Elaborate the argument that china is arguably the most

impressive model of ‘state-led capitalism’ during the last half

century

Submitted by : Anuj Kumar

Guided by : Prof. Praveen Jha
Reg No :1318003150
EP613: Deveoplment Economics
End Semester submission
CESP, JNU
Introduction

The rise of china in 21th century may be one of the most popular discourses discussed
ever among economists. While, most of them regard it as commendable example of
economic growth but forget to acknowledge its exploitative side. But, among those who
believe that there is something distinctive about china model and often labelled it as
”State capitalism”. In this paper, we try to argue how china led the most impressive
model of state capitalism after reforms which emerged with dramatic rise in inequalities,
low wage rates and lagged in terms of improvement of welfare of people. While Chinese
State insists that China is still a socialist country with the slogan of “constructing the
socialism with Chinese characteristics”

Theoretically, perhaps the most classic paradigm of industrial capitalism is given by

Karl Marx. For him, capitalism is first of all an economic system in which the class of
capitalists, who own means of production (capital goods, factories, machines) and
pursue maximum profits, hires and exploits the class of workers, who sell their labour to
the capitalists without alternative choice. As an extension of the model of Marx, State
capitalism is regarded as a system where the State is the principal actor and the referee
in the economy, carrying out primitive capital accumulation of capitalists in traditional
sense. Therefore, first, we put our focus on discussing the role of the Chinese state in
fostering and guiding capitalist accumulation and later try to delve ourselves into some
serious questions how it is different from free market capitalism or how china has landed
on a path not very different from neoliberal model or may be china has adopted worst of
both worlds an authoritarian government and an exploitative economic system that is
now organised around private profit rather than public needs but before understanding of
china’s developmental path, one should first look into continuously changing
relationships of Chinese society within and with outside world in much more dynamic
sense. Therefore first, we briefly touch upon how Chinese reforms not only led to
changes in Chinese social political structure along impressive economic performance but
also contributed to social and economic inequality that was previously unthinkable in
china and later, go through some specific theoretical reasons that what china has done
differently from others.
Impressive yet capitalism

Why china is an impressive example of state capitalism? Well, It’ s impressive in a sense
that China's GDP to grow at an average rate of 9.5 per cent per year and its international
trade by 18 per cent in volume terms over the past 30 years and also according to the
World Bank, more than 850 million Chinese people have been lifted out of extreme
poverty. As a result, China is presently the world's second largest national economy, a
powerhouse in international trade and a major destination for foreign investment, its
state owned and state-controlled portions of the economy continues to be at
commanding heights of the Chinese economy even though market reforms have led to a
rapid expansion of the private sector. But, government doesn’t need to have ownership
of enterprises for carrying out state capitalism as there is no unique definition of the
term 'state capitalism', despite its widespread use as some economists equates state
capitalism with government intervention in markets, with central planning, with
governments favouring big business and even with expropriation of any kind of
property. Musacchio and Lazzarini describe state capitalism as being the 'widespread
influence of the government in the economy, either by owning majority or minority
equity positions in companies or through the provision of subsidized credit and/or other
privileges to private companies.

Therefore if we try to look at the role of Communist Party, it has been so unique in sense
that it has a reach that extends far beyond government institutions but also into private
firms and other institutions of Chinese society. The party has the power to exercise
political control over economic policy and influence the behaviour of firms through its
own financial institutions or controlled legal system. It is also frequently alleged that
China's state capitalism has not only distorted the Chinese domestic market but as well
as markets around the world through government-directed development model of
adaptation of the 'Go Global' strategy, the essence of which is to promote the
international operations of Chinese firms through outbound direct investment with a
view of enhancing their international competitiveness. Infact, the concept of Sino-
capitalism proposed as an incorporatisation of the informal business networks rather
than legal codes and transparent rules can be assigned to the Chinese State (MCNALLY,
C., 2006) because of widespread presence of hybrid enterprises.
State capitalism journey with Chinese reforms

