More capitalism for Chinese ‘Communist’ Party

A deeper integration into the world capitalist system appears to be the goal of the Chinese Communist Party, a decision obscured but not occulted by the ritual “all hail the party” slogans littering the “communiqué” the party issued following this month’s much anticipated planning meeting.

Nonetheless, the gradually mounting contradictions of China’s heavy reliance on exports and investment, and the larger implications for global living standards, remain in place. China’s role in global capitalism, despite its impressive growth figures, has been an assembly platform for foreign multi-national corporations. This system has brought wealth to a minuscule layer of Chinese capitalists while enormously profiting Western and Japanese companies, and their East Asian contractors.

Two-thirds of China’s exports are shipped from factories wholly or partially owned by non-Chinese companies. In high-technology industries, the ratio is higher: Wholly owned non-Chinese corporations account for 68 percent of high-tech exports and, if firms partially owned by foreign companies are included, the total is 83 percent.

And in contrast to misleading trade statistics, most of the money captured by this Chinese production is taken by Western and East Asian multi-national corporations, not by China. The world’s multi-national corporations profit immensely from China’s low wages and like the current Chinese system just as it is.

Socialist rhetoric, but capitalist content

The communiqué referenced above is the official statement released by the Chinese Communist Party following the “Third Plenum” of the 18th Party Congress. The plenum, a meeting of the entire party Central Committee that concluded on November 12 in Beijing, was intended to re-orient the Chinese economy in a new direction. The corporate media predictably issued downcast reports in the wake of China not immediately adopting International Monetary Fund diktats.

Factory on Yangtze River

Factory on Yangtze River

The communiqué is full of long-winded sloganeering and short on details. Nonetheless, in between the repeated ritualistic panegyrics to the party’s guidance and the “magnificent progress” it has bequeathed China, there are clear indications that the party intends to continue down its capitalist path. That no significant backtracking is contemplated is signaled by this oxymoronic formulation:

“The Plenum stressed that to comprehensively deepen reform, we must hold high the magnificent banner of Socialism with Chinese characteristics, take Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the important ‘Three Represents’ thought and the scientific development view as guidance.”

The “Three Represents” reference is an official line announced in 2001 the party should represent the most advanced productive forces, the most advanced culture and the broadest layers of the people. Promulgated by former President Jiang Zemin, it is a declaration that the interests of different classes are not in conflict and that the party can harmoniously represent all classes simultaneously. One can of course enunciate such a program if one wishes, but such a theory has nothing in common with Marxism. “Three Represents” follows naturally from the policies of President Jiang’s predecessor, Deng Xiaoping, who firmly pushed China on to its capitalist path.

Also noteworthy is the one Communist leader omitted from the list — Hu Jintao, the president between Jiang Zemin and current President Xi Jinping. President Xi is seen as a protégé of former President Jiang, who is believed to have helped pack the Politburo Standing Committee, China’s highest political body, with his followers. The references to Marxism-Leninism and Mao Zedong Thought are ritualistic references, necessary to establish the party’s right to continuity in power and thus its authority to continue to rule.

That only “Three Represents” had the adjective “important” in front of it can be interpreted as to the importance of that line. Moreover, President Jiang was elevated to power following the massacre in Tiananmen Square, which smashed dissent and enabled paramount leader Deng to dismantle social protections. During the 1990s, when President Jiang was in power, state- and collective-owned enterprises were privatized, millions were laid off, peasant rights were revoked and dislocation induced a steady stream of migrant workers into the urban sweatshops. No basic change to this pattern should be expected.

Exalting the party but the market, too

Some of the key ideas put forth by the communiqué are these:

• “The Plenum pointed out that we must closely revolve around the decisive function that the market has in allocating resources.”

• “The Plenum pointed out that to comprehensively deepen reform, we must base ourselves on the largest reality that our country will remain in the preliminary stage of Socialism for a long time, persist in this major strategic judgment that development still is crucial in resolving all of our country’s problems.”

• “We must relax investment access, accelerate the construction of free trade zones and expand inland and coastal openness.”

• “[W]e must strengthen and improve that Party’s leadership, fully give rein to the Party’s core leadership function in assuming all responsibility for the entire picture and coordinating all sides.”

The corporate media was unified in grumbling over the last of these, and although the party will certainly maintain a tight grip on political power, the direction of the party over the past three decades is what has granted Western and East Asian multi-national corporations opportunities for massive profiteering on the backs of Chinese workers. In contrast, Xinhua, the official Chinese news agency, focused on the word “decisive,” declaring the use of that word to describe the role of markets a development from the party’s previous use of “basic.” Xinhua wrote:

“The role of the market in China has officially switched from ‘basic’ to ‘decisive,’ and is key to understanding the reform agenda. [The party] communique … stressed profound economic reform, with the market to play the decisive role in allocation of resources. The previous socialist market economy — official policy since 1992 — attributed only a ‘basic’ role to the market. … [A] unified market for both urban and rural construction land and an improved financial system are definitely in the pipeline.”

More market capitalism then. But as there are no perpetual-motion machines, how long can China continue to its current path?

Export-based economy can’t be easily changed

China’s economy continues to be overly dependent on investment and unable to easily shift toward more household consumption, and thus dependent on exporting. Its ability to be the world’s workshop rests on its ultra-low wages, which are in turn based on systematic exploitation of its rural population.

Three Gorges Dam (photo by Christoph Filnkössl)

Three Gorges Dam (photo by Christoph Filnkössl)

For China to re-orient itself to producing for internal consumption would mean having to allow dramatic growth in workers’ income. But doing so would mean ending foreign capital’s reason to move production to China. China could try to switch to high-end manufacturing — to some degree, it is trying to extend its mix of production to do that — but it doesn’t have the capabilities of non-Chinese companies that are already making such products and it would have to compete by muscling out foreign competitors. (Much of China’s machinery is imported from Germany.)

As their own populations become more restless, foreign governments could find it politically difficult to continue to allow themselves to be swamped by cheap Chinese imports. Moreover, the internal demand for such high-end products is limited within China, so it would be right back to having to rely on exports. Considerable Chinese demand for high-technology products comes from government infrastructure projects and there comes a time when such a high level of investment ceases to be prudent and becomes wasteful spending, as has happened to Japan.

