David Leonhardt’s reporting on his trip to China and his numerous insightful interviews give important insights into development questions of great interest to progressives and socialists everywhere. While its not as long as a book – though I expect Leonhardt will turn it into one – I felt compelled to re-organize the material from the parts that reflect upon some important theoretical and practical questions of market socialism and Marxism. Consider this a review of his "new book," which opens:

When the Wuqi International Hotel was completed this spring, it immediately dominated the modest skyline of Wuqi, a small city in north central China. The hotel is part of an effort by local officials to reshape a city far from the fast-growing export oriented towns and cities on the coast.

But changes here are the kinds that a new breed of Reformers including many industrial workers, service providers and small business/enterprise producers have been recommending for China as a whole. In Leonhardt’s report, the government of Wuqi offers more generous health insurance to its citizens than many places. Its schools are free all the way through high school, rather than through only ninth grade, as is usual in China. Over the last decade, the city has embarked on ambitious tree-planting programs that have brought green to the yellow-brown hills of the Loess Plateau, where Wuqi is located, and where the famed  Long March ended in those hills in 1935.

The idea is to build  what Chinese leaders call “a balanced and harmonious society.” In that economy and society, families would not have to save 20 percent of their income in order to pay for schooling and medical care, as many do now, and would thus be able to afford better housing, clothing, transportation and communication.

In contemplating China’s likely future as a great consumer society, that expression may have acquired negative connotations in the United States, but it means something very different for China, than in the US.

The means to obtain time and labor saving tools, services and commodities are also the means to acquire advanced culture. Expanded consumer society would improve the lives of hundreds of millions of Chinese people. The benefits of the industrial boom that began in the 1980s would spread more rapidly beyond the country’s eastern coast. The service sector would grow substantially. This would have a dual impact of raising the demands for quality in production and thus in the quality of labor inputs; and – the production sector could afford more environmentally clean processes – dovetailing with a major "green" emphasis in Chinese industrial policy.

For the rest of the world an advance in Chinese consumerism is one of the best hopes for future economic growth. In the years ahead, the United States, Europe and Japan will have no choice but to slow their spending and pay off their debts. Millions of Americans could end up with jobs to design, make or sell goods and services to a growing, consuming China.

Yet some elements of consumer growth are missing. Leonhardt reports that the hardware, liquor and food stores down the block from his hotel were each the size of a storage closet and about as well lighted. They would have great difficulty scaling to handle a rising consumer movement. The parents in Wuqi were indeed “thrilled that high school was free but were still saving an enormous portion of their modest incomes to pay for college or a new home.”

Further, he observed that the ingrained saving culture has a self