[S1 E07] The Chinese economy is now the 2nd largest in the world. Prof. Harvey argues that China's expansion saved capitalism after the 2008 crash.
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TRANSCRIPT by Victor Vulovic
This is David Harvey and you're listening to the Anti-Capitalist Chronicles: a podcast that looks at capitalism through a Marxist lens. This podcast is made possible by Democracy at Work.
On January 2nd, 2019, after the stock market was closed, Apple Computer announced that it was not going to meet its sales targets particularly in China. There was an immediate crash in Apple's stock, and the following day, the stock market that had already lost a lot of money, declined by another 2.5 percent.
Now the interesting thing about this was that it was Apple Computer sales in China, and, of course, Apple computers are made in China, but it also has a significant market there. And the main, official explanation of this was that the consumer market in China was softening because economic conditions there were a bit more perilous for a number of reasons: one, it was said, was because of the Trump assault upon tariffs, but, actually, the other which came in small print and later reporting, was that for some time now, in China there had been a cutback in consumerism for a variety of reasons.
But then it turned out, when we started to look were much more closely at what happened, it turns out that Apple computers were no longer as popular as they had once been, and it turned out that Apple's share of the China market had been reduced to a mere 7%. The other 80% was covered by Chinese computer companies with names like Huawei, others that I have difficulty pronouncing, but Xiaomi, Oppo, Vivo-- companies that nobody had really ever heard of, and it turned out that most of these companies did not exist in 2010.
So there has been a huge increase in Chinese production of iPhones, and computers, and the like; and that huge increase is producing at a much lower rate of cost and [with] much easier systems to follow so that increasingly, in about four years in China, just preceding all of this, many cities (and I experienced this myself firsthand) went from a cash economy to a cashless economy within the process of three years, where everybody just took their iPhone, and put it against a reader, and I couldn't even pay for a cup of coffee while I was there with cash, and in some places, it becomes hard to use cash anymore.
Now I mention all of this because there is a significance to China's presence in the global economy, which is not really made very central, in many of the accounts we have of what's going on in the world, yet as evidenced by this last incident, what is happening in China is going to be pretty determinate for global capitalism in general. And, in fact, I want to argue: it has been really determinate, particularly since the crisis of 2007/2008.
In general, I want to argue that capital-- capitalism, in general, was rescued in 2007/2008 by an expansion of the Chinese economy. And the other reason, I think, is you have to come to terms with the size of China's economy, and we have come to terms with the speed of transformation. I mentioned, for example, that in three years, major cities in China (the one I visited: Nanjing) went from a cash economy to a cashless economy in a space of three years. There are other speedier things as well, which I will talk about in a little bit.
But the size of the Chinese economy is something that really needs to be recognized at the outset. You're dealing with the second largest economy in the world by conventional measures of GDP. If you take the price parity measure, which is a measure based upon what a local currency is worth and what it can buy, then it turns out that the Chinese economy is, in fact, right now the largest economy in the world. And if the Chinese economy flourishes, then the rest of the world flourishes. If the Chinese economy goes into a recession, which there are signs that it's going into a gentle version of recession right now... if that is the case, then this has a tremendous impact upon the evolution of capital.
But the other side of this, and this is why it's so important to think about it from an anti-capitalist standpoint, is that China is still formally committed to its Marxist position. It is still governed by a Communist Party, and while many people will kind of say the Communist Party is, in fact, a sort of a capitalist class party, but it's still a communist party. They still believe in the heritage of Marx, of Lenin, of Mao, Deng Xiaoping, and now, Xi Jinping, as being absolutely central to their ambitions.
At the last Party Congress, they declared that they plan to be a fully socialist economy by the year 2050, and that fully socialist economy will be characterized by equality, by democracy, by a benign relationship to nature, by a cultural world of beauty and excellence, and this is all going to be accomplished through the agency of the Communist Party. The declaration made very clear that there was no chance of democracy right now; that the domination of the party was absolutely crucial, but it was the party that was going to be the instrument for this transition to socialism with Chinese characteristics.
So if we are interested in the future of socialism, I think we need to take what is happening in China seriously and to see it with two questions in mind: to what degree does the future of capitalism actually depend upon what is happening in China, and if so, what kind of future will it be? The second question is: will the future of socialism be determined by what might happen in China, by this programmatic transformation of its own economy towards a socialist economy with Chinese characteristics?