The Chinese Communist Party can continue to apply repression to keep wages and working conditions low, but such policies directly contradict its supposed reliance on Mao Zedong Thought, which produced the now-shredded social safety net known as the “Iron Rice Bowl” — an achievement not lost to collective memory. If the continual drip of scattered local rebellions organizes enough to force competitive wages, Western capitalists would still want to sell their products in China, but would produce at least some of them elsewhere.

Chinese industry could step in and build new capacity, or acquire the capacity that Western capitalists abandon, but the upward pressure on wages would undercut China’s ability to export cheaply, and without much increased internal demand China would have a glut of capacity that would face shuttering.

Chinese workers endure long period of low wages

Household consumption — all the things that people buy for personal use from toothbrushes to automobiles — constituted about 36 percent of China’s gross domestic product in 2012, only two percentage points above China’s bottom three years earlier and far below the 51 percent in 1985. In comparison, household consumption is 58 to 72 percent of the economy of the world’s largest advanced capitalist countries. Fixed capital investment continues to account for large and growing portions of China’s GDP — 46 percent in 2012, a figure more than double countries like Japan and the United States.

What those numbers signify is that China, despite the repeated proclamations of its leaders, has made no progress in re-orienting its economy.

The share of labor income in China’s gross domestic product shrank to 37 percent in 2005 (the latest for which I can find statistics) after having been consistently above 50 percent in the 1980s. A bigger proportion of China’s surplus is being taken by capitalists, but not necessarily Chinese capitalists.

For example, a paper written by Yuqing Xing and Neal Detert found that almost all of the value created by iPhone production in China goes to manufacturing corporations outside of China, where only the final assembly is conducted. The paper, “How the iPhone Widens the United States Trade Deficit with the People’s Republic of China,” argues that conventional trade statistics are highly misleading because the value of the entire product is assigned to the country where the final assembly is conducted, rather than allocated by the value of the various inputs. The paper reports:

“The US also has an absolute advantage in the smart phone category. … [T]heory would suggest the US should export iPhones to the [People’s Republic of China], but in fact the PRC exports iPhones to the US. All ready-to-use iPhones have been shipped to the US from the PRC. Foreign direct investment, production fragmentation, and production networks have jointly reversed the trade pattern predicted by conventional trade theories. Chinese workers simply put all these parts and components together and contribute only US$6.50 to each iPhone, about 3.6% of the total manufacturing cost.

If the PRC’s iPhone exports were calculated based on the value-added, i.e., the assembling cost, the export value as well as the trade deficit would be much lower, at only US$73 million, just 3.6% of the US$2.0 billion calculated by using the prevailing method. … Bilateral trade imbalances between a country used as a final assembler and its destination markets are greatly inflated by trade in intermediate products. … The Sino-US bilateral trade imbalance has been greatly inflated.”

The paper argues that the other $162 of the total manufacturing cost of iPhones (all of the cost other than the $6.50 contributed by underpaid Chinese labor) came from U.S., German, South Korean and Japanese manufacturers who supplied the parts and shipped them to the final assembly plant, which itself is owned by a Taiwanese corporation that is a subcontractor to Apple. The iPhone is designed and sold by Apple, which enjoys a large profit from it. Thus, the money from trade deficits fills Apple’s, and not necessarily Chinese, coffers.

Rural exploitation drives sweatshop exploitation

The dramatic increase in Chinese manufacturing is driven by multi-national corporations from the U.S., East Asia and Western Europe. State-owned enterprises account for 25 percent of China’s industrial output, down from 75 percent in the mid-1980s.

Exploitable workers are needed in those factories, and China’s supply of labor comes from rural wages being consistently 40 percent or less that of urban wages and that local and regional officials continually take and sell off farming land to developers, partly for their own enrichment but also to generate revenue to fund local government. According to a Reuters report, about four million farmers lose their land annually — and those farmers receive an average of $17,850 an acre from local governments, which resell it for an average of $740,000 an acre.

The vast disruptions, vicious exploitation and cavernous inequality of early capitalism is being repeated in China, at an accelerated pace. Earlier industrializing countries did so during a time when capitalism covered only a portion of the globe and thus had considerable room for growth. Wages could eventually rise because of the scope for expansion via exporting, capital controls and the difficulty of moving production to other countries. Mass organizing, including the creation of then-militant unions, leveraged those factors into rising living standards.

Capitalism no longer has places into which to grow, having blanketed the Earth, and the capitalist class has succeeded in eliminating barriers to their moving production at will, accelerating a race to the bottom. The rise of China, or any other country, can only come by taking market share away from somebody else, and the growing mass of low-wage workers drags down wages globally. The alliance of party-connected Chinese capitalists with Western capitalists is profitable for them, but at the expense of working people in those countries and around the world.

Could the rise of China fatally de-stabilize capitalism?

By Pete Dolack

The world is not limitless, yet growth without limits is touted as a permanent economic elixir. But natural resources aren’t infinite, nor can demand be infinite. What happens when the limits of growth are reached?

We aren’t supposed to ask that question about capitalism; the assumption is that economic activity will always grow. The insertion of China into the world capitalist system has created the opportunity for more growth as a country of 1.3 billion people has been thrown open to the world’s markets.

But what if, rather than throwing capitalism a lifeline in the form of a vast pool of consumers who will drive demand, China instead will fatally destabilize an already weakened world economic system?

China will be the final straw that will bring about the downfall of the capitalist system is the provocative conclusion of an interesting book by a Chinese economist, Minqi Li, who now teaches at the University of Utah. Professor Li doesn’t pull any punches in his book; indeed his book’s title is The Rise of China and the Demise of the Capitalist World Economy.* The book’s central thesis is that the huge mass of low-wage Chinese workers will drag down wage levels globally; the increase of industrialization in developing countries will lead to exhaustion of energy sources; and that ecological limits will force a halt to growth, fatal to a system dependent on growth.

Professor Li believes that the combination of these crises will bring an end to the capitalist system by the middle of this century. The Rise of China, however, is not apocalyptic; rather it methodically builds it case piece by piece through a sober examination of economic trends, calculations of the limits to a range of natural resources, analysis of long-term environmental unsustainability, and study of historical trends going back centuries. Nor is this a bleak work; Professor Li writes in the Gramscian spirit: pessimism of the intellect, optimism of the will. What will follow the collapse of capitalism is not pre-ordained but is up to humanity to determine.

