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The Chinese model and the manufacturing of its development

Ilustración realizada por el autor del artículo

Note: As the author of this article I am indebted to Reilly Zandes for assistance in English writing.

China has become an enigmatic economy. Its impressive economic growth sustained over time has summed to a huge size and has driven the country toward its transformation into a powerhouse economic pole that competes with the rest of the industrialized nations.

Although it is true that China has relied on low wages, as has been the case of all countries that have sought capital accumulation, its economic model has more than proven to be a success: its accelerated growth rates have been recorded along with substantial technological change. All of these changes have made possible a strong poverty reduction (Lin, Fang y Li, 1998) with real growth rates of wages, something that was stated by Marx (1865) when he recognized that capital accumulation brings about the strengthening of workers’ bargaining power over their wages, although such a favorable position does not last forever.

In the Little Red Book, Mao Tse Tung (1966) acknowledged that saving is a key element for output expansion. Today there is little doubt that savings and the extraordinarily high investment rates have allowed the fast economic growth of China (Knight & Ding, 2009). The allocation of resources to the expansion of the productive capacity is a common element of any economy that accelerates.  However, many international experiences have shown that for such an expansive dynamic of investment and long-term economic growth to take place, it is necessary for capital accumulation in the manufacturing industrial sector to rise the technological ladder (Chang, 2003; Chang, 2007; Chang, 2010), as is the case of East Asian countries, including China (Lin & Chang, 2009).

 

The mixed Chinese model

China took advantage of the following two elements. On one hand, it tapped into the market advantages of producing goods with exchange value (price and profits), where there is competency between private companies and also, individual enrichment. On the other hand, it stepped up on planning and State-owned enterprises (SOE) production, where the State monopolizes the production of goods with use-value to cater to the needs of the population without individual enrichment. In this sense, China has used both hands, as it was stated by John Ross (click here); the visible hand of the State and the invisible hand of the market.

China learned from socialist camp mistakes and set market reforms before the Soviets, and in the midst of their popularity joined by socialism, it permitted hold of political stability and national independence under the Communist Party’s rule (ibid).

It seems like the Chinese model is the logical development of the guidelines once made by Mao Tse Tung, who in his criticism of Stalin, (click here)  pointed out that in socialism, private ownership is to be maintained despite economic planning. In that way, as long as the capital goods are under the command of the bureaucracy, the consumer goods should be under the market logic.  The Communist Party of China took control of the main industries, and delegated the remaining industries to the capitalists, who seek the profits ruled by the law of value, having acknowledged the difficulties of planning these industries by virtue of the size of what is planned. The bureaucracy can define the use-value of the heavy industry and infrastructure, but it is unable to plan the huge amount of consumer goods, given the fact that it is not possible to define their use value (click here to see the article of Saikat Bhattacharyya about the topic).

Besides, in Mao’s view, such a commodity production in a socialist context is a commodity production that serves the socialist project. So what the Chinese have done, is to use the production of commodities, while maintaining the planning of the economy and key production of goods by the State; as it was stated by Mao (2004) nine years after the revolution in 1949:

The law of value does not have a regulative function. Planning and politics-in-command play that role… In our society the law of value has no regulative function, that is, has no determinative function. Planning determines production, e.g., for hogs or steel we do not use the law of value; we rely on planning. P.9

So, the market reforms of 1978, which allowed foreign direct investment to enter China, would be the continuation of a guideline already plotted, but this time based on the foreign production of commodities through international trade.

The market reforms, despite being in a country controlled by the Communist party spelled good business for foreign capitalists, who saw China as a big market of producers and consumers to profit from. Thus, the Chinese took advantage of the foreign direct investment, conditioning it for multinationals to transfer knowledge and technology with the purpose of learning and updating the economy.

