Will China Save the World from Depression?

Will China be the "growth pole" that will snatch the world from the jaws of depression?

This question has become a favorite topic as the heroic American middle class consumer, weighed down by massive debt, ceases to be the key stimulus for global production.

Although China's GDP growth rate fell to 6.1% in the first quarter — the lowest in almost a decade — optimists see "shoots of recovery" in a 30% surge in urban fixed-asset investment and a jump in industrial output in March. These indicators are proof, some say, that China's stimulus program of $586 billion — which, in relation to GDP, is much larger proportionally than the Obama administration's $787 billion package -- is working.

Countryside as Launching Pad for Recovery?

 With China's export-oriented urban coastal areas suffering from the collapse of global demand, many inside and outside China are pinning their hopes for global recovery on the Chinese countryside. A significant portion of Beijing's stimulus package is destined for infrastructure and social spending in the rural areas. The government is allocating 20 billion yuan ($3 billion) in subsidies to help rural residents buy televisions, refrigerators, and other electrical appliances.

But with export demand down, will this strategy of propping up rural demand work as an engine for the country's massive industrial machine? 

There are grounds for skepticism. For one, even when export demand was high, 75% of China's industries were already plagued with overcapacity. Before the crisis, for instance, the automobile industry's installed capacity was projected to turn out 100% more vehicles than could be absorbed by a growing market. In the last few years, overcapacity problems have resulted in the halving of the annual profit growth rate for all major enterprises.

There is another, greater problem with the strategy of making rural demand a substitute for export markets. Even if Beijing throws in another hundred billion dollars, the stimulus package is not likely to counteract in any significant way the depressive impact of a 25-year policy of sacrificing the countryside for export-oriented urban-based industrial growth. The implications for the global economy are considerable.

Subordinating Agriculture to Industry

Ironically, China's ascent during the last 30 years began with the rural reforms Deng Xiaoping initiated in 1978. The peasants wanted an end to the Mao-era communes, and Deng and his reformers obliged them by introducing the "household-contract responsibility system." Under this scheme, each household received a piece of land to farm. The household was allowed to retain what was left over of the produce after selling to the state a fixed proportion at a state-determined price, or by simply paying a tax in cash. The rest it could consume or sell on the market. These were the halcyon years of the peasantry. Rural income grew by over 15% a year on average, and rural poverty declined from 33% to 11% of the population.

This golden age of the peasantry came to an end, however, when the government adopted a strategy of coast-based, export-oriented industrialization premised on rapid integration into the global capitalist economy. This strategy, which was launched at the 12th National Party Congress in 1984, essentially built the urban industrial economy on "the shoulders of peasants," as rural specialists Chen Guidi and Wu Chantao put it. The government pursued primitive capital accumulation mainly through policies that cut heavily into the peasant surplus.

The consequences of this urban-oriented industrial development strategy were stark. Peasant income, which had grown by 15.2% a year from 1978 to 1984, dropped to 2.8% a year from 1986 to 1991. Some recovery occurred in the early 1990s, but stagnation of rural income marked the latter part of the decade. In contrast, urban income, already higher than that of peasants in the mid-1980s, was on average six times the income of peasants by 2000.

The stagnation of rural income was caused by policies promoting rising costs of industrial inputs into agriculture, falling prices for agricultural products, and increased taxes, all of which combined to transfer income from the countryside to the city. But the main mechanism for the extraction of surplus from the peasantry was taxation. By 1991, central state agencies levied taxes on peasants for 149 agricultural products, but this proved to be but part of a much bigger bite, as the lower levels of government began to levy their own taxes, fees, and charges. Currently, the various tiers of rural government impose a total of 269 types of tax, along with all sorts of often arbitrarily imposed administrative charges.

Taxes and fees are not supposed to exceed 5% of a farmer's income, but the actual amount is often much greater. Some Ministry of Agriculture surveys have reported that the peasant tax burden is 15% — three times the official national limit.

Expanded taxation would perhaps have been bearable had peasants experienced returns such as improved public health and education and more agricultural infrastructure. In the absence of such tangible benefits, the peasants saw their incomes as subsidizing what Chen and Wu describe as the "monstrous growth of the bureaucracy and the metastasizing number of officials" who seemed to have no other function than to extract more and more from them.

Aside from being subjected to higher input prices, lower prices for their goods, and more intensive taxation, peasants have borne the brunt of the urban-industrial focus of economic strategy in other ways. According to one report, "40 million peasants have been forced off their land to make way for roads, airports, dams, factories, and other public and private investments, with an additional two million to be displaced each year."  Other researchers cite a much higher figure of 70 million households, meaning that, calculating 4.5 persons per household, by 2004, land grabs have displaced as many as 315 million people.

Impact of Trade Liberalization

China's commitment to eliminate agricultural quotas and reduce tariffs, made when it joined the World Trade Organization in 2001, may yet dwarf the impact of all the previous changes experienced by peasants. The cost of admission for China is proving to be huge and disproportionate. The government slashed the average agricultural tariff from 54 to 15.3%, compared with the world average of 62%, prompting the commerce minister to boast (or complain): "Not a single member in the WTO history has made such a huge cut [in tariffs] in such a short period of time."

The WTO deal reflects China's current priorities. If the government has chosen to put at risk large sections of its agriculture, such as soybeans and cotton, it has done so to open up or keep open global markets for its industrial exports. The social consequences of this trade-off are still to be fully felt, but the immediate effects have been alarming. In 2004, after years of being a net food exporter, China registered a deficit in its agricultural trade. Cotton imports skyrocketed from 11,300 tons in 2001 to 1.98 million tons in 2004, a 175-fold increase. Chinese sugarcane, soybean, and most of all, cotton farmers were devastated. In 2005, according to Oxfam Hong Kong, imports of cheap U.S. cotton resulted in a loss of $208 million in income for Chinese peasants, along with 720,000 jobs. Trade liberalization is also likely to have contributed to the dramatic slowdown in poverty reduction between 2000 and 2004.