The first two of the book’s seven chapters provide an interesting discussion of Chinese history, before and after the 1949 revolution. Pro-capitalist factions within the Chinese Communist Party gained the upper hand soon after Mao Zedong’s death in 1976, with Deng Xiaoping wresting party leadership by the end of the decade. Early reforms granting concessions to workers and peasants cemented political control for the Deng faction, Professor Li writes, enabling the party to then introduce capitalism. A 1988 law granted enterprise managers full control in the workplace (including hiring and firing at will), and the development of market relations enabled privileged bureaucrats to enrich themselves.

Intellectuals on the one hand, and enterprise and bureaucratic elites on the other, sought the growth of market relations and a firm turn toward capitalism. The two groups, however, disagreed on how the spoils would be divided between them, and the party was split three ways on how fast and how far to move toward putting the economy on full market relations. It was Deng who proved to be “the master of Chinese politics,” Professor Li writes, as he was able to implement an intermediate strategy between the party’s poles and use the crackdown in Tianamen Square to reduce the intellectuals to the junior partners of the ruling elites and to break the resistance of urban working people. Thus the stage was set:

“Throughout the 1990s, most of the state and collective-owned enterprises were privatized. Tens of millions of workers were laid off. The urban working class was deprived of their remaining socialist rights. Moreover, the dismantling of the rural collective economy and basic public services had forced hundreds of millions of peasants into the cities where they became ‘migrant workers,’ that is, an enormous, cheap labor force that would work for transnational corporations and Chinese capitalists for the lowest possible wages under the most demanding conditions. The massive influx of foreign capital contributed to a huge export boom.” [pages 64-65]

The “socialist rights” that were revoked included job security, medical insurance, access to housing and guaranteed pensions. The creation of an exodus from the countryside provided a huge pool of surplus labor to keep wages extremely low.

“China’s economic rise has important global implications. First, China’s deeper incorporation into the capitalist world-economy has massively increased the size of the global reserve army of cheap labor. In some industries, this allows capitalists in the core states to directly lower their wages and other costs by directly relocating capital to China. But more important is the ‘threat effect.’ That is, capitalists in the core states force core-state workers to accept lower wages and worse working conditions by threatening to move their factories or offices to cheap labor areas such as China, without actual movement of physical capital. …

“Secondly, China’s low-cost manufacturing exports directly lower the prices of many industrial goods. To the extent that unequal exchange takes place between China and the core states, part of the surplus value produced by Chinese workers is transferred to the core states and helps to raise the profit rate for capitalists in the core states.” [pages 70-71]

Professor Li’s analysis rests on “world systems” theory, which divides the world’s capitalist countries into three general groupings. World systems theory emphasizes that capitalism is a global system that changes and mutates over time and therefore must be analyzed as a single unit rather than as a collection of nation-states. The global division of labor forms the basis for a division of the world’s countries into three broad categories: core, semi-periphery and periphery, with the latter two subordinate to the core countries and the periphery the most exploited.

Inequality between core and periphery is an “indispensable mechanism” of global capitalism, Professor Li writes, and the existence of a semi-periphery acts as an important buffer because it is exploited to a relatively lesser degree than the periphery and can also, to a lesser degree, exploit the periphery. The semi-periphery historically comprised a small percentage of the world’s population and thus could be “bought off” relatively easily and thus a buffer against any united resistance by the world’s non-core countries. But if the semi-periphery were to become a significant portion of the world’s population, the world system would be destabilized.

The massive size of China is the destabilizing agent, Professor Li argues. He presents four possible scenarios that could arise from the rise of China:

“First, China may fail. China’s great drive toward ‘development’ in the end may turn out to be no more than a great bubble. [In this scenario,] as China sinks back to the status of periphery or poor semi-periphery, China’s existing regime of accumulation will collapse as it can no longer withstand the exploding social pressures the very process of accumulation has generated. This scenario, however, may be the least devastating for the capitalist world-economy.

“For the capitalist world-economy, the problem of China lies with its huge size. China has a labor force that is larger than the total labor force in all the core states, or that in the entire well-to-do semi-periphery. As China competes with the well-to-do semi-peripheral states in a wide range of global commodity chains, the competition eventually would lead to the convergence between China and well-to-do semi-peripheral states in profit rates and wage rates. This convergence may take place in an upward manner or a downward manner.

“In the downward-conversion scenario (the second scenario), China’s competition, with its enormous labor force, will completely undermine the relative monopoly of the historical well-to-do semi-peripheral states in certain commodity chains. As relative monopoly is replaced by intense competition, the value added contained in the traditional semi-peripheral commodity chains will be squeezed, forcing the historical well-to-do semi-peripheral states to accept lower wage rates that are closer to Chinese wage rates.” [pages 109-110]

Professor Li is arguing that, in this second possible scenario, wages rates in industrialized countries not among the “core” states (industrialized countries other than Western and Northern Europe, North America, Japan, arguably South Korea) would collapse under the competitive pressure of China’s low wages, which long hovered at about five percent of U.S. wage rates, and in the mid-2000s were one-quarter to one-fifth of countries such as Argentina and Hungary. A collapse in wages in semi-peripheral countries around the world such as Argentina, Hungary and Turkey would spark unrest and lead to economic depression around the world.

“There is the third scenario, that of upward convergence. China may succeed in its pursuit of ‘modernization’ and become a secured, well-to-do semi-peripheral state. In the meantime, the historical well-to-do semi-peripheral states may succeed in maintaining their relative monopoly in certain commodity chains. As a result, the Chinese wage rates converge upwards towards the semi-peripheral levels. Unfortunately, this scenario is as dangerous for the capitalist world-economy as the second scenario. The problem, again, lies with China’s huge size. Should the Chinese workers generally receive the semi-peripheral levels of wages, given the size of the Chinese population, the total surplus value distributed to the working classes in the entire well-to-do semi-periphery would have to more than double. This will greatly reduce the share of the surplus value available for the rest of the world.” [pages 110-111]

Here, Professor Li is arguing that a multi-fold increase in Chinese wages simultaneous with a maintenance of wages in countries around the world would likely be unsustainable. Multi-national companies based in core countries have moved production to China to take advantage of its low wages and lack of effective labor laws, enabling them to extract more surplus value. “Surplus value” is the sizable difference between the value of what an employee produces and what the employee is paid; some of the surplus value is used by capitalists for investment or to cover other expenses but much of it goes into stratospheric executive pay and financial-market speculation.