The journey of Chinese reforms can be traced way back to the start of 1979 as according
to some authors it was the time when sovereign Chinese state represented by Chinese
Communist Party (CCP) realized how other East Asian counterparts had managed great
spurts of growth with state led export oriented industrialization and therefore the leader
of CCP, Deng Xiaoping mustered the political will to reform the developmental
dynamics of Chinese state. Also, Deng Xiaoping(1992), once famously proclaimed “It
doesn’t matter whether a cat is black or white so long it catches the mice “ .
Therefore, china needed to catch mice and willing to start the long march towards china
modernisation. Firstly, it began gradually through focussing on strengthening and
legitimizing the already existing autonomies at the local level by giving local cadres a
political space for a variety of experimental economic trials, which chnng zu(2011)
described as regionally decentralized authoritarian regime (RDA} means combining
political centralization with economic regionalization. Initially, The RDA system
supported the CCP’s rebuilding of the political hierarchy as promotion opportunities
attached with responsible appointments which helped in providing incentives like
performance based appointments and motivated party cadres to improve local economic
performance, which in turn improved regional competition among states and motivated
them to carry out reform experiments regionally. This system of regionally based
experimentation has made country wide economic failures less likely and led to the
gradual liberalization of China's economy and triggered substantial improvements in
China’s investment climate for both domestic and foreign investors.

But Xu (2011) also points out that China’s RDA system is by no means immune from
the inherent deficiencies of an authoritarian regime, such as the lack of an independent
judiciary, rent-seeking behaviours and indifference to citizens’ needs and preferences.
While, this system can also be termed as ‘local state corporatism‘ as through fiscal
decentralization, state has selectively increased decision-making power to local
governments and tied revenue growth to the career progression of local officials(Oi,
1992,1995). This initially, has also led to rise in number of TVEs { Township and
Village enterprises: a typical TVE is a collectively owned enterprise located in a
township/village.} as according to Huang (2008), there were 12 million TVEs by 1985,
while, there were only 1.5 million in 1978, at the start of the Reform period and soon,
they contributed for almost one-third of national GDP growth (Oi, 1995). Similarly as
Arrighi(2007, 363) speculated that “TVEs may well turn out to have played as crucial
a role in the Chinese economic ascent as vertically integrated bureaucratically managed
corporations did in the US ascent a century earlier.” But due to increase in competition
and a growing preference for foreign-owned enterprises, profitability of the TVE sector
declined subsequently after the mid-1990s, causing many enterprises to be privatized or
converted into shareholding cooperatives (Naughton, 2007). Therefore, with increased
market integration and competition, official discrimination against TVEs, and official
preference for foreign-owned enterprises, TVEs lost their competitive position.
Furthermore, the fiscal reforms of 1994 substantially reduced the sub national
government share of national tax revenues, from 70% to 40% with further
decentralization of public-expenditure responsibilities (Tsui and Wang, 2004). This fiscal
reversal immediately made TVEs less attractive but also created a new form of real
estate developmentalism. This resulted in shifting the primary role of local states from
shareholders of state-owned firms, including TVEs, to that of a land developer and tax
collector competing for private and foreign investment based on subsidised
infrastructure. According to You-tien Hsing(2010) “urban modernity, more than
industrial modernity, now captured the political imagination of local state leaders’ as
local capital accumulation raised based on increase in land rent with ‘urbanisation’ of
Chinese state.
Land has become increasing precious and scarce as land seized for newly built industrial
parks, Special enterprise zones (SEZs), new cities and largely requisitioned from the
peasants and later, migrating peasantry acted as principal labour supply for the fast-
growing urban manufacturing and service sectors of the cities. According to
Gallaghers(2005, 14), SEZs are localized ‘laboratories for capitalism, introducing new
and destabilizing reforms of employment, social welfare and enterprise management’.
This heterogeneous local state configurations and strategies led to regional differences
where localities along the coast enjoyed better circumstances as compared to country
side regions, mainly due to FDI and trade, since both regions have different investment
climate.

Chinese privatization is not based on any kind rational design, instead, its result of
political games as privatization has been carried out by municipal governments at their
discretion under regional competition for economic growth. One of the early major
reforms attempted by many cities in the late 1980s, that has led to privatization later,
was the leasing of SOE amid rapidly growing SOE debts and mounting state banks held
Non Performing Loans, while Bankruptcy reforms were also emerged as a top-priority
issue in the 1990s. Moreover, even by then, due to political and ideological constraints,
privatization has occurred in a camouflaged form, the term “privatization” was officially
disguised as “transforming the system” or “Gaizhi” in Chinese (Garnaut et al. 2001,
2005).Nevertheless, in 2005, about two-thirds of the Chinese SOEs and COEs with
annual turnover of more than 5 million RMB Yuan have been privatized (Guo, Gan, and
Xu 2008) and large number of SOEs employees were laid off, whereas new private
owners obtained huge amounts of wealth through management buy outs.

