Monday, April 06, 2009

Strategies for Late-late-late Capitalist Development Part One

0. Introduction

The banking system is a crucial instrument in China’s strategic choice to pursue capitalist development. Since the opening-up policies of the late 1970s until today, banks have experienced significant reforms, from decentralisation in the 80s to recentralisation in the 90s. While these changes may have restructured China’s financial institutions in the past decades, they have not deviated from their original intent.

The country’s financial system, which is still dominated by the state, serves to disburse capital accumulated from the most successful non-state sector of the economy – hand-picked ‘winners’ plugged into China’s greater export-led growth strategy – to the state sector, i.e. the state-owned enterprises (SOEs). The ‘developmental’ character of the Chinese state has also used the predominantly state-owned financial institutions to redistribute available capital resources across regions.

The non-commercial function of the banking system, financing SOEs and incurring staggering losses on non-performing loans, is an institutional fix of the Chinese state’s management of its transition to what it calls a ‘socialist market economy.’ The SOEs serve as the powerbase of the Party leadership, as well as the State’s source of continuing legitimacy among its constituency – the working class. For this reason, successive governments from Deng Xiaoping to today were willing to shoulder these costs. Since Deng’s Open Door policy however, there have been successive attempts to overhaul the financial system so that it may operate on a more commercial basis.

Increasingly the impetus for further reform become more urgent as China prepares to open its domestic financial markets to the world. Other than domestic concerns, there is a growing consensus on the need for reform as China becomes an increasingly important player in the global economy.

The following discussion aims to characterise the strategies employed by the Chinese state as it has chosen to ‘transition’ into a more market-based economy, with an emphasis on the problematic and even contradictory roles played by its financial system – as a political resource and a commercial resource.

Deng Xiao Ping’s gradualist, ‘piecemeal social engineering’ has triggered the country’s transition to what it names ‘socialist market economy.’ Consequent congresses and leaderships have built on the policies of the late 1970s, and have explicitly put ‘development’ as top priority.

The Chinese state’s “developmental” character is examined in comparison to East Asian models. In which ways does it adhere to the model and in which ways is it different? And how do these differences translate into the State’s ability to regulate the economic reforms of the past three decades? And more importantly, how have economic adjustments made an impact on politics and vice versa?

1. The Great ‘Fall’ of China: A Synthesis

The 1960s were tortuous times in Chinese history, as they were for many countries around the world. The ideological zeal of Mao Ze Dong’s Cultural Revolution left in its wake not only a leadership deeply divided but a dilution of that which before underpinned the unfolding of its modern history. The certainty of victory in revolutionary movements (as in the Stalinist case) gave politics and history an engine with which to move forward. The fact that Mao conceded to the open-endedness of the revolution, even its defeat, generated a “pall” on the political machine.

Nevertheless, the victors of the Chinese leadership’s internal struggle put aside the momentary ‘hiccup’ of the Cultural Revolution and have not looked back since. Deng's principles of adhering to socialism, the dictatorship of the proletariat, the philosophy of Marxist-Leninist and Maoist thought, all co-opted and absorbed the ideological fragmentation within the Chinese Communist Party's re-invigorated and re-legitimised role as the ultimate embodiment of the state. The continuing process of assuring the Party’s continued legitimacy and the state’s re-calibration as a result of its enmeshment in the global economy will be further discussed in the second section.

Under Deng’s leadership, China began its tentative embrace of what was once its antithesis – capitalism. The Dengist regime’s open-door policy on the level of industrial policy-making and the espousal that “To get rich is glorious” were signals to the international community that China had taken a more pragmatic view of the world than its Soviet comrades. The short-comings of the Soviet Union’s centrally planned economy had become evident by the late 1970s vis-à-vis the capitalist sphere. Growth hit negative levels in the eve of the eventual Soviet collapse (White 2000). These stresses, coupled with the sudden political reforms of the Gorbachëv era, finally led to the demise of Capitalism’s ideological foe.

Without going into the nitty-gritty of how the reformist under Deng were able to seize state power, from a systemic level it is apparent that China chose to play the capitalist game given the geopolitical and geoeconomic context of the ‘winding down of history’ in the late 1970s to the final ‘end of history’ in the late 1980s.

Viewed from the lenses of history, the changes of the past few decades seem nothing but revolutionary. However closer scrutiny will show the prudence of ‘feeling the stones’ as China entered into heretofore unknown territory. This prudence continues to be exhibited today.

