China, Crisis or Structural Change?

The slowdown in Chinese growth (from 10% to 6% of annual GDP) incites commentaries in Western press regarding a crisis in this Asian country. Faced with stagnation and the crisis of the Western social, economic, and political system, the Chinese alleged misfortune (perversely) encourages Western spiritless elites. Largely, it involves a projective defense mechanism, those that once Freud used to study. Two in distress make sorrow less, the saying goes. Reality is different: China is transforming from a factory with cheap labor force exporting surpluses to the world to a modern society of services and innovation, focused on better domestic living standards with sustainability. Challenges are huge but are no match to the Western impasse. Certainly there are motives for worrying in the West: China’s change accelerates current crisis in Europe and decreases US world power. Latin American countries must also adapt to this new reality.

 

The Chinese have a popular curse that goes: “May you live in interesting times.” Bad news: we have entered a very interesting historic period—and particularly China is at the center.

The prevailing globalization model is cracking. Neoliberalism had to abandon its promises. In particular the free-trade and financial imperialism is being whipped all over the place. At the same time the systems that opposed it today are breaking down. Among gthe reat powers, US recklessness in foreign policy threatens to diminish its hegemony in the Middle Eastern quicksand. That region’s implosion accelerates the rupture of the European Union. The opportunism of middle powers, Russia, Turkey, Iran, encourages the regional disequilibrium in the Mediterranean. Germany is losing control over Europe and Europe in turn is rapidly losing its ability to act together. Africa, that retains a great development potential, is impeded by intertwined tribal conflicts and above all by the colonial aftermath and the interests of central countries to have access to the African natural resources. Latin America vacillates between two failures: that of an ultra-neoliberalism and the electoral failure of popular-base governments that corrected those excesses. The country that weighs more in the region—Brazil—is still not able to overcome an acute governability crisis. With few exceptions, all these countries stumble today at the rhythm of the tango “Los Mareados” (the dizzy ones). Frankly, it is a far from a promising picture.

In many regions of the world we will have to live with the resurgence of protectionism, reactionary nationalism, and an adventuresome foreign policy. We know that the tendency towards self-absorption, “staying at home,” “living within our means,” and care only about “people like us” (likeminded people and from the same upper class segment) is unviable and a multiplier of conflicts. But that is the most likely reaction in the short and medium term.

In this inward race only three countries are capable of leading, because of their geographic location, the size of their internal market, their resources (natural, technological, and human), and because of their strategic depth in terms of security: the United States, the People’s Republic of China, and the Russian Federation. For reasons I will develop in a forthcoming book, neither the US nor Russia are able to react creatively to the aforementioned globalization crisis. The US suffers from an external strategic impasse and an internal political impasse, which delay the arrival of a new phase in economic and social development. The Russian Federation is not able to compensate the deindustrialization that succeeded the collapse of the Soviet Union with a model dependent on the export of natural resources. In this article I will focus on examining the perspectives for the third country of the geopolitical troika: China.

In my view, only China is seriously addressing the challenge of changing its model of economic growth, keeping as much as possible the global profile in every sector but at the same time shifting towards an economy with a different composition of its GDP. I risk saying that, compared with other strong countries, China is a pioneer now. Its strategy is now directed towards a service economy with a more advanced and innovative technological profile. In particular, I quote essays from a Brazilian sociologist Anna Jaguaribe that I use as script for this article (see “Estratégias de Governança no século XXI: Observações sobre os novos desafios da China,”  IBRACH, Institute for Brasil-China Studies, January2016)

For thirty years, the Chinese economy grew at an annual average rate of 10% –quite a record in the world’s economic history. I dare saying that this large country has entered a third phase in its development. The first one, under the communist system sponsored by Mao was, to my understanding, the historical equivalent of what Marx called the phase of primitive accumulation. The second, under Deng’s sponsorship, experienced with State capitalism and foreign investment, pouring out the productive surplus towards exports. During that phase, China changed into the world’s industrial workshop. In global terms, its growth can be summarized as follows: an ultra-industrialization for exports with cheap labor. It entailed the deindustrialization of good part of the capitalist mature economies that turned into specializing in services, especially financial services and an avant-garde technology in terms of communications and information.

Having reached this point, as every economy that matured before, China faces a “natural” deceleration of growth, with the need to give more emphasis to the internal market, a more extensive redistribution of wealth towards the working class, and to provide more services and consumption to the whole population. In brief, the country is in the middle of a process of “export substitution” together with a correlative import substitution of industrial inputs, that is, a larger internalization of the productive chains.

