"The world is investing too little,"
according to one prominent economist. "The current
situation has its roots in a series of crises over
the last decade that were caused by excessive
investment, such as the Japanese asset bubble, the
crises in emerging Asia and Latin America, and
most recently, the IT bubble. Investment has
fallen off sharply since, with only very cautious
recovery."
These are not the words of a
Marxist economist describing the crisis of
overproduction but those of Raghuram Rajan, the new
chief economist of the International
Monetary Fund (IMF). His analysis, now
more than a year old, continues to be accurate.
Global overcapacity has made further
investment simply unprofitable, which
significantly dampens global economic growth. In
Europe, for instance, gross domestic product (GDP)
growth has averaged only 1.45% in the past few
years. Global demand has not kept up with global
productive capacity. And if countries are not
investing in their economic futures, then growth
will continue to stagnate and possibly lead to a
global recession.
China and the United
States, however, appear to be bucking the trend.
But rather than signs of health, growth in these
two economies - and their ever more symbiotic
relationship with each other - may actually be
indicators of crisis. The centrality of the US to
both global growth and global crisis is well
known. What is new is China's critical role. Once
regarded as the greatest achievement of this era
of globalization, China's integration into the
global economy is, according to an excellent
analysis by political economist Ho-Fung Hung,
emerging as a central cause of global capitalism's
crisis of overproduction. [1]
China and
the crisis of overproduction China's 8-10%
annual growth rate has probably been the principal
stimulus of growth in the world economy in the
past decade. Chinese imports, for instance, helped
to end Japan's decade-long stagnation in 2003. To
satisfy China's thirst for capital and
technology-intensive goods, Japanese exports shot
up by a record 44%, or US$60 billion.
Indeed, China became the main destination
for Asia's exports, accounting for 31% while
Japan's share dropped from 20% to 10%. China is
now the overwhelming driver of export growth in
Taiwan and the Philippines and the majority buyer
of products from Japan, South Korea, Malaysia and
Australia.
At the same time, China
became a central contributor to the crisis of
global overcapacity. Even as investment declined
sharply in many economies in response to the
surfeit of productive capacity, particularly in
Japan and other East Asian economies, it increased
at a breakneck pace in China.
Investment in China was not
just the obverse of disinvestment elsewhere, although
the shutting down of facilities and sloughing
off of labor was significant not only in Japan
and the United States but in the countries on
China's periphery such as the Philippines,
Thailand, and Malaysia. China was significantly
beefing up its industrial capacity and not simply
absorbing capacity eliminated elsewhere. At the
same time, the ability of the Chinese market to
absorb its own industrial output was limited.
Agents of over-investment A major actor in
over-investment was transnational capital. In the
late 1980s and 1990s, transnational corporations
(TNCs) saw China as the last frontier, the
unlimited market that could absorb endless
investment and throw off endless profitable
returns.
However, China's
restrictive rules on trade and investment forced TNCs
to locate most of their production processes in
the country instead of outsourcing only
selected numbers of them. Analysts termed such
TNC production activities "excessive
internalization". By playing according to China's rules, TNCs
ended up over-investing in the country and building up a
manufacturing base that produced more than China
or even the rest of the world could consume.
By the turn of the millennium, the dream
of exploiting a limitless market had vanished.
Foreign companies headed for China not so much to
sell to millions of newly prosperous Chinese
customers but rather to make it a manufacturing
base for global markets and take advantage of its
inexhaustible supply of cheap labor. Typical of
companies that found themselves in this quandary
was Philips, the Dutch electronics manufacturer.
Philips operates 23 factories in China and
produces about $5 billion worth of goods, but
two-thirds of its production is exported to other
countries.
The other set of actors
promoting overcapacity were local governments
investing in and building up key industries. While
these efforts are often "well planned and executed
at the local level", notes Ho-Fung Hung, "the
totality of these efforts combined ... entail
anarchic competition among localities, resulting
in uncoordinated construction of redundant
production capacity and infrastructure."
As a result, idle capacity in such key sectors
as steel, automobiles, cement, aluminum, and
real estate has been soaring since the mid-1990s,
with estimates that more than 75% of China's
industries are currently plagued by overcapacity
and that fixed asset investments in industries
already experiencing overinvestment accounted for
40-50% of China's GDP growth in 2005.
China's State Development and Reform
Commission projects that the automobile industry
will produce double what the market can absorb by
2010. The impact on profitability is not to be
underestimated if we are to believe government
statistics: at the end of 2005, Hung points out,
the average annual profit growth rate of all major
enterprises had plunged by half and the total
deficit of losing enterprises had increased
sharply by 57.6%.
The low-wage strategy
The Chinese government can
mitigate excess capacity by expanding people's
purchasing power via a policy of income and asset
redistribution. Doing so would probably mean
slower growth but more domestic and global
stability. This is what China's so-called New Left
intellectuals and policy analysts have been
advising.
China's
authorities, however, have apparently chosen to
continue the old strategy of dominating world
markets by exploiting the country's cheap labor.
Some 700 million out of China's population of 1.3
billion live in the countryside and earn an
average of just $285 a year, according to some
estimates. This reserve army of rural poor has
enabled manufacturers, both foreign and local, to
keep wages down.
Aside from the
potentially destabilizing political effects of
regressive income distribution, this low-wage
strategy, as Hung points out, "impedes the growth
of consumption relative to the phenomenal economic
expansion and great leap of investment". In other
words, the global crisis of overproduction will
worsen as China continues to dump its industrial
production on global markets constrained by slow
growth.
Vicious cycle Chinese production and US
consumption are like the proverbial prisoners who
seek to break free from one another but can't
because they're chained together.
This relationship is increasingly taking
the form of a vicious cycle. On the one hand,
China's breakneck growth has increasingly depended
on the ability of American consumers to continue
their consumption of much of the output of China's
production brought about by excessive investment.
On the other hand, America's high consumption rate
depends on Beijing's lending the US private and
public sectors a significant portion of the
trillion-plus dollars it has accumulated over the
last decade from its yawning trade surplus with
Washington.
This chain-gang relationship,
says the IMF's Rajan, is "unsustainable". Both the
US and the IMF have decried what they call "global
macroeconomic imbalances" and called on China to
revalue the yuan to reduce its trade surplus with
the US.
Yet China can't really abandon its
cheap-currency policy. Along with cheap labor, cheap
money is part of China's successful formula of
export-oriented production. And the United States
really can't afford to be too tough on China, since
it depends on that open line of credit to Beijing
to continue feeding the middle-class spending that
sustains its own economic growth.
The IMF
ascribes this state of affairs to "macroeconomic
imbalances". But it's really a crisis of
overproduction. Thanks to Chinese factories and
American consumers, the crisis is likely to get
worse.
Note
1. Ho-Fung Hung, "Rise of China and
the Global Overaccumulation Crisis", paper presented
at the Global Division of the annual meeting
of the Society for the Study of Social
Problems, August 10-12, 2005, Montreal. A revised
version of this paper will soon be published in a
leading international-relations journal.
FPIF
columnist Walden Bello is executive
director of Focus on the Global South and
professor of sociology at the University of the
Philippines. This article is based on work done
for the Nautilus Institute's China Project.