Furthermore, the number of SOEs has been dramatically reduced due to CCP’s post
1997 policy of ‘grasping the big, letting go the small’ as the remaining SOE giants
occupied the central positions in both natiional and the international economy. Finally
under Xi, jinping, consolidation of 96 SOEs owned by central government has started to
improve their performance and in 2003, a special commission directly under the State
Council, SASAC (State-owned Assets Supervision and Administration Commission of
the State Council ) was set up to act as the funder and regulator of non-financial SOEs
on behalf of the state which has strategic linkage to national economic development, and
maintain the necessary influence in normal industries e.g. Defense, electricity, oil and
gas, telecom, coal, shipping, aviation, rail, auto, chemicals, construction, electronics,
equipment manufacturing, nonferrous metals, prospecting, steel, agriculture,
pharmaceutical, real estate, tourism, investment, professional services, general trade, and
general manufacturing.

The performance of SOEs can be attributed towards two kinds of incentives offered to
SOE executives. On the one hand, they want the SOEs to be profitable because their
evaluations are based on the firm's financial performance. On the other hand, their career
paths are ultimately determined by the CCP which is equally, if not more, concerned
with how well the executives respond to the government directions and carry out the
goals of the state. Therefore, it is reasonable to assume that commercially success of
SOEs is often in the best interests of its owner, the Chinese government. As in 2018, 48
central SOEs made the list of Global Fortune 500 up from only six in 2003. Even, some
international countries accused the Chinese government of implementing policies that
directly favoured SOEs thereby distorting the allocation of market resources and
disrupting the level playing field.
What’s wrong with China

In the wake of Chinese State capitalism, the government has become a special interest
group in the society and followed the behaviour logic of a private capitalist, i.e.,
competing with other actors and putting its own political and economic interests in
priority over the mass public. This has led to various kind social economic problems .
Inequality has substantially worsened after the reforms as Gini coefficient of china
probable is either close to .50 or exceeds it, therefore placing it among highly unequal
countries. A study published in the PNAS estimated that China’s Gini coefficient
increased from 0.30 to 0.55 between 1980 and 20021. While absolute poverty in China
has decreased dramatically, poverty itself persists on a large scale and the gap between
the poor and the wealthy has widened with an astounding disparities between rural and
urban areas.
Also, not only China is the largest producer and consumer of coal in the world along
with largest user of coal-derived electricity but also the centre of most number
occupational death in coal mining. The mining industry alone claims 6,000 to 7,000
lives each year. China produces approximately one third of the world's coal, but
accounts for around 80 percent of the world’s coal mining related deaths. Although, this
number has come down recently due to closure of some coal mines.
Prior to the introduction of the market economy, China maintained a full employment
policy and a system that assured workers in state enterprises access to housing, food,
education, medical services, and state pensions - a system referred to as the "iron rice
bowl.". But now, Former employees of state-owned enterprises who were once had
guaranteed jobs and life time benefits are now living without either of them. Previously,
the price of food and grain was strictly regulated but in the early 1990s, deregulation led
to increases in prices. As a result, the poor and working class are spending a
significantly larger portion of their income on food. This increase in basic living
expenses has pushed many low-income households into poverty.

In 1980, more than 75 percent of educational funding came from the government. Ten
years later, that figure dropped to just 54 percent well below the international average
and thus most schools are now increasingly rely on higher tuition fees something that
has impacted negatively on the ability of poor and working class households to keep
1
Xie, Yu; Zhou, Xiang (2014). "Income inequality in today's China
their children education. Similarly, Health care is also being privatized .The cooperative
medical system that provided health care to the population prior to 1980 has been
replaced with a health insurance system. Most people in China now have to buy health
insurance, meet the costs as they arise or live without health care.

There has also been a significant increase in regional disparity as some scholars argue
that the rapid widening of regional disparity may lead to even disintegration of china
(hu wang and kang,1995). The inland coastal GE(the generalized entropy index)
component increased by nine times, from 0.4 percent in 1978 to 3.8 percent in 2000. On
the other hand, the rural–urban GE coefficient component increased from 11 percent
in1978 to 13.9 percent in 2000 (Kanbur and Zhang, 2005). Rapid widening gap between
coastal and inland region can be mainly due to FDI and trade in SEZs, since both
regions have different opportunities. Therefore, the role of SEZs has always not only
been instrumental in china success but also in creating wide regional disparities.

Capitalism but How?