An upward convergence of wages around the world in present-day low-wage havens such as China would significantly reduce capitalists’ profits. In this scenario, capitalists would seek to cut wages in core countries to make up the difference, which in turn would trigger reductions in demand. Declining rates of profit, under capitalism, lead to economic downturns. Each of the world’s major economic crises, from 1873 on, have followed declines in the rate of profit.

“If the scenario of upward convergence turns out to be too expensive for the capitalist world-economy, what if China’s upward mobility takes place at the expense of the historical well-to-do semi-periphery? In other words, imagine the scenario (the fourth scenario) in which the rise of China (and India) successfully displaces the historical well-to-do semi-periphery, what are the likely implications for the existing world system? … [A]fter all of the investment is distributed, how much will be left for the other half of the globe?” [page 111]

Were the growth in energy consumption of the Chinese and Indian economies to continue at the same rates, and likewise for the United States and the eurozone, the rest of the world would be left without an energy supply in two decades, Professor Li argues. He writes:

“Given these trends, the rest of the world will have to get by with less and less energy consumption after 2017 and by 2035 there would be virtually no available energy left for the entire world outside China, India, the U.S. and the Eurozone. It is certainly impossible for such a scenario to materialize.” [pages 111-112]

But will there be enough energy to meet even the increasing needs of whatever countries will be in a position to dominate energy resources? Because of the intense competition imposed by the market in capitalism — individuals, businesses and states must all engage in it — a substantial amount of available surplus value must be used toward further capital accumulation to secure and expand market share. Those who do not do so are eliminated in the competition.

Investment is a necessity, and to compete successfully, what is wrung out of labor must rise. Machinery is the route toward greater efficiency. But as machinery and consumer products become more sophisticated, energy and other resources are consumed at greater rates; thus energy inputs rise faster than the population, pushing energy usage beyond sustainability and degrading the environment.

The world is already consuming resources beyond the world’s bio-capacity, Professor Li argues. Not only have the world’s “core” countries already exceeded their regional bio-capacities, but China, India, the Middle East and Central Asia have as well. Using calculations in a 2006 report by the World Wildlife Fund in the USA and Canada, the Zoological Society of London and Global Footprint Network, China and India consume resources and impose domestic environmental damage at a rate twice beyond their ability to be sustainable. Although those countries consume per capita far less than do the U.S. or the European Union, they also have much lower bio-capacities.

Such problems are compounded by an imminent peak in oil and gas, and limits to a variety of metals and other natural resources. If renewable energy sources prove unable to make up for the future shortfall in energy from oil and gas, the world will have much less energy available to it in the latter part of the 21st century than is available now. Professor Li believes that renewable energy will only be able to produce a small percentage of that of non-renewable sources. Even if his pessimism proves unfounded, the unsustainability of present energy consumption remains — as is the damage being done to the environment.

Another looming crisis for the capitalist system is the lack of a successor to the United States as the system’s center. Capitalism has had a succession of dominant centers; each successive center has been bigger to be able to cope with increasingly complex tasks. When London succeeded Amsterdam as the financial center, the financial center became located within a country with a powerful military, not only a large merchant fleet as Amsterdam’s United Provinces possessed. With New York succeeding London, the country at the center is continental in size and possesses a military that can be projected around the world.

Professor Li predicts a rapid decline for the U.S., including an imminent end to the dollar as the world’s central currency. Here I believe the professor’s forecast will prove to be considerably off; although the U.S. has entered a period of decline, its military and financial powers will remain preeminent for some time. And the dollar and U.S. debt instruments remain safe havens.

Declines from the capitalist system’s apex have tended to be gradual and not precipitous; moreover, the former financial center tends to remain powerful in financial markets for some time after the military baton has been passed. And there is no country remotely near being able to mount any challenge to U.S. military supremacy; U.S. military spending is nearly equal to military spending of all the rest of world put together and a significant portion of the Pentagon budget goes to weaponry.

It is a contradiction that the “duties” of the central power contribute to its ultimate decline. For the U.S., that is not only the enormous drain of military spending that starves the rest of its economy of investment and needed social provisions, but that it props up the world system through its deficits.

“After the systemic breakdown of the early twentieth century, the capitalist world-economy can no longer afford another similar breakdown. The hegemonic power has since then assumed the new responsibility to actively manage the global economy. Instead of allowing the system to simply collapse [during the repeated economic crises from the 1980s], the U.S. responded to growing systemic instability by running large and rising current account deficits, in effect pumping ‘liquidity’ into the global economy.” [page 123]

No other country has a big enough economy, nor a big enough military to apply the muscle that underlies the capitalist system, to replace the U.S., yet the capitalist system is unable to function without such a center. The next hegemon must be bigger than the U.S., and there is no country or bloc that fits the bill. Moreover, Professor Li argues, such a hegemon would be so large that it would stifle competition among countries, kicking out one of the crucial legs of the capitalist system.

Crises in economics, the environment, shrinking natural resources and the chaos of global warming are leading to a threat to very survival of humanity, Professor Li argues. Moreover, multiple crises are leading to a point where economic growth is no longer possible, the ultimate contradiction for the capitalist system, the very existence of which is based on endless growth and accumulation. He writes:

“Centuries of relentless capitalist accumulation have set humanity on a course of self-destruction. The very survival of humanity and civilization is at stake. The crisis can not be avoided or overcome within the historical framework of capitalism. To rebuild human society on an ecologically sustainable basis, there must be an economic system that is based on the production for use which is capable of meeting people’s basic needs, rather than one that is oriented towards the endless pursuit of profit and accumulation.” [page 173]

What comes next is up to humanity to decide. Professor Li quotes world-systems theorist Immanuel Wallerstein as predicting the world will enter a post-capitalist era in the second half of the 21st century. But what will that system or systems be? It could well be much worse — an authoritarian feudalism in which survival is a struggle in a time of scarcity is certainly foreseeable. Or it could be a democratic socialist system, in which production is for human necessity rather than an elite’s wealth accumulation and in which the consequences of a changing climate and the limitations on the world’s resources are handled in fully democratic, rational manners without elites to confiscate most of what is produced.