And I think that, actually, for anybody on the Left, we should pay attention to this because in a sense, we live in a world where what Marx called the “coercive laws of competition” play a very important role in defining who we are. And we are very much in competition with China, and China is very much in competition with us, and I think that this is one of those things that, of course, the Trump administration has brought forefront into our consciousness, so that we now think about China, and have to think about China in a more coherent way.
Now I'm not an expert on China. I wish I knew much more about it. I wish I knew the language. I've been there a few times, and I've just worked, read a great deal, and I try to follow what's going on in the press, but I have to say that I have not got a very clear answer to those questions. And I have not got either a very clear analysis of everything that is happening there, and I think there's a very complicated society, but there are certain things that I think we should look at as background to looking at those those issues.
The first thing is that the big transition occurred in 1978 when Deng Xiaoping and a group of young people who actually got together and looked at the situation and said, “we have to change something and we have to change it in ways which are going to actually allow us to increase productivity in the economy dramatically” because the economy was stagnant. And they were faced with the following situation: that a mass of the population in China were living under conditions of abject poverty. The World Bank in 1980 did a survey, and they estimated that something like 850 million people were living under conditions of abject poverty in China. Now that is one thing-- the other thing that that is important to this is that China was surrounded by countries that were developing very fast and improving the standards of living of everyone very quickly. Japan had done so, South Korea had done so, and even more important Taiwan, which Chinese considered this part of China, had done so. Also Hong Kong, which, of course, at that time was still part of China had done so, and Singapore had done so.
So you had a Chinese diaspora out of the country that was flourishing: becoming very, pretty wealthy, and you had a stagnant economy on the China mainland itself. And I think that party leadership saw this as a very threatening situation, leaving aside the attacks that might come from Imperialist powers and all of those sorts of things. They realized, just to take Marx's phrase, “the world of freedom begins when the world of necessity is left behind”, and they had a huge gap in terms of covering the necessities of the Chinese population before they could really start to say they were a developing country. And it was in that context that they decided to introduce one of those elements into the economy which was going to become critical for the years that followed. That is, they were going to actually start to make economic entities compete with each other. There were going to introduce market forces into the economy.
In so doing, of course, they did consult with Western economists; Milton Friedman visited there in 1980. There was a considerable revision in the way in which economics was taught in universities so that if you go to China right now, you'll find very few people who've studied Marx. And very carefully, most of the economics departments are staffed by people who've got Ph.D.'s from MIT, and Stanford, and places like that. Their neoclassical economics is very well understood in China, and so their method of analysis of the economy started to shift; their policies started to shift.
So there was this introduction, and whatever you think of it, it was astonishingly successful. If you take any of the other countries that moved out of communism or socialism into capitalism, you think of what happened to all those countries that were in this ex-Soviet Empire, then you would say that they all went through a period of chronic disaster. China developed very rapidly.
The World Bank estimated by 2014, that whereas there had been 850 million people in abject poverty in 1980, there were now only about 40 million people in abject poverty. And most recently, China has argued that it is going to make sure that there's zero poverty in the country by 2022. So whatever you may think of this, there's no question that the standard of living of people in China-- their access to commodities and goods and so on has increased very very substantially, and that it is, therefore, an astonishing achievement to bring 800 million people out of poverty in a period of 20 or 30 years. This is, I think, China's accomplishment.
But it's not only done that; it's also developed completely new ways of living, and in particular, one thing we would see is a rapid urbanization of Chinese society. By the time you get to mid 1990's there are hundreds of cities which have more than a million inhabitants. You now will see a rate of urbanization which is about 15% per year, and a tremendous migration of populations from rural areas in into the city. There were estimates in the 1990's, for example, that something like 300 million people had actually moved from the countryside into the cities over the last 10 or 15 years.