Historically, Poverty and other terrible conditions of life were necessarily linked to the
existence of labour reserve as it’s a tendency of evolving capitalist system to leave huge
masses unemployed e.g. china also possesses a huge army of labour reserves. Surely,
there could be many reasons but in china’s case, concerted efforts have been made to
increase labour-market flexibility, especially regarding the hiring and dismissal of
employees. This was aided by the timing of foreign direct investment that has weakened
role of labour over time.
As Praveen jha and golder (2007) argues that Chinese policy makers may have been
persuaded by wrong logic of labour market flexibisation can generate good labour
market outcomes. Since, China’s labour relations have been fundamentally changed with
the gradual movement towards privatization and shifted towards flexibilisation of labour
market with increase in the autonomy and managerial control of workers organization .
This has also led to slower employment generation along with significant reduction in
quality of employment e.g. huge number of footloose migrant workers. Therefore, the
comparative advantage of massive cheap labour has been systematically institutionalized
by the government intervention.

While, in its model of development, china has adopted some neoliberal tenets such as
openness to foreign investment and flexible labour markets, with prominent role of state
generating a form of capitalism fundamentally different from other global variants
through its fiscal, foreign exchange, money and State-owned firm policies. Also, the
Chinese government successfully accumulated capital, institutionalized the utilization of
domestic labour, and well protected its interest as a special social group,

Also, Patnaik (2007) called Chinese strategy as Neo-Mercantilism because Chinese

growth is mainly an export led growth based heavily depended on manufacturing sector
means it can manufacture goods at much lower prices compared to West. Therefore,
China will not be able to raise effective wage rate and hence domestic demand as the
effective wage rate of workers has been virtually stagnant in west in the epoch of
globalisation. As a result, there will always be a stage of unemployment, under-
employment and the existence of huge unabsorbed labour reserves, notwithstanding the
high labour productivity growth, because wages are stagnant in the West and china
heavily depends on West. He further substantiate his claim by showing that how China’s
manufacturing sector has a growth rate of nearly 12 percent per annum over the last
several years, while the growth rate of growth of manufacturing employment has been
no more than 1 percent over this same period. The reason was the rate of growth of
labour productivity in the manufacturing sector has been extremely high, around 11
percent due to continuous adoption of new technology from west as China is emerging
as a major processing destination for machinery, appliances and equipment, using
imports of intermediates and parts from the developing countries in the Asian region to
produce final goods for export to the developed countries of the West.
Similarly, Marx himself regarded mercantilism as part of the apparatus of the early
modern state which promoted capitalism. Also, may be china is going through capitalist
development before its possible socialist future as Marx himself wrote after the first
European attacks (opium Wars): the next time that you send your armies to China they
will be welcomed by a banner:
"Attention, you are at the frontiers of the bourgeois Republic of China".

Therefore, China's successful emergence could completely be the result of its sovereign
project and its necessity of going through capitalist phase before its march towards
socialism as any society has to liberate itself from historical capitalism before a lengthy
long struggle towards the long route of socialism/communism. It’s just that china has not
yet begun the reorganization of labour from the perspective of socialization of economic
management (Samir Amin , 2012)
Conclusion

We have looked upon some aspects of growth story of china and surely, it can be called
as state capitalism because the Chinese government continuously searches to maximize
its own economic benefits, even in competing with other collective actors in the society,
as well as to defend its own power status from challenges and constraints. However,
challenging question remains the same associated with any kind of capitalism that how
china can sustain the inherent crisis associated with any this of capitalism, crises of
accumulation and then crises of realization e.g. Asset price bubbles together with global
stagnation of wages and depressed domestic demand, amid rising dependence on global
world. Many argue that its growth for four decades has been due to deliberate exchange
rate depreciation, promoting exports and discouraging imports, thus rapidly
accumulating foreign exchange (forex) reserves. Well, some economist suggest that
china can make use of its hugely accumulated foreign reserves, mainly came from
current account surpluses e.g Social wage (Paitnaik , 2007). Though it may slightly
affect growth in short run but would be able to provide sustainable long run growth
along with the welfare of the Chinese people without impinging its international
competitiveness. Well, other major challenge could be sustainability of its authoritarian
characteristic of Chinese state as demand of pluralism continuously increasing with
political awareness among young Chinese people e.g ‘89’ Democracy Movement or
Tinamanen square protests.

We may conclude that while china embarked on a impressive growth path mainly due to
state capitalism or china called it as ‘market socialism’. Nonetheless, it continues be
afflicted by same capitalist characteristics e.g. deprivation among workers, low wage
rate etc. However, the particularity of Chinese State capitalism doesn’t lie on the State’s
intervention and control over the economy, it lies on the fact that the State builds up its
own assets and institutions, while accumulating and exploiting capital for serving the
permanence of the system.
.

.
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