All social systems are historical, and capitalism is no exception, Professor Li argues. Indeed, all previous systems have reached their limits and been supplanted by newer forms. Ending on an optimistic note, he writes that “if the future socialism is able to make the best use of the human knowledge of nature that has been developed under capitalism and further expand that knowledge” and a sustainable relationship between population and resources can be established, then “humanity will be in a position to resume the great historical march to the realm of freedom.”

The Rise of China rewards the reader with a wealth of information and analysis. It is not necessary to agree with everything in the book to find it a valuable contribution toward understanding the stresses of the present economic crisis and a stimulant to discussion of the viability of continuing on the current economic path. One conclusion that shouldn’t be controversial, however, is that there will be no saviors. We’ll have to save ourselves.

* Minqi Li, The Rise of China and the Demise of the Capitalist World Economy [Monthly Review Press, New York, 2008]

Chinese exploitation and multi-national corporate profits

By Pete Dolack

The extent to which multi-national corporations are profiting from super-low Chinese wages is often obscured in the rush to point nationalist fingers at China’s economic policies. In the corporate media the subject generally remains a taboo.

One way of shining some light on that profiteering is this: During the mid-2000s, Wal-Mart was China’s fifth-largest export market. In other words, there were only four countries that imported more goods than Wal-Mart, the world’s biggest retailer, did by itself.

By now, Wal-Mart has slipped a bit down the charts because the volume of Chinese exports continues to grow; but the company would remain among the top ten destinations were it a country by itself. Wal-Mart is hardly unique among multi-national corporations, but, true to its general business practices, is perhaps the most ruthless in not simply exploiting Chinese workers but in accelerating the trend of moving manufacturing to the location with the lowest wages.

Other major United States retailers began procuring clothing items from Asian subcontractors before Wal-Mart, but the relentless drive to have the lowest costs forced an acceleration in the shift of production to countries with the most exploitable populations. If a manufacturer wants to continue to have contracts to supply Wal-Mart, then it has no choice but to ship its operations overseas because it has no other way to meet Wal-Mart’s demands for ever lower prices.

Eighty percent of Wal-Mart’s suppliers are located in China. And because the company is so much bigger than any other retailer, it can dictate its terms. Gary Gereffi, a professor at Duke University, said in an interview broadcast on the PBS show Frontline that “No company has had the kind of economic power that Wal-Mart does, to be able to source products from around the world. … Wal-Mart is able to transfer whole U.S. industries to overseas economies.”

Because of its size and its innovation in computerizing its inventory and tightly managing its suppliers, coupled with its willingness to squeeze its suppliers to the exclusion of all other factors, Wal-Mart holds life or death power over manufacturers, Gereffi said:

“Wal-Mart is telling its American suppliers that they have to meet lower price standards that Wal-Mart wants to impose. The implication of that in many cases is if you’re going to be able to supply Wal-Mart at the prices Wal-Mart wants, you have to go to China or other offshore locations that would permit you to produce at lower cost. … Wal-Mart’s giving them the clear signal that you can’t be a Wal-Mart supplier if you can’t produce at substantially lower prices. … You can go to China, or, in many cases, many U.S. suppliers can’t make that move, and they just go out of business, because Wal-Mart is the dominant company for many U.S. suppliers. If they can’t go offshore, those suppliers end up going out of business.”

And Wal-Mart leverages this power further by contracting to make products with its own name (“private-label products” in retailing lingo) and undercutting makers of traditional branded products, who can’t survive unless they, too, drive down their costs. This only accelerates the race to the bottom.

Nonetheless, let us not lay all the blame for corporate globalization at the doorstep of Wal-Mart headquarters. The internal logic of capitalist development is driving the manic drive to move production to the locations with the most exploitable labor, not any single company, industry or country. One company will inevitably become the most ruthless in implementing what companies in a variety of industries are forced to do under the rigor of capitalist competition. Wal-Mart so happens to be it.

Fully two-thirds of China’s exports are shipped from factories wholly or partially owned by non-Chinese companies. The world’s multi-national corporations profit immensely from China’s low wages and like the current Chinese system just as it is.

As I noted recently in my Feb. 9 post, extraordinarily low wages and harsh working conditions endured by Chinese workers are fueled by a steady flow of peasants from the countryside (where wages are even lower) to the cities. Most of these workers, often young women, intend to return to the countryside.

Working conditions are too harsh to endure, and wages are so low that it can literally be impossible to survive on them, report John Bellamy Foster and Robert W. McChesney in an excellent article in the February 2012 edition of Monthly Review:

“The eighty hour plus work weeks, the extreme pace of production, poor food and living conditions, etc., constitute working conditions and a level of compensation that cannot keep labor alive if continued for many years—it is therefore carried out by young workers who fall back on the land where they have use rights, the most important remaining legacy of the Chinese Revolution for the majority of the population. Yet, the sharp divergences between urban and rural incomes, the inability of most families to prosper simply by working the land, and the lack of sufficient commercial employment possibilities in the countryside all contribute to the constancy of the floating population, with the continual outflow of new migrants.”

The world’s attention on those harsh conditions have lately centered on the Foxconn electronics factory, manufacturer of Apple computer and phone products, after a rash of suicides by employees who could no longer endure their prison-like conditions. Foxconn executives showed their humanity and compassion when their response was to install nets to catch future suicide attempts. But as with Wal-Mart, Apple is far from alone in exploiting low-wage workers; in fact, these companies are the norm and not the exception.