Now, if you look at the total migration from Ireland to the United States you're looking at about 30 million people or something like that. When we start to compare what is going on in China with what has happened globally and what's happened elsewhere, the speed of transformation is enormous; the scale of it is enormous. And let me give you here I think one of the crucial examples, which is important for the saving of global capitalism. In 2007/2008, you get the global crash. A global crash crashes the consumer market in the United States. The crash of the consumer market in the United States means that those companies in those countries feeding that consumer market are in recession. China, it is said, lost around 30 million jobs in 2007/2008. There was a tremendous labor unrest in China during that time. There are reports on the numbers of incidents of labor protests in China, and during that year a lot of companies went bankrupt; they didn't pay wages that they owed for six months; people were left on the streets with nothing, so there was a tremendous problem in China.
Yet having lost what many people said was something like 30 million jobs-- by 2009, there was a survey done by the IMF and the ILO to say what was the net job loss from the crash of 2007/2008? The net job loss in the United States was around 14 million people, and the net job loss in China was 3 million. So somehow, rather, China had created 27 million jobs in one and a half years. Now, again, that is something which is absolutely phenomenal, and when I was writing about this, I was saying, “nobody's ever heard of this or anything before” until I started to read further, and I read actually: China, right throughout 2000 was creating 20 million jobs a year. I mean, again, this is a huge transformation.
Now, in 2007/2008, they couldn't create jobs in the export industries because the export industries were dead, and many of them were going bankrupt. So what China did was to expand something which had been beginning in the 1990s, which was to expand infrastructure & investment. And I have a graph I often use to illustrate this, which is the consumption of cement in China. Now, cement is used in construction, so if a lot of cement is consumed, it means there's a lot of construction going on, and actually, China, after 2007/2008, tripled its consumption of cement to the point, where in between about 2009 and 2012 China consumed more cement in those two or three years than the United States consumed in 100 years.
Now, living in the United States, there's a lot of cement consumed. But China was consuming at an astonishing rate, and they were building new cities, they were building new roads and highways, & they built a high-speed rail network-- they had zero miles of high-speed rail in 2008. By the time you get to 2014, they've got around 15,000 [miles] maybe. Now they've got around 20,000 miles high-speed rail. All of this takes a lot of materials, so China boomed in terms of its infrastructure and investment.
Now, if you remember what happened after 2007/2008, there was a proposal in this country to say, “Look, we can put everything back to work we have all of these bridges that are falling down. We should be investing in infrastructure, long term investments, etc.”. But politically it wasn't allowed to happen because the Republicans, in particular, said, “We need austerity. You can't expand the budget, you can't do those things”, so a politics of austerity set-in in the United States, a politics of austerity set-in in Europe, and a politics of austerity [set-in] in Japan.
So you have this politics of austerity in the capitalist world saying the crisis of 2007/2008 was a debt crisis. We've got to pay off the debt; how are we going to do that through a politics of austerity? People have to suffer in order to retire their debt and get the economy back onto onto a good basis. And then you look at well you know what that meant for countries like Greece and you see that appalling kind of politics.
The Chinese did exactly the opposite. They said, “okay we've got this problem: we've got all of these people milling around with tremendous social unrest. We have to put these people back to work; We've got to create millions of jobs and do it very fast. We're going to do it in construction. And we're going to build, and build, and build. How are we going to pay for it? We don't care. We're actually going to pay for it indebtedness.” And the Chinese borrowed in their own currency, not in a foreign currency, and this then allowed them to get out of the crisis.
Now, as they got out of the crisis, of course, if you're building like crazy then, you need raw materials to build, and one of the consequences was that all of those countries and all of those economies that were actually supplying raw materials to China came out of the crisis of 2007/2008 fairly quickly. Australia, for example, provides a lot of mineral resources to China. A lot of Latin America does; Latin America experienced the crisis, but not as not as badly as you would have thought under normal circumstances. And so countries like Chile were sending copper like crazy to China. The rest of Latin America was sending soybeans. So that's what I mean by China saving the global economy in the way that it did 2007/2008.
And what this meant was that China's expansion was critical at that time and has been critical ever since. China's increase in GDP has actually been the most significant element in the revival of the global economy since 2007/2008, but as I've indicated, a lot of it was debt financed. And the debt limit was exceeded. The second thing that happened was that the China was not only using debt financing, but was having to build in a situation where they needed consumers, so they had to start to push very hard to build the consumer capacities of the Chinese economy.
Now, this is something that's very important globally. Because the interest of foreign capital is not only in using China as a place to produce low-cost goods. There's also an interest in China as a market.
