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A Dying Model: Chinese Capitalism

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China Power

A Dying Model: Chinese Capitalism

China’s impressive growth is based on cheap labor, high levels of investment, and Western exports. Can it survive?

Since the 1980s, China’s economy has grown rapidly with an average annual growth rate of real GDP at about 10 percent.  Today, the Chinese economy is the world’s second largest and is set to surpass the U.S. to become the world’s largest economy by around 2015 when measured by purchasing power parity.  However, various economic, social, and ecological contradictions have accumulated in recent years and China’s current model of capitalism is unlikely to remain viable beyond the medium term (defined as the next ten to fifteen years).

China’s economic growth has been based on the intense exploitation of a large cheap labor force, unusually high investment rates, and exports to western markets.  As the global capitalist economy struggles with stagnation and crisis, China’s exports will achieve at best sluggish growth in the coming years.

Investment has risen to about 50 percent of China’s GDP.  The excess investment has reduced the rates of return on capital and threatens to undermine China’s financial system as much of the investment has been financed by bank loans and other forms of debt.  A more sustainable level investment is probably around 30 percent of GDP.  However, to lower the investment by about 20 percent of GDP, household consumption needs to rise by a similar magnitude.  Most households depend on wages as their main source of income.  Thus, for household consumption to rise by 20 percent of GDP, a large portion of the national income (between 15 and 20 percent of China’s GDP) needs to be redistributed from the capitalists to the workers.  This is likely to face strong resistance from China’s capitalist class.

In this context, a serious debate has emerged in Chinese society.  A growing number of Chinese intellectuals and social activists argue that China needs to rethink its free market-oriented economic reform.  Public ownership of the means of production needs to be revived and income and wealth need to be redistributed from the wealthy to the poor in order to enhance social stability.  These intellectuals and activists are known as the “New Left.”  Many of them are also known as the “Maoists” as they tend to have a sympathetic perspective on China’s Maoist socialist past.

In the early 2000s, the Maoist social base was limited to older state sector workers who suffered the most during the privatization in the 1990s.  But in recent years, with rising economic and social inequality, the Maoists have gained support among the urban middle class as well as a newer generation of the Chinese working class.

Partly encouraged by the growing influence of Maosim, Bo Xilai attempted a moderate social reform agenda while he was the Party Secretary of the city of Chongqing.  Bo Xilai cracked down on organized crimes with connections to the local capitalists, increased investments on social housing, and promoted “simultaneous developments” of state owned and private enterprises (rather than outright privatization as has been practiced in many other parts of China).

Therefore, the recent purge of Bo Xilai is politically significant.  It suggests that the “Communist Party” is determined to push forward with further free market-oriented economic reforms without serious social reform.  While such a course might benefit Chinese capitalists in the short run, it is set to further intensify China’s various contradictions and potentially prepare the conditions for a general social explosion in the not very distant future.

Historical experience from Brazil, South Korea, and Poland suggested that when a country’s non-agricultural labor force increased to more than 70 percent of the total labor force, the working class was likely to emerge as a powerful political and social force, demanding higher wages, social welfare, and political democracy.  China’s non-agricultural labor force currently accounts for about 60 percent of the total labor force and its share has been rising at an annual rate of about 1 percent.  At this rate, China’s non-agricultural share of labor force could exceed the critical threshold of 70 percent by around 2020.  If China’s current capitalist system fails to accommodate Chinese workers’ demands by then, a general economic and political crisis will be highly likely.

Chinese capitalist development has taken place at the cost of massive environmental degradation.  According to the latest Living Planet Report, China’s ecological footprint is already more than twice as much as China’s own bio-capacity.  China’s has some of the world’s most polluted cities and about 40 percent of China’s land has already been degraded.  According to a report prepared by the “2030 Water Resources Group,” China could face a water deficit that amounts to 25 percent of China’s projected water demand by 2030.

Thus, in the next one or two decades, economic, social, and ecological crises are likely to converge in China, leading to the downfall of China’s current capitalist model.  How the crises will be resolved will have enormous implications not only for China’s future but also for the entire planet.

Dr. Minqi Li is an Associate Professor in the Department of Economics at the University of Utah. He is the author of The Rise of China and the Demise of the Capitalist World Economy (Monthly Review Press, 2009).