Here are but three examples, each a separate investigation conducted by the Institute for Global Labour and Human Rights:

  • Workers at the Meitai factory are prohibited from talking, raising their heads or putting their hands in their pockets. They are fined for being one minute late, for not trimming their fingernails or for stepping on the grass, and are searched on the way in and out of the factory. Workers sit on hard wooden stools twelve hours a day, seven days a week, for a base pay of 64 cents an hour. The Meitai factory produces computer equipment for companies including Dell, Microsoft, IBM and Hewlett-Packard.
  • Workers at the Jabil Circuit factory work twelve-hour shifts, seven days a week — they are at the factory 84 hours a week. They are prohibited from sitting down and are paid 93 cents an hour. Workers who make a mistake are forced to write a “letter of repentance” begging forgiveness, which they must read aloud in front of all their co-workers. This factory produces circuit boards for Whirlpool, General Electric, Hewlett-Packard and Nokia.
  • Base wages at the Yuwei Plastics and Hardware Product Company are 80 cents an hour for 14-hour shifts performed seven days a week. During the peak season, workers toil 30 days a month, often drenched in their own sweat. Safety equipment is turned off to speed up production. The punishment for missing one day of work is to be docked three days’ wages. Yuwei produces auto parts for Ford, General Motors, Chrysler, Honda and Volkswagen.

These are the prices that millions of people are forced to pay so that more money can be distributed upward. The profits from these reductions on labor costs are distributed to high-ranking corporate executives and to shareholders. It pays to be cheap: Wal-Mart reported net income of US$16.4 billion on revenue of US$419 billion for its fiscal year ending on Jan. 31, 2011. Four members of the Walton family, descendants of the company founder, are each among the 22 richest people in the world, according to Forbes magazine — they are collectively worth 73 billion dollars.

One final thought related to Apple. The New York Times columnist Paul Krugman recently wrote that, although Apple is the largest U.S. corporation by market value, it employs only 43,000 people in the U.S., but indirectly 700,000 overseas through its subcontractors. By contrast, 50 years ago, General Motors was the largest U.S. corporation but employed ten times as many U.S. workers as does Apple. Those were union jobs, not sweatshop jobs.

Chinese workers make about five percent of what workers in the United States earn. I strongly suspect that Apple products are not sold at five percent of what they would be had they been produced domestically. Good for corporate profits, but not good for working people.

As wages are driven down further, who will be able to afford the products that are made? If wages fall below a level at which employees can remain alive, what does that portend for the future? That such a question can even be asked illustrates the insanity of our economic system.

Not so fast: The contradictions in China’s capitalist rise

By Pete Dolack

Hand-wringing over China increasingly seems to be a preoccupation of mainstream journalism, popular culture and the world of politics. In the past two years, China has passed Japan to become the world’s second-largest economy and passed Germany to become the world’s biggest exporter. Speculation abounds on when China will be crowned the world’s largest economy.

Among other forms, the decline of the United States can take comical or satirical forms in novels, Rick Moody’s Four Fingers of Death and Gary Shteyngart’s Super Sad True Love Story being two recent, outstanding examples. The plot of both unfold against a backdrop of a rapidly decaying United States at the brink of bankruptcy as the Chinese contemplate cutting off all credit, the former novel contemplating the human costs of economic free-fall layered over an absurd military gambit to salvage imperial prerogatives and the latter deftly using satiric exaggeration to lampoon the consumer fetishism that passes for U.S. popular culture. Laughing at the precipice is, arguably, better than crying.

Contemplation of the end of U.S. dominance can of course take much deadlier forms, such as the Bush II administration’s invasion of Iraq — a desperate ploy to re-assert U.S. military supremacy, impose a neoliberal paradise for its corporations, provide an economic and military base for the U.S. to assert itself over the Middle East and secure energy resources. Administrations from Nixon to Clinton had, in some form, carried out policies designed to slow down the incremental but steady relative decline of U.S. power in relation to the rest of the world, but such policies were tossed aside last decade in a mad gamble to restore undisputed supremacy. That the Bush II gamble backfired spectacularly cannot be in reasonable dispute; plunging the country into debt, wasting resources on military adventure, inflicting an appalling scale of casualties and engendering increased international willingness to oppose U.S. initiatives has instead accelerated imperial decline.

I think this is one critical reason for why U.S. corporate elites and their allied thinkers and policymakers split between Bush epigone John McCain and Barack Obama instead of their usual pattern of heavily tilting toward the Republican Party — the election of Obama promised a return to working with the allies of the advanced capitalist world instead of go-it-alone bull-in-the-china-shop adventures. That does not necessarily mean a less aggressive foreign policy as bombing campaigns in Libya, Yemen and Pakistan attest, but it does mean a more targeted use of the military, more consultation and more spreading of the costs and responsibilities, and therefore leading to a reduced burden and less instability, which are good for business. Wall Street in particular prizes stability. Therefore, the business elites who back Obama more or less got what they expected — a cool, steady hand at the helm of empire in which broader considerations are taken into account rather than a cowboy mentality that benefitted only a small, politically favored segment of Corporate America.

The general pattern of a relative decline in U.S. hegemony remains outside the ability of any strategy to alter. No country could possibly maintain the dominant position enjoyed by the United States in the years following World War II. Europe and Japan were in ruins, most of the rest of the world undeveloped and the U.S. possessed an intact manufacturing base and the ability to export its products around the globe. Europe and Japan rebounded, many other countries developed — sometimes in spectacular fashion — and there was much more competition.

But until the rise of China, there was no perceived direct threat to U.S. centrality. No single European country, nor Japan, was big enough to push the U.S. off its position at the apex of the global economy, and the centrality of the dollar in the Bretton Woods system and in the current era of free-floating currencies has cemented that status. An economically integrated European Union is not up to the task, despite the wishes of its industrial and banker architects, because there are too many centrifugal forces tearing at its foundation.

But now there is a country that seemingly has the potential to unseat the United States. But can China actually do so? Is Shanghai going to replace New York as the world’s financial center?

Let’s not hold our breaths just yet — China is not nearly capable today of becoming the new capitalist center.

Size matters. In earlier times, the seat of a small republic such as Venice could be the leading financial center based on the strength of its trading networks. Once capitalism supplanted feudalism, however, the financial center was successively located within a larger federation that possessed both a strong navy and a significant fleet of merchant ships (Amsterdam); then within a sizeable and unified country with a large enough population to maintain a powerful navy and a physical presence throughout an empire (London); and finally within a continent-sized country that can project its economic and multi-dimensional military power around the world (New York). China does have a population four times larger than the U.S., but its military and economy are much too small.

