, transportation and real estate. Prices were held in check and consumer spending stimulated. The investment pattern enunciated on December 4th included:
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- The limitation of private capital investment in nonpublic, over-capacitated sectors
- Correction of regional imbalance and cooperation among regions,
- Technological updating and innovation of existing fixed assets as distinct from increased investment in fixed assets in general and
- Stimulation of new enterprises in the service sectors with the support of small and medium enterprises that create the largest number of new jobs.
- Use personal savings to expand internal consumption
Obviously these moves by the state had never been established in any market economy and represents a departure in the exercise of state responsibility for the guidance of capital formations and the use of social capital. As an aside, it occurs to the writer, that the experience in handling social capital under Bush in the USA was to dissipate accumulated government income available for social use through tax returns and reductions, aggregating in the trillions overtime and depleting the social capital availability for health, education, housing and social security etc. Obviously there is a difference in the use of state power in sharing the country’s wealth.
Long before the historic conference, in August of 2002, Hu Angang, China’s well-known national conditions research expert and Quinghua University professor, writing on “China’s Economic Rise Brings New Global Opportunities,” observed that:
“The rise of China in the 21st century will become the most significant event in the development of mankind….that China’s economic growth and economic internationalization will have important effects on developed industrialized countries…..(by)…..China’ development demands on capital-intensive, technology-intensive and knowledge-intensive products…..China’s economic export of labor-intensive products…..Along with economic globalization, industrialized countries will shift a large amount of the production of labor intensive products to developing countries, especially to China, which has abundant labor resources and a rapidly developing market.”
And quoting a 1997 report of the World Bank, titled, “2020 China,” Hu Angang concludes that China’s economic rise will bring opportunities to world development just as the economic take-off of the United States in the 19th century and Japan’s in the 20th.
In March of 2004, Angang, reacting to the state intervention with a series of macroplans wrote:
“To a certain extent, regulation is a reflection and requirement of the development law of the world economy studying and mastering regulations also means, from a certain angle, studying and mastering the operational law of the world economy of course, the present economic regulations contain a lot of points that are irrational, and not inconformity with the objective law, to study them, we can participate in the process of revising these regulations and through putting forth efforts, make them gradually head towards rationalization, so as to set up a new order for the new international economy.”
However he concludes:
“The report indicates that China’s government has made a change in its development goal by replacing such a traditional goal as pursuing economic growth only with a new one, namely, pursuing comprehensive, coordinated and sustainable development. This shift has signaled a major conceptual renewal with regard to development…..The “Government Work Report” adopted by the NPC deputies by an overwhelming vote on 14 March has been found to have played down the economic growth target (now set at merely 7 percent or so). Yet, it has highlighted the “three rural issues (sans nong – agriculture, peasants, and rural areas),” among other issues concerning the livelihood of the people, such as employment, education, health, and so on. This is an indication that the current administration is resolved to handle various livelihood issues with increased pragmatism, concern, and realism, and by staying closer to the realities as well.”
With tongue in cheek, on May 29, after noting several months of change in China’s economic direction, H. C. K. Liu, a Chinese-American economist who regularly publishes in the South China Post of Hong Kong picked up Hu Angang’s theme in an article titled “China Inspires Third World Countries.”
“Dictatorship of the proletariat is a political notion parallel with the Mandate of Heaven,” which political responsiveness to the needs and the will of the people (Baixing – Hundred surnames), “the moral mandate is based on the well being of the people, not the sanctity of the market.”
“The signs now are that the CPC is back on track, and requiring the prosperous regions to subsidize the development of the interior regions and the financially well-off segment of the urban population to subsidize the improvement of peasant income. The current emphasis on green economics, poverty reduction, full employment, balanced development etc., are components of the Mandate of Heaven, which justifies the CPC claim to leadership. The CPC will allow the market to operate unrestrained if it supports these developmental goals. If the market resists these goals, the market will be regulated or reduced to subordinate roles.”
China has come a long way since 1978 when it joined the world with its notion of “Socialism with Chinese Characteristics” creating an example for world development on a humanistic scale.
Notes______________________________
1. Additional quotations from World Economic Cycles:
“We should admit that we have not made sufficient study of the laws governing the cyclical movements of the world economy. At the present, the descriptions and explanations about various cycles are not entirely accurate and scientific and a lot of issues still need to be discussed. Nevertheless, the cyclical changes in the world economy do really exist. And the phenomenon of this kind of cyclical change is exactly a concentrative expression of the operational law governing the world economy. To more accurately reveal this cyclical nature is an entrance for us to discover the law of the world economy.
“Maybe we can gain a deeper understanding about the operational law of the world economy, more freely master the operational process of the world economy, and foresee the prospects and tendencies of its development, so as to seize the initiative in our country’s economy, which is developed in the grand environment of the world economy.
“On the Basis of Mastering the Law to Pursue Advantages and Avoid Damages and Seize the Initiative in China’s Economic Development:
“In the new century, we have entered into a new stage of comprehensively building a well-off society and a new stage of expediting modernization. The situation is gratifying as well as more pressing.
“‘The multipolarization of the world and economic globalization is development in a zigzag manner; science and technology are developing at an amazing speed; competitions in overall national strength are becoming increasingly intensive; and profound changes are taking place in the reorganization of strengths and distribution of interests in the world.’
“‘As an objective process, the economic globalization possesses a dual character. The developed countries in the West strive to dominate the economic globalization and, generally speaking, the developing countries are in a weak position.’ It is impossible for a country to isolatedly develop itself divorced from the world economy. In the face of the future and the world, we should seize the initiative in China’s economic development, and we cannot but actively participate in the process of economic globalization, earnestly study and strive to master the operational law of the world economy and on the basis of mastering the law fulfill pursuing advantages and avoiding damages.
“First we must broaden our horizon and strategically master the two-way interactive relationship between China’s economy and the world economy.
“An increase in the degree of dependence of China’s economy on the world economy means that China’s economy will be more directly restricted and affected by the operational law of the world economy. Whether we can consciously understand and master the law in this regard is extremely important to the rapid, sustainable and healthy development of China’s economy.
“To adapt ourselves to these new situations and changes, we need to further broaden our horizon and also change our thinking, measures and strategies. It is necessary to regard China’s economy and the world economy as a whole to understand and master, comprehensively examine the external conditions of China’s economic development, promptly discover the latest tendencies and situations in the world economy, profoundly study the intrinsic laws governing the world economy and scientifically foresee the basic tendency of the world economic development. To pay attention to the impact of China’s economy on the world economy as well as the impact of the world economy on China’s economy and master well the two-way interactive relationship between the two.”
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