I mentioned at the beginning that the Chinese market was terribly important to Apple, even though [it] no longer really is doing very well in that market. There are some other companies that do a tremendous business in China. For instance, Starbucks has more cafes in China than it does in the United States. And actually, the China trade for Starbucks is huge, and if Trump messes around too much with the Chinese, I can just imagine them putting some sort of restrictions on Starbucks or something like that. And you'll soon see US firms having a hard time in China. In fact, some of the automobile firms which produce there already [are] having some kind of complicated relations with the Chinese authorities to the degree that this is one of the other ways in which the Chinese authorities can set up a counter movement to Trump's proposal about about the tariffs.
So the internal market in China then needs to grow, but it needs to grow also in a certain way. For example, if you build housing at the rate that the Chinese build housing then, people have to buy that housing or have to have money to invest in that housing. To do that, they need to be able to borrow mortgage finance. Now, before 2007/2008, there was very little mortgage finance in China, but when this huge building process began, then they had to create new instruments so that people could finance the purchase of housing. Now, this is an interesting kind of thing because then, what you see is that the financial sector suddenly becomes an area in which money is being expended on lending people to build housing and apartments and all the rest of it. At the same time, it's being lent to consumers to purchase the housing and the apartment, which means that you need very strong financial institutions to be able to back this whole kind of process.
Now, in the Cultural Revolution before 1978, banks basically did not exist in China. Banks were abolished during the Cultural Revolution in the ordinary retail sense of the word, so there was no banking. They grew came back into the picture very fast [...] particularly after 1995 or so, the bank started to play a much more vigorous role in in Chinese society. But, again, look at something which is significant: what are the largest banks in the world today? The four largest banks in the world today are Chinese.
Now, you go from a situation in 1978, when the Chinese banks don't exist, to a situation where the four largest banks in the world [are Chinese]. The fifth largest bank is Japanese, and the six largest bank in the world is JPMorgan, so we like to think we have the biggest and most powerful banks in the world, but the Chinese have four banks which are far bigger than anything else. And these banks are lending money to developers, and they're also lending money, of course, to consumers so the Chinese boom is also financializing at a very rapid rate, and, again, the Chinese economy is being transformed radically.
Now, there is, at the same time, an attempt by the Chinese to recognize that you cannot actually build a really vigorous economy in the long run if the only form of industrialization you have is the low-wage, high-labor content forms production. So there starts to become an interesting question of “How do you change the Chinese economy?” So you start to produce high-value goods. And this is where the Chinese computer companies and all the rest of it suddenly come into the picture.
And, again, notice the speed with which this happened. A lot of Chinese entrepreneurs, and Chinese scientists, and engineers, and so on had training in the United States. Many of them had worked for Apple and Google, and in the computer companies, and the like of Microsoft and so on. And there was an interesting sort of debate within China about, “How can we create the equivalent of a Chinese Silicon Valley?” And if so, “How would we do it, and what would we do?”
Now, here we're going to go into something else which is crucial in the Chinese case: one of the big misunderstandings about China is that everybody thinks of it as a highly centralized economy. It is not-- it's actually an incredible machine in which centralization and decentralization work together. Essentially, the party in Beijing proposes something. The rest of the country runs around and everything is decentralized, and people try to satisfy what it is that the central government is asking. So in a sense, the central government proposes, but it's the localities that do the disposing, and; therefore, the decentralization becomes very very significant.
And the method the Chinese use is, if they've got a problem, then it gets farmed out in a certain way. So people say, “We've got a problem”, and all of the localities, and all of the cities, and the regional governments are invited to solve this problem. And one of them then sets up and solves the problem and then the central government says, “Oh! Down in this place, they solved it this way; therefore, everybody has to do what that solution is”.
And to do that you need local entrepreneurs who are going to be very active, and actually what you find in China is that the localities are very insulated from each other. They form competitive entities within the totality of the Chinese economy, and they're competing with each other.