The capital accumulation and the productive capacity are guided by production criteria driven by profitability, instead of by allocation decreed from above without economic criteria by the political bureau.  Data provided by Knight & Ding (2009) shows evidence that the investment, measured as a share of the GDP, between 1995 and 2005 was made mainly by the enterprises (around 29%), followed by the households (by 5%), and the government (which rose from 2.8% to 4.1% throughout the time).  From another perspective, if the investment is broken down by sector, the enterprises account for three-fourths of the total invested. Moreover, the private companies between 1994 and 2003 did not get to share in the State budget, while the state-owned enterprises and the collective owned enterprises were funded by 11% and 5% by the State respectively.

Lin (1998, 2004) argues that the Chinese strategy lies in the exploitation of the comparative advantages identified by the market and supported by the State. Labor-intensive industries were built given the large disposal of relatively cheap labor that allowed China to compete in the international markets and get a surplus to invest. Years later, along with the capital accumulation, China has become competitive in capital-intensive industries with much more technological sophistication.

 

Manufacturing as leverage for development

China belongs to the historical pattern of countries that industrialize thanks to State intervention (Chang, 2003, 2007). From a theoretical perspective, it can be argued that the State can play the role of the coordinator of industrial activities and channel the economy towards an industrialization equilibrium, with high productivity, with increasing returns to scale (Murphy, Shleifer, Vishny, 1989).

China has delivered a high level of industrialization, measured by 32% of the added value of manufacturing as a share in the GDP between 2004 and 2011 (click here to see data). Although it is true that manufacturing progressively loses share in total production, it still remains above the figures in Japan, Singapore, Switzerland, and, Germany; four of the most industrialized economies worldwide.

At least until the end of the ‘90s, China prioritized its production targets and employment levels over the profitability objectives, keeping its State-owned enterprises and holding its soft-budgets constraints policy to sustain the high levels of investment. After that, the reforms in the public sector came in the form of privatizations as a way to increase profitability (Knight and Ding, 2009). Nevertheless, China never abandoned its industrial policy, as it has been stated in 2018 by the White House Office of Trade and Manufacturing Policy of the United States, when it cataloged such a state intervention as a threat that distorts international prices.

In sum, the Chinese strategy consists of keeping the investment and output backed by the State, allowing the learning-by-doing process of workers through the accumulation of production in the manufacturing sector, which is characterized by its high productivity rates, and delivering its products through the external market, (Knight y Ding, 2009) while keeping the profitability and creating surpluses by way of the private sector (Lin Y Chang, 2009). It is in this way that China would have achieved the structural change that is reflected in its technological upgrade, making economic but no political concessions, as was once done by the Bolsheviks (Bukharin, 1921); restoring capitalism. The Communist Party of China holds the central ruling of the economy instead of a bunch of magnates ( click and click to read about the wealthy people in China and Jack Ma).

 

 

References

 

Bukharin, Nikolai. The new policies of soviet Russia, Chicago: C.H. Kerr & Co., 1921, pp. 43-64.

Chang, Ha-Joon (2003). Kicking Away the Ladder: The “Real” History of Free Trade

Chang, Ha-Joon (2007). Bad Samaritans: the myth of free trade and the secret history of capitalism. Bloomsbury Press.

Chang, Ha-Joon (2010). 23 things they don’t tell you about capitalism. ALLEN LANE an imprint of PENGUIN BOOKS

Knight, John. y Ding, Sai (2009). Why does China invest so much? University of Oxford.

Lin, Justin (2004). Lessons of China’s Transition from a Planned Economy to a Market Economy. Peking University and Hong Kong University of Science and Technology

Lin, Justin. Fang, Cai. y Li, Zhou (1998). The China miracle: development strategy and economic reform.

Lin, Justin. y Chang,  Ha-Joon. Should Industrial Policy in Developing Countries Conform to Comparative Advantage or Defy it ? A Debate Between Justin Lin and Ha-Joon Chang. Development Policy Review, 2009, 27 (5): 483-502

Mao Tse Tung (1966). Quotations from Chairman Mao Tse Tung. The little red book. Foreign Language Press: Pekin.

Mao Tse Tung (2004). Critique of Stalin’s Economic Problems of Socialism in USSR.

Marx (1865). Salario, precio y ganancia. Editorial Progreso Moscú.

White House Office of Trade and Manufacturing Policy. (2018). How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World. Recuperado de https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf

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