The 14th CCP Congress in 1992 finally gave the ongoing reforms a name - a “socialist market economy with Chinese characteristics.” Communist China has well and truly embraced its capitalist foe. In thirty short years it has become the ‘world’s workshop’ in this new century. The illustration below neatly summarises China’s centrality in today’s global commodity chains.

Thus began the meteoric ‘rise’ of China’s economic growth. Between 1979 and 2005 average, it maintained an unprecedented average growth rate of 9.6 percent. Post-WTO membership, its economy is 70 percent bigger from 2001.

China now openly espouses that ‘development’ in a peaceful context is its ‘strategic choice’. This development is now understood as capitalist development, being played in Chinese terms.

Historically, the modern State has played key roles in capitalist accumulation in the Western experience. It is also observable that “the later a country embarks on the path of capitalist development, the stronger is the need for state intervention to make capitalist accumulation successful.” This has been demonstrated by the experience of ‘late’ capitalist developers of the 19th century – the United States, Japan and Germany and the ‘late, late’ developers of the 1960s – South Korea, Singapore, Taiwan and Hong Kong.

Its transition into what can be characterised as ‘capitalism’ has been managed and regulated by the CCP. The Chinese state is now being tagged as the latest incarnation of the Asian developmental state model.

2. East Asian Developmental State…with Chinese characteristics

Chinese scholars also recognise three models of development - namely the Anglo-Saxon mode, the continental European mode, and the Asian mode. The last has been judged “the most suitable” to Chinese needs, and this was predominant in the thoughts of Chinese reform strategists from the very beginning. Among the Chinese intelligentsia, there were defenders of the first two models. However in the end it was recognised that the experience of Western Europe and the United States could not be copied. These countries accomplished industrialisation under different historical circumstances.

The scholarship on the East Asian developmental state charted initially the rise of Japan and later the newly-industrialising countries (NICs) of Singapore, Taiwan, Hong Kong and South Korea. The developmental state approach, in the scholarship of the 1980s, was essentially a theory of economic growth.

Observers claim it this same path that has inspired China in its transition away from the Soviet-style centrally-planned economy which was failing not only externally in terms of competition with capitalism but domestically in terms of a working provision of even the most basic of commodities. This ‘inspiration’ is perhaps best illustrated by Chinese authorities in the 1990s expressing that they wanted to create firms in the mould of the South Korean chaebols. These firms were envisioned to be listed on Fortune magazine’s largest enterprises by the year 2000.

The Chinese state exhibits the characteristics of the archetypal developmental state. Not unlike the imperial period’s bureaucracy of mandarins, it is manned by technocrats. The State itself, being an autarky, enjoys relative autonomy from society. Since Deng’s regime, it has put development as the top priority. And lastly, it is ‘dirigiste’ in character, intervening in the planning and implementation of economic policies, the orchestration of preferential loans with target industries, the creation of monopolistic enterprises and the selection and protection of market winners.

Some of the characteristics shared by China with other East Asian developmental states include, having the US become a major export market, strong control of fiscal and monetary policies, state control over key industries and a high savings rate. Japan and Korea also picked industry winners and lent them support through banks. While China shares similarities to Southeast Asia's FDI-led export strategy, the key difference is in China's SOEs dynamism in the economy. China effectively practiced a dual economy – the SOEs and the non-state sector.

But the Chinese developmental state differs from the Asian model in a number of ways. Unlike the development strategy of Japan which sought to protect domestic markets while promoting exports, China’s industrialisation was largely externally-driven. It has been willing to exploit the opportunities presented by economic globalisation, while shielding selected key industries - the machinery, electronics, petrochemicals, automobile, and construction sectors. It is thus qualitatively different from the classic Asian export-led model of development, as its main engine is FDI.

The Chinese developmental state has also had to adjust to a different geopolitical and geoeconomic context compared to the other East Asian states. It is engineering its take-off in an environment of highly-regulated and rules-based global trade regime. South Korea, Taiwan, Singapore and Hong Kong industrialised and completed their integration into the global economy prior to the existence of the World Trade Organisation.

Adhering to the rules of the current global trading regime has qualitatively changed the Chinese state’s regulatory framework. Because China lobbied for fifteen years to join the WTO, this means it was willing to pay the institutional costs needed to join, as it were, the club. For example, a restructuring of the government was initiated in 1998, shrinking the bureaucracy from eighty ministries to less than thirty. This reform shrank and centralised industry ministries to just one – the State Economic and Trade Commission (SETC). Further, this institution was scrapped later on and merged with Ministry of Foreign Trade and Economic Cooperation to form a new Ministry of Commerce. There have also been proposals to scrap the constitutional definition of China as a “people’s democratic dictatorship” as this “contradicts the spirit of the World Trade Organization and the requirements of globalization.” The reasons behind China’s institutional concessions will be explored in further detail in the fourth section.