As the capitalist sphere grows larger and the problems of increasing complexity become more difficult, the capabilities of the center must become greater. Moreover, a center must be able to apply the force that maintains capitalism. There is no conceivable defensive reason for the U.S. to maintain military bases in more than 120 countries or to spend about as much on its military as all other countries combined. Such an overseas presence is a function of the force that has always underlaid capitalism: forcing open countries to trade, invasions and coups d’etat to ensure compliant governments, violent repressions against restive foreign populations and armed strike-breaking at home. There is no country or bloc that can meaningfully challenge U.S. military might in the near future.

Amsterdam’s reign as the financial center was doomed once the United Provinces (a precursor to the Netherlands) was soundly defeated in naval battles by the British, although Amsterdam did remain a significant financial entrepôt for some time. By the start of the 20th century, the U.S. had become the world’s biggest economy, and when it emerged stronger from the world wars while Britain emerged weaker, the U.S. became the global hegemon, although London remains one of the world’s most important financial entrepôts. History, however, does not repeat itself in neat patterns.

The rise of Britain and then the United States rested on exporting manufactured products and protecting their domestic industries. But unlike China, both also relied on internal consumer demand and had large areas of the world into which their corporations could expand; rising employee wages could be tolerated because of the ability of profits to grow in an era of expansion. In an era of mature capitalism, China is dependent on taking market share from others.

Success in doing that, so far, has enabled extraordinary trade surpluses, but the fact that much of that surplus is parked in U.S. Treasury bonds illustrates that China is nowhere near displacing the United States. On the surface, it appears as an irony that borrowing costs for the U.S. government are stable, or even falling, during a protracted economic crisis that originated within U.S. borders. But the centrality of the dollar, and the sheer size of the U.S. economy, makes U.S. government debt as reliable a safe haven as exists. If the U.S. government goes down, pretty much the entire global capitalist system goes down.

Only a currency that is fully convertible and represents the most rock-solid government guarantee could replace the dollar, and neither is the case with the renminbi. China in 2012 is a developing country and believes it must protect its young industries, just as other countries did during their rise. The advantage that China has over other countries is that, because of its vast trade surplus, it can afford to spend huge sums of money intervening in foreign-exchange markets to keep the value of its currency low, giving its exports a continuing advantage.

Doing so is really not so sinister; many countries, among them Japan, Switzerland and the United States, intervene in the markets to reduce the value of their currencies. (Despite the continual insinuations in the corporate media that the Chinese Communist Party issues decrees and, voila!, the renminbi is cheap, it requires continual heavy spending in foreign-exchange markets. You would think more corporate-media business reporters would be familiar with the fact that the Bretton Woods system of fixed exchange rates ended nearly 40 years ago even if Republican Party congressional members aren’t.)

Both the Bush II and Obama administrations maintained policies aimed at a cheap dollar; Obama’s goal of doubling U.S. exports in five years would be impossible without a dollar valued low against other currencies, thereby making U.S. products more affordable overseas. Nonetheless, China does this at a larger scale than other countries and is too dependent on exporting cheap products to stop doing so.

The production of cheap products is dependent on ultra-low wages, and that brings us to the contradictions within China’s capitalist rise. China’s low wages are based on ruthless exploitation of its rural population, and even China does not have a limitless supply of peasants able to move to cities to work in sweatshops. And even China has limits to how much manufacturing capacity it can rationally use.

Democracy is a historical accident of capitalism, not a prerequisite or something somehow built in. The spaces and contradictions contained within the political systems created to stabilize the functioning of capitalism (including institutions to adjudicate conflicts among capitalists and mechanisms for selecting political leadership in the absence of an absolute monarchy or the continued ascendency of a static landed aristocracy) enabled working people to wrest some of that democracy for themselves. Authoritarian capitalism is a model that has built industrial or trading powerhouses on small scales: Singapore and South Korea come most readily to mind. China is unique in that it is using this model on a vastly larger scale, and to become a global superpower, not simply a regional player as the others. South Koreans eventually forced a democratic opening from below through organizing; it is an open question as to whether a similar pattern will emerge in China.

Regardless of any possible democratic opening, if Chinese can’t buy the products that are produced with new capacity, what good is this extra production? For China to re-orient itself to producing for internal consumption would mean having to allow dramatic growth in workers’ income. But doing so would mean ending foreign capital’s reason to move production to China. China could try to switch to high-end manufacturing — to some degree, it is trying to extend its mix of production to do just that — but it doesn’t have the capabilities of non-Chinese companies that are already making such products and it would have to compete by muscling out foreign competitors.

As their own populations become more restless, foreign governments would not be able to stand by and allow themselves to be swamped by cheap Chinese imports. Moreover, the internal demand for such high-end products is limited within China, so it would be right back to having to rely on exports; much of China’s demand for high-technology products comes from government infrastructure projects and there comes a time when such a high level of investment ceases to be prudent and becomes wasteful spending, as has happened to Japan.

Another way out for China is what it seems to be intent on doing — buying foreign companies and buying interests in foreign operations. Yet it seems to be doing this not for investment purposes but to guarantee supplies for its internal markets as it is increasingly unable to meet its own needs, especially in energy. The Chinese certainly have the capital reserves to pursue this strategy, thanks to their massive trade surpluses and the large profits of their state-owned enterprises, but at some point will appear to be throwing their weight around, engendering resistance. Right now, Western capitalists see a market of 1.3 billion people and dollar (and euro and pound) signs dancing in their heads if they can gain access to it. But we come back to the fact that the production that has been moved to China from the West and other East Asian countries is based on extremely low wages.

The Chinese Communist Party can continue to apply repression to keep wages low, but such policies directly contradict its historic Mao-based ideology, which rested on the now-shredded social safety net known as the “Iron Rice Bowl” — an achievement not lost to collective memory. If the endless drip of scattered local rebellions organizes enough to force competitive wages, Western capitalists would still want to sell their products in China, but would produce at least some of them elsewhere. At that point, could China continue to grow its economy eight to ten percent a year? It does not appear it could. Chinese industry could step in and build new capacity, or acquire the capacity that Western capitalists abandon, but the upward pressure on wages would undercut China’s ability to export cheaply, and without much increased internal demand China would have a glut of capacity that would face shuttering.