Now, the mayors of a local city don't get elected-- they get appointed by the Party. The average length of tenure of a mayor is three and a half years; let's say four years. So you're a mayor for four years, and at the end of four years, you're going to be evaluated. You're in the Party, and the Party is going to look at what you've done. At the end of four years, there's this spreadsheet of achievements. How much did you grow the local GDP? How did you do in terms of ensuring social harmony? Actually, it turns out, as somebody told me, there's now a spreadsheet of about 40 items. Early on, there was only about 7 or 8 items. One of them was: “How much did you grow the local economy?” So as a local mayor, you come in, and you're appointed, and you've got four years to grow the local economy. And if you do a good job, and you grow the local economy real well, and you maintain social harmony, people say, “Ah, ok. You're a good mayor of this place. There's a bigger city over here, maybe you'd like to become mayor of this bigger city”. And that way you can make go up the hierarchy, and you may end up in the Central Committee in Beijing, and join the party apparatus at its great heights.
But in those four years, you've got to go like gangbusters to try to make things happen, and whenever there's something going not necessarily on ideas coming from Beijing, you would seize upon an idea which seemed to work locally, and if it works locally, then the Beijing would look at it, and say, “Oh, that's a good idea.”
Well, an entrepreneur in particular, who had experience of Silicon Valley and all the rest of it said to the Beijing government, “Why don't we create a kind of a space in the city which is going to be all about innovation and incubators for all of these new electronics companies and the like?” Now one of the things a central government can do is clear a space. You don't have a problem with that in China. So Beijing, just in six months, basically evicted everybody from a particular area, and they created this space called the “Avenue of the Entrepreneurs”. And they put together this whole kind of organization of startup incubator spaces. They put in facilities, they put in all of the paraphernalia you might need, and then it turned out that, of course, one of the big things that you would have to do... China was having problems of very high rents on spaces of that kind, so the government basically said, “Okay we'll turn it into a space of zero rent, so that you don't have to pay any rent.” So they set up this incubator space.
It was highly successful in adapting and becoming an entrepreneurial space, which was extremely competitive, and, in fact, involved themselves in what they call a “copycat culture”. That is, there's absolutely no respect for intellectual property rights in that space. If somebody has a good idea, other people would steal it immediately. So if you had a good idea, you had to act upon it very fast because if you didn't act on it very fast, somebody else would take it, and somebody else would act on it.
So this is an extremely dynamic situation, and in this particular space in Beijing, this sort of thing went on, and they very quickly started to develop all kinds of new phones systems, new structures for utilizing it. So you would go through the different phases of innovation, diffusion, implementation in a very short space of time. And this created the equivalent of a Silicon Valley, and it was done in about three years, but it had a very different philosophy to it than Silicon Valley. In Silicon Valley, stealing other people's ideas is not good.
I'll read you something from somebody who is part of this as to what the culture was like in China, and it's rather scary. Let me read it to you. This is from this book about AI superpowers, which is about the way in which China has positioned itself to be the only challenger on artificial intelligence to the United States within the global economy.
So, this is what he says: “Silicon Valley's entrepreneurs have earned a reputation as some of the hardest-working in America: passionate young founders who pull all-nighters in a mad dash to get a product out and then obsessively iterate that product, while seeking out the next big thing. Entrepreneurs there do indeed work hard, but I've spent decades deeply embedded in both Silicon Valley and China's tech scene, working at Apple, Microsoft, & Google before incubating and investing in dozens of Chinese startups. I can tell you that Silicon Valley looks downright sluggish compared to its competitor across the Pacific. China's successful internet entrepreneurs have risen to where they are by conquering the most cutthroat competitive environment on the planet. They live in a world where speed is essential, copying is an accepted practice, and competitors will stop at nothing to win a new market. Every day spent in China's startup scene is a trial by fire, like a day spent as a gladiator in the Colosseum. The battles are life or death, and your opponents have no scruples.”
Now, this is the world which creates these new companies which did not exist before 2010/2011, but which then sudden sweep in and take 40% of the China's market in mobile phones. This is the kind of world which is being constructed there. Now, this explains something to me; this copying economy, which, of course, is one of the things that is very upsetting to US entrepreneurs because there's no defense of intellectual property rights internally within China, and not very much respect for intellectual property rights outside of China. But this guy then goes on to talk about the way in which this alternative digital universe, which is being created then becomes the standard by which everybody is evaluated.