This change is as much revolutionary and disruptive as the previous ones, but with an important novelty. This time, the world’s economic relations that took for granted the previous global division of labor get altered. The economies, so far recipients of the Chinese industrial surplus with all their commercial and financial links tied to this model, are forced to adapt, to enter a new phase of productive competition with China, to experience an even larger fall in their own (already low) rate of growth, and to suffer the consequences, such as, the end of the super-cycle of commodities. The current Chinese transition represents a true shake-up for the rest of the world—including all emerging markets.

As Jaguaribe mentions, after thirty years of an accelerated catching up, China is entering a new phase and, thus, faces disequilibria and disarticulations, on the one hand,  from their previous accelerated growth and, on the other hand, from transformations in the global economy.

China answers the first challenge with the so called strategy of a “New Normal” (larger internal modernization) and the second one with strategy called “New Silk Route.” They are policies designed for bringing sustainability to the economic model with a new combination of globalized market economy and State intervention in new key sectors and with a new investment profile. It is a dynamic version of “living within their means.” In foreign policy, Chinese strategy aims at an intensification of commerce, investments, and economic arrangements with other Asian countries, and a more active inter-regional presence.

The two larger strategic lines reinforce each other within a general plan of turning from the catching up phase to an innovation economy. The authorities of the single party (transformed into a managerial state-party) want to deal with social and economic problems in a global context but now without the advantages that characterized the previous phase of growth. For many observers, it is a major reform in the financial, tributary, and administrative system, of fostering the internal market, and with innovation as the motor of growth.

It is about a reorientation of investments with deceleration of growth in an uncertain international context. This choice implies now a larger concentration of the central power (more personalized and less collegiate under President Xi) to break the internal resistances from the interests created in the previous phase (anticorruption campaigns to heal the bureaucracy and change the profile of the military-industrial sector). Hence, we face a great debate regarding the future of the system, its solidity or fragility, the crossed resistance from inside and outside, and regarding the trust and legitimacy of the managing and control apparatus (regarding this debate see more in this link). We do not yet know which ways of participation, predictability, and new institutions will come out of this process. I do insist: we live in times truly interesting.

The rise of China in the last decades transformed global conditions for development of the emerging economies and the conditions for sustainability in mature economies. The current reform in China will transform them again. One thing is true: Global geopolitical axis is inexorably moving towards the East, where China has gone from being an exception to its own rule.  Whatever the outcome of this new transition, the rest of the world will not be the same as we know it.

I review and say: the model that today is reaching its limits was characterized by a spectacular growth that transformed the economy into the world’s manufacturing center and the main link in the productive chain of the electronics complex. The main characteristics of the model were: long-term strategic planning, high savings and investment rates, a financial system composed by public banks to facilitate infrastructure works and lend credit to large State companies, and competitive insertion of Chinese enterprises in the world market. Among the facilitating factors we must note the favorable demographic curve, cheap energy and labor force, and repressed demand.

Over time the model accumulated several disequilibria such as: indebtedness and over-investment at the provincial level, financial speculation, and high corruption. The current reform wants to correct the course, change the incentives, repress corruption, and eliminate the volatility of the stock exchange.

The change towards a “New Normal” aims at lowering quantitative growth indexes and increasing qualitative growth indexes; going from an excessively exporter profile to a service economy geared towards the internal market and achieving environmental improvements (development of alternative energies). In fiscal terms, they are trying to mitigate regions’ debt and redirect credit towards the private sector. In institutional and legal terms, there is a search for more transparency and predictability. Readers can find more details on this model in the nine directions presented at the 2015 Economic Conference of the Central Committee of the Chinese Communist Party (see Hu Angang,  “Embracing China’s New Normal,”  Foreign Affairs May 2015)

In terms of foreign policy, from now on China will try to extend its direct investments, sponsor multilateral funds, and achieve more density in regional agreements. The final objective might be the internationalization of the remimbi as the currency of reference.

Without going into further details, we can say that China is currently focused on the systematic search for new economic opportunities and new comparative advantages. That is more than what can be said regarding the European and American economies that in comparison seem much disoriented.

As a final note, I will say that in the context of global stagnation and crisis China is at the forefront of innovation. The sun rises in the East, though sometimes we cannot realize that, due to the cloudy skies and isolated thunderstorms of the West.

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