China has limits, as all countries do, and if social explosions happen on a massive scale, none of us knows what the outcome might be. The party continues to apply repression to keep a lid on dissent. How long can it do so? None of us knows the answer to that, either, although it is interesting that U.S. capitalists who have moved production to China have an interest in continued Chinese “communist” repression at the same time that Chinese “communists” are now the most fearsome capitalist competition. Rivals who cannot let go of each other: The U.S. needs China to buy its debt and China needs the U.S. as an export destination.

My friend Paul Gilman, an activist-historian who has spent many years studying China, has said to me during our correspondence on this topic that Taiwan and South Korea’s right-wing dictatorships had to invest in the countryside to keep peasants even with the urban proletariat in terms of living standards to prevent revolutionary outbreaks, and that partially explains why Taiwanese and Korean workers were able to force large rises in wages, to the point where neither country can be used as low-wage havens for multinational corporations. (The militancy of those working people also helped.)

Two numbers will illustrate these points: The percentage of China’s gross domestic product that is household consumption (that is, all the things that people buy for personal use from toothbrushes to automobiles) is an extraordinarily low 35 percent and wages for Chinese workers held steady for a quarter-century at approximately five percent of U.S. wages.*

Let’s put those two numbers into some context. Household consumption accounted for 51 percent of the Chinese economy in 1985. To put that in further perspective, household consumption in the United States today is 71 percent and in the largest economies of East Asia and Western Europe it is around 60 percent. At the same time, the wages of Chinese workers have drastically declined as a percentage of gross domestic product during the past fifteen years, while the composite profits of Chinese corporations, private and state-owned, have nearly doubled. And one final comparison: Wages in Japan, South Korea and Taiwan started at less than ten percent of U.S. wages but rose quickly in comparison to world standards.

And that in a nutshell explains why so many manufacturers have shifted so much production to China. And why all those corporations headquartered in the U.S. and elsewhere who manufacture in China do not want change to come to China any more than do China’s coastal corporate elites, who decisively influence policy within the Communist Party. (Maybe we can just call it the “Chinese Capitalist Party” and end the pretense.)

One manifestation of that party policy is heavily concentrating investment in coastal industry while neglecting the countryside. Hung Ho-fung, a sociology professor who writes frequently about China, in a New Left Review article pungently titled “America’s Head Servant?: The PRC’s dilemma in the Global Crisis,” reports that rural per capita income has never exceeded 40 percent of the urban level during the past two decades. China’s countryside is arguably overpopulated, but government-party policy induces the exodus that has maintained downward pressure on wages.

Following a wave of strikes in China last year, some factories were forced to raise wages by as much as 50 percent. The U.S. corporate press simultaneously marveled that Chinese workers had “suddenly” organized themselves and were “no longer docile” while also wringing their hands on behalf of capitalists that China might no longer be a reliable low-wage haven. No need to worry just yet — 50 percent added on to five percent means seven and a half percent of world standards. That seems to remain a good deal for capitalists. It would seem that the Chinese political leadership decided it was prudent to let restless workers vent some steam, win a real concession (in relative terms) and thereby boil off (for now) the possibility of an organized challenge coalescing.

Eventually, the surplus army of labor will dry up, and Chinese manufacturers will face the same situation that Taiwanese and South Korean manufacturers began facing in the 1990s. Wages will have to rise, sharply, to at a minimum be competitive with East Asian living standards, thereby reducing the level of exploitation to a point intolerable to Chinese capitalists, and even more intolerable to multinational corporations operating in China. The Chinese export model, however, may have trouble before the countryside empties out because of its dependence on suppressing internal living standards, continually growing external demand and maintaining its currency valued low. The specter of inflation also looms, and China is interminably showing signs of tapping the brakes.

Meanwhile, the world probably cannot absorb much more Chinese production — the deep economic malaise in Europe and North America shows no signs of relenting, and may get worse. China has no choice but to create internal demand. But Chinese capitalists/Communist Party functionaries are getting rich on the current export model, and in a one-party system there is a built-in resistance to change and a security apparatus that can be used to stifle internal dissent.

Then there is also the degradation of the Chinese environment, another looming check on Chinese expansion. And, finally, one more element to think about: Can capitalism survive hundreds of millions of Chinese dramatically raising their material standards? This question may seem counter-intuitive, as conventional capitalist wisdom assumes that more is better, implicitly assuming a bigger market means bigger profits.

Expanding markets has been a critical factor in rising Western living standards in the past. But what happens when there are no more markets to conquer, and, more directly pertinent here, are there enough raw materials and energy to support China — or China and India — reaching the material standards of the advanced capitalist countries?

One economist who believes that the size of China is resulting in irreconcilable contradictions is Minqi Li. In his book The Rise of China and the Demise of the Capitalist World Economy, Professor Li argues that future demands by Chinese workers to raise their living standards will put catastrophic pressure on the rest of the world: Either the size of China’s labor market will force living standards down in other developing countries to China’s low level, causing vast unrest in those countries, or Chinese living standards do rise but in doing so reduce what is available for the rest of the world, driving down living standards and reducing the availability of resources elsewhere to intolerable levels. Moreover, Professor Li argues, there will not be enough energy available for the projected global demand before 2035 if the demand continues to increase at current rates.

Too pessimistic? Sorry, I have no happy ending to offer. Capitalism is a system that requires continual expansion: Expand or die is its remorseless law. Capitalism has in the past escaped depressions through expansion to new places. But there is almost nowhere else in which to expand. In the present crisis, private enterprises and governments continue to reduce workforces and cut wages and benefits. The products that are made cannot be sold because there is not enough income for working people to buy them; weak demand necessitates more cuts or moving more production to a new low-wage haven.

The world is in a vicious circle and there is no easy way out. Or no way out, other than by a better economic system — and creating one will require a tremendous grassroots struggle.

* Statistics in this and the following paragraph from the World Bank; Xinhua; and Hung Ho-fung, “America’s Head Servant?: The PRC’s dilemma in the Global Crisis,” New Left Review, November-December 2009