As I mentioned, I sometimes visit Nanjing. The second year I was in Nanjing, I went to the local planning office, and there was a huge exhibition there, which is about creating a Silicon Valley culture in Nanjing and how they were going to do it. And, in effect, the central government (when they looked at what happened of the entrepreneurs in Beijing) basically turned to all of the cities in China and said, “Okay, do this.”
Now, what this does, of course, is to start to say that China is going to start now to move into high-tech artificial intelligence, all those kinds of value-added activities. And this is, in effect, what has happened, and we now have a situation... (which, I think, it was indicated by this Apple thing that I started about) ...and now we have a situation in which Chinese competition in these areas has become so fierce and so good that actually the United States is, I think, seriously threatened in terms of its hegemony in many of these areas.
For instance, the one big company is Huawei, and you may have read that the executive of Huawei was arrested in Canada at the behest of the United States for trading with Iran, and there's obviously something going on here, which is rather more than just simply a trading with Iran kind of problem.
But Huawei has done a great deal of innovation. Now, there's something called 5G: the fifth generation of systems which handle mass data. Huawei has been way ahead in terms of actually developing the 5G network and 5G technology. Now, other companies can't compete technically. Now, the United States has argued that we should not invest in this technology because it has within it the capacity for the Chinese government to listen in on everybody's conversations, and that; therefore, it is not secure, and there's a security problem, and; therefore, there can be no guarantee that this network will actually work in the way which will be insulated from utilization by the Chinese government.
So this is the argument the United States is making, and on that basis, the US is banning the utilization of their 5G technology. The same thing has been happening in other countries. They persuaded, I think, Australia and New Zealand. They're trying to convince the Europeans. In fact, the British are now kind of investigating Huawei's technology over this security question, but most of the rest of the world is taking the Huawei technology.
So, again, notice the speed of this. We were thinking of China as a country and an economy, which is about low-wage labor. And it still is a very important low-wage industrial economy, but since 2010, in effect, China has suddenly moved into this area, and within the space of about eight years, has positioned itself to be a major competitor. So, if you take the ten top high tech companies in the world, four of them are now Chinese, and that was not the case in 2011. So this is the Chinese model in motion. It is very fast, it is very quick, it is backed by government, and it is has mixed in with it strong government interventions, but it's also highly decentralized in a way in which that entrepreneurial spirit that I'm talking about (entrepreneurial culture) has become absolutely central to what you might call almost a gladiator capitalism, which is emerging in the Chinese context.
Now, I think at this point, we have to ask the question: “Is this the future not of China, but is this the future of capitalism?” Capitalism has historically grown, usually through uneven geographical development. A place develops, and becomes hegemonic. If I was giving a talk of this sort back in the 1980's we would be talking about Japan and we would be talking about West Germany. As it was at the time that these were the prime economies, and everybody had to do what the Japanese are doing, so everybody started talking about just-in-time production systems and all the rest of it.
By the time you get to the 1990's, Japan has fallen into crisis, Germany is mixed up with its kind of reunification, so who's top dog in the 1990's? Well, we have the Washington Consensus, which is basically the United States emerging in the Clinton years as a growth economy with the dot-com economy, and all this kind of stuff. And so, the US starts to become top dog, and basically the US says to everybody, with the the end of history and all the rest of it, “Everybody has to be like us because we've got the answer to to how capitalism should or should not be.”
Okay, there's a there's a economic crash of 2001, there's then a housing bubble and then the crash of 2007/2008 and the question of who's top dog right now and who everybody should copy is becoming really an interesting competitive global scene. And you can start to see the emergence of these different regional hegemons. There's the China circuit, the North American circuit, and the European circuit, with Japan uneasily in the middle of a lot of this.
So, here we have a situation where the Chinese are beginning to move into the the top dog position, and if they move into the top dog position, you will then ask yourself, “What kind of capitalism is this going to be about?” And that's where the artificial intelligence comes in because the Chinese have decided that artificial intelligence is the future. Now, what is artificial intelligence about? Well, it's about, actually, finding a way to remove labor from the production process and this is I think then the big question is: “What's going to happen to labor?” And that, I think, I will deal with in the next program.
Thank you for joining me today you've been listening to David Harvey's Anti-Capitalist Chronicles, a Democracy At Work production. A special “thank you” to the wonderful Patreon community for supporting this project!