Loosening the Property Regime

In the past few years, the priority placed on a capitalist transformation of the countryside to support export-oriented industrialization has moved the party to promote not only agricultural trade liberalization but a loosening of a semi-socialist property regime that favors peasants and small farmers. This involves easing public controls over land in order to move toward a full-fledged private property regime. The idea is to allow the sale of land rights (the creation of a land market) so that the most "efficient" producers can expand their holdings. In the euphemistic words of a U.S. Department of Agriculture publication, "China is strengthening farmers' rights — although stopping short of allowing full ownership of land — so farmers can rent land, consolidate their holdings, and achieve efficiencies in size and scale."

This liberalization of land rights included the passage of the Agricultural Lease Law in 2003, which curtailed the village authorities' ability to reallocate land and gave farmers the right to inherit and sell leaseholds for arable land for 30 years. With the buying and selling of rights to use land, the government essentially reestablished private property in land in China. In talking about "family farms" and "large-scale farmers," the Chinese Communist Party was, in fact, endorsing a capitalist development path to supplant one that had been based on small-scale peasant agriculture. As one partisan of the new policy argued, "The reform would create both an economy of scale — raising efficiency and lowering agricultural production costs — but also resolve the problem of idle land left by migrants to the cities."

Despite the Party's assurance that it was institutionalizing the peasants' rights to land, many feared that the new policy would legalize the process of illegal land grabbing that had been occurring on a wide scale. This would, they warned, "create a few landlords and many landless farmers who will have no means of living." Given the turbulent transformation of the countryside by the full-scale unleashing of capitalist relations of production in other countries, these fears were not misplaced.

In sum, simply allocating money to boost rural demand is unlikely to counteract the powerful economic and social structures created by subordinating the development of the countryside to export-oriented industrialization. These policies have contributed to greater inequality between urban and rural incomes and stalled the reduction of poverty in the rural areas. To enable the rural areas of China to serve as the launching pad for national and global recovery would entail a fundamental policy shift, and the government would have to go against the interests, both local and foreign, that have congealed around the strategy of foreign-capital-dependent, export-oriented industrialization.

Beijing has talked a lot about a "New Deal" for the countryside over the last few years. But there are few signs that it has the political will to adopt policies that would translate its rhetoric into reality. So don't expect Beijing to save the global economy any time soon.

Comments

[sherbug]

The way of the Chineese peasant, is what our government has in mind for us. They have been at war with the middle class for decades. What with union busting and illegal immigration, they have managed to drive down wages. The housing bubble pyramid, created by Wall Street, has now burst. and like any pyramid scheme, those on the bottom get left holding the bag, and we are certainly left holding onto devalued real property. The new middle class are the millionaires.

[FogBelter]

It's funny how the hope for Global Capitalism is pinned on Communist China.

I'm not sure if people read China accurately at all. The Chinese Government had it's own Katrina in terms of its response to the massive Earthquake China recently experienced. There is stilll fallout in the countryside over that. Not everyone in China has benefited from the open door policy and with restive populations in Tibet, and in the southern islamic portions of China, combined with the massive dislocation of factory workers who are returning to the countryside due to the economic downturn ... I would read any movement China makes in terms of maintaining social stability. I don't frankly think China cares a bit about the outside world except in terms of how it benefits China. We shouldn't project capitalist motivations on the Chinese Government's actions ... they are still Communists and engaging in capitalism is a means to an end not an ideology they are dedicated to as is the case in the United States. Counting on China to purposefully benefit any nation outside of China is a stretch.

[AhnAmuru]

" ... the heroic American middleclass consumer, weighed down by massive debt ..."

An oxymoronic contradiction is ever there were one!

There's nothing heroic about being encumbered by "massive debt" - even if you're an "American middleclass consumer". Notice the absence of qualification

Let's try that again, ... Irresponsible American middleclass consumers who lived beyong their means and have now run bankrupt are now demanding that their government bail them out. (Note the qualification).

I'll admit that after noting the unsound premise of the entire articles my mind dimmed, but unpon completion I should have just switched off.

Not a single mention of the "heroic" (or otherwise) middleclass Chinese consumer - perhaps iit's assumed here that there're none!

The article seems to suggest that China is made up of peasants and the CP.

Teachable pointers; the method of analysis whereby the familiar is categorized in glowing individual terms "heroic ... American ... middleclass ... consumer", whilst the "others" are couched as "the masses ... peasants..." ignoring the nuances of a complex society with a middleclass the size of the entire US population is archaic and beyond that simply a bore.

[watchTVgetSTUPID]

China is now the world's sol economic superpower.

Momentum is building for a collapse of the dollar. During the last month, the dollar has consistantly dropped about 0.4% per day against the Canadian and Australian dollars. It is dropping against other currencies including the yen, pound and Euro. Soon even the world's sole economic superpower (China) will not be able to keep the dollar afloat.

International economic news programs are beginning to openly talk about the fall of the dollar's credit worthiness. "How soon is the dollar's AAA status going to fall?" As the FDIC appraches one bank failure away from insolvency, watch the panic grow more legs than a centipede. Bailing out the Banksters instead of the Banking system was wasting the antidote on wrinkled old reptiles spawned in the depths of deregulation.

The US will soon follow Russia's path out of Afghanistan for the same reason ... collapse of the economy. China will be left to pick up the pieces around the world