Lastly, the Chinese developmental state, unlike the others, has to manage the ‘duality’ of its economic system. It exhibits both two seemingly opposed strategies - it follows the market-oriented structures of neoclassical economics, the same model lauded and promoted by the World Bank. At the same time it has followed the developmental state model - i.e. heavy public involvement in the economy.

As a result China has built a dual economy - the SOEs supported by government funding, and the dynamic FIEs and emerging private sector. The re-calibration of the state’s institutional capabilities is difficult in the financial system because this would entail, first and foremost, a reform of the SOEs. Up to 80 percent of total bank loans and up three-fourths of all bank loans are absorbed by these SOEs.

The non-state sector has been outperforming the state sector in the past decade. But why has China subsidised this sector through loans?

In Reforming China’s State-Owned Enterprises and Banks, authors Chiu and Lewis propose the following factors (2006: 9-12):

1. While SOEs have had a decreasing proportion of total industry output since 1980, they still posted strong economic growth.

2. SOEs still account for 32 percent of employment in urban centres. The provinces of Liaoning, Jilin and Heilongjiang (China’s version of the rust belt) derive 70 percent of GDP from local SOEs. Heavy industry and technology are still largely state-owned. All other sectors rely on these SOEs for basic productive inputs.

3. While the number of SOEs have officially shrunk, many other non-SOE are in fact “mutations” of the former. 80 percent of the 1,300 largest companies listed in the stock market were once SOEs or offshoots of SOE holding companies, and remain majority government owned. A good percentage of foreign-invested firms (FIEs) are joint or cooperative ventures with SOEs.

4. SOEs’ reforms are also dependent on SOEs’ reforms.

5. Foreign firms funded by FDI contributed 30 percent of gross output in. FDI from overseas Chinese was a response to the lack of domestic financing for mainland Chinese non-state enterprises.

6. SOEs are politicised – they serve more than just commercial functions but a combination of socio-economic and political ones. SOEs continue to provide housing, health and other social welfare benefits to current and past workers. Similar to the PLA, which has a military as well as political leader, SOEs have a CCP party committee attached and is headed by a Secretary who has equal rank as a CEO.

A reform of the SOEs – owned by central ministries and local governments - would entail counterbalancing the interests of the Chinese state’s domestic constituencies, essentially its powerbase, with the interests (and discipline) of global capital. On the one hand are the workers and local government administrators of the state-sector and on the other are nascent domestic and foreign capitalists of the private sector. As Minxin Pei argues in his seminal work China’s Trapped Transition: the Limits of Developmental Autocracy, eliminating loan losses means eliminating the existing system on which politicians and their constituents rely (2006).

SOEs are the economic basis of the State’s power. Thus, Chinese leaders often remark that the development of SOEs is related to the future of the CCP. Also, factors including the scale of SOEs, their importance in the national economy and the role of social stability, determine that SOEs relate closely with the political future of the CCP. So, the State devotes great attention to SOEs because of the considerations of the political ruling group. Although traditional SOEs are inefficient, they could not be allowed to become bankrupt (Yang 2006: 54).
This counterbalancing is further reflected in the institutional fix of “Three Represents” which enable the State to legitimately harness the non-state sector’s productive capacities on behalf of the ‘majority.’ Amendments to the Consitution were made in 1993, 1997, 1999 and 2004 to legitimise the non-public sector and indeed the market economy, with the State. To accommodate the increasingly influential non-public sector, they have been incorporated into the state by becoming members of the CCP. The percentage of private enterprise owners who are also Party officials rose from 13.1 percent in 1993 to 19.8 in 2000. For the first time, eight Party officials from the private sector were present in the 9th Guangdong Provincial Congress convened in 2002.

“Three Represents” neatly sums within the CCP, on behalf of the State, the most ‘advanced social productive forces (economic production), the ‘progressive course of China’s advanced culture’ (cultural production) and the ‘fundamental interests of the majority’ (political consensus) (Zemin 2002). While China may seem unchanging to the causal observer, headed as it is by an ‘outmoded’ authoritarian regime, the ongoing internal changes and ‘experimentation’ in governance has been a fascinating study of modern statecraft.

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