Some Reflections on China’s Economic Performance Prabhat Patnaik

The fact that China has had a remarkable economic performance over the last two decades or more is absolutely undeniable. She poses a potential challenge to the hegemony of the mightiest capitalist economy of our time, the U.S. This cannot but be welcomed by all progressive people, since it breaks the unipolarity of the current power structure in the world, and hence can act as a restraining force on imperialism.

There is however another side to China’s economic performance which is a source of some disquiet. While China has experienced rapid economic growth, enormous improvements in the material productive forces, and hence has emerged as a big economic power, her achievement in terms of improving the welfare of the people has clearly lagged behind. True, she may not have poverty on the scale we have in India. True, the Chinese population may not experience absolute deprivation to the extent that one finds in other third world countries of Africa and Asia. But, two points can be safely made: first, her remarkable achievements in terms of economic growth have not been transformed into anything like commensurate welfare improvement of the people, as had happened in the Soviet Union even in the face of enormous strains; and secondly, considerable deprivation still exists in China.

It may be thought that the persistence of deprivation in China is only a temporary affair, something that would vanish the moment the authorities decide to use the great material achievements of that economy for the benefit of the people; that China is at the moment simply concentrating on growth, and will take up the issue of distribution in due course; and that it is all a mere matter of sequencing. This however is wrong in my view for two reasons: first, in any growth process, no matter how it is propelled, if the distribution of the benefits are highly uneven to start with, then the beneficiaries of this process become crystallized into a strong vested interest opposed to any future effort at redistribution; hence the idea of “growth today and distribution later” is an untenable idea. Secondly, the nature of Chinese growth, which relies heavily on external markets, has an intrinsic tendency to breed social inequality, and consequently the persistence of deprivation. The elimination of such deprivation will come in the way of the sustenance of this growth performance itself on the basis of the current strategy. Of course this growth performance on the basis of the current strategy may collapse for other independent reasons anyway, such as a slump in the capitalist world economy, on which China has become so heavily dependent; or the imposition of protectionist restrictions on Chinese goods in the markets of the advanced capitalist countries. But even if none of these factors intervened, and even if the impressive growth performance of China continued, nonetheless the deprivation we notice in China would still continue, since the logic of the Chinese growth strategy entails the persistence of such deprivation.

The reason is as follows. While China’s growth is propelled by the growth of manufacturing exports, China is not the innovator of the technologies used in these manufacturing sectors. The success of China’s export drive arises therefore from the fact that she can produce manufactured goods at much lower prices than in the West, even while using the same technologies as are available in the West. In other words, she is a successful exporter because her effective wage rate is significantly lower than in the West. If this gap in wages between China and the West got closed, or even significantly narrowed, then her growth strategy will no longer be successful. Now, in the West in the current epoch of “globalization” the wage rate of workers has been virtually stagnant. As a result, Chinese wage rates, which necessarily have to remain persistently lower than the Western ones for the success of her export-led strategy, cannot increase much either. No matter how high the rate of growth of labour productivity in China in the export sectors, since this rate of growth of labour productivity is more or less what obtains in the West (because China is not an innovator and only adopts technologies innovated in the West), the growth rate of China’s wage rates cannot move out of sync with that of Western wage rates. If the latter are stagnant then so must China’s be, even though labour productivity everywhere is rising at a fantastic rate.

This is exactly what we find happening. Even though Chinas manufacturing sector has a growth rate of nearly 12 percent per annum over the last several years, her rate of growth of manufacturing employment has been no more than 1 percent over this same period. The reason is that her rate of growth of labour productivity in the manufacturing sector has been extremely high, around 11 percent. And an important contributing factor towards this is that, whether China likes it or not, she has to keep adopting technological innovations introduced in the West, which typically tend to be labour-productivity-augmenting (as Marx had argued), if she is to remain a successful exporter, and that these innovations, once introduced in the export sector then spread to the rest of the economy. In short, once China has opened herself up to unrestricted international trade, she has little control over the pace of structural-cum-technological change in her economy. But this implies, first, that she continues to be afflicted by unemployment, under-employment and the existence of huge unabsorbed labour reserves, notwithstanding her extremely high growth rate (unlike the Soviet Union and the Eastern European countries which, by cutting themselves off from the world economy, had succeeded in absorbing their labour reserves and had even experienced labour scarcity); and secondly, that she continues to have low and relatively stagnant wages, notwithstanding the high labour productivity growth, since wages in the competing sectors are also stagnant in the West.

All this is not to say that there is no scope for any increase in wages, but that the constraints of an export-oriented economy restrict this scope. There is however one other obvious way that the welfare of the Chinese people could be increased without impinging on her international competitiveness. And this is by increasing not the wage rate paid to workers by the enterprises, but by increasing the social wage, through for instance the provision of collective consumption facilities. China, as is well-known, has accumulated huge foreign exchange reserves. Unlike the foreign exchange reserves of India which have been built up primarily through the inflow of foreign finance, China’s reserves have come mainly from her own enormous current account surpluses. China in short is lending huge sums of money to the advanced capitalist countries, especially the U.S. If instead of handing over a part of output each year to the advanced capitalist economies of the world, and holding their IOUs in the form of reserves, China could use her resources for enhancing transfer payments to the working people and for public investment for enhancing collective consumption (both these avenues together enhance the social wage), then there could be substantial improvement in the quality of life of the people. But this will entail a reduction in her export surplus, and hence possibly in her exports. China’s export-orientation makes her persist in adding to her reserves instead of enhancing the social wage.

China is not the first country to do this. Earlier when Germany and Japan used to run huge export surpluses vis-à-vis the United States, they too were averse to enhancing domestic demand instead of piling up foreign exchange reserves. This represents a neo-mercantilist outlook, which goes with a desire for economic strength in preference to an improvement in the welfare of the people. China too is afflicted by the same desire, born perhaps out of a strong sense of nationalism, but clearly distinct from a socialist outlook.

Unlike what the Indian neo-liberals suggest, what characterizes China’s strategy is not neo-liberalism but neo-mercantilism. Not only is there, contrary to neo-liberal tenets, no significant opening up as yet to international financial flows (as distinct from FDI), which enables the State to retain its autonomy vis-à-vis international finance capital; but there is an emphasis on export surpluses reminiscent of mercantilism of yore.

Of course, all this may change. There is no one single strategy that one can identify as China’s “reform” strategy. Even within the post-Mao period, China’s “reforms” have gone through several changes. First, it was a case of expanding agricultural production through breaking up the communes, even while retaining communal ownership over land and communal control over water-works. This was a period when industrial growth was essentially home-market-based, and hence agriculture-based. Subsequently there was a shift of emphasis towards Township and Village Enterprises which catered to the export market but on the basis of local production with relatively simple technology. In the later period there has been greater emphasis on the special economic zones and somewhat more sophisticated production technologies. Indeed in contrast to the first phase of post-Mao reforms, when the peasantry was a beneficiary, we now have a situation where China’s economic strategy has led to peasant resistance. (There were 79000 incidents of clashes between the militia and the peasantry last year, which made the Communist Party of China adopt its policy of building a “socialist countryside”, entailing larger expenditure in the countryside). Likewise there have been significant changes between the Jiang Zemin era and the Hu Jintao era. So, whether China’s growth strategy continues to be neo-mercantilist remains to be seen. But neo-mercantilism necessarily implies in the current context, i.e. in the context of high unemployment and stagnating wages in the advanced capitalist world, a persistence of deprivation among the people.

The clearest evidence of such deprivation is to be found among the workers. The condition of miners working in the numerous private mines that have mushroomed all over China, encouraged by local governments, is well-known. It is only recent intervention by the central government that has succeeded, according to Chinese official sources, in bringing down somewhat the very large number of mining deaths. The migrant workers constitute another significant site of deprivation. There are 180 million migrant workers in China who work in the cities but have not permanently severed their ties to the countryside. They work in extremely difficult circumstances, have dwellings that are 3metres by 3 metres per capita, and are without much social security or trade union rights. The migrant construction workers were not even paid for a long time by unscrupulous private employers, but the State is now taking some steps to make the employers pay both current wages and the arrears.

There is a view within China that if land is made a saleable commodity, through the transfer of ownership rights to individual households, then the migrant workers can sever their ties from the countryside by selling off their land, and can become a permanent urban-dwelling proletariat, which would improve their social position and bargaining strength. Others disagree, and argue that this would remove whatever social security that access to land-use still provides the Chinese rural population, and hence even the migrant workers, as a legacy of the Chinese Revolution; they see it as a measure of counter-revolution which would lead to large-scale expropriation of peasant property by a new segment of urban rich, keen on benefiting from the construction boom and from real estate speculation.

What course China takes in the months to come remains to be seen. But those who talk of a “Chinese model” and eulogize it, usually as a means of pushing neo-liberal policies in our own country, are way off the mark. China herself is engaged in an intense debate about her development trajectory, which perhaps is the most positive aspect of contemporary China, much more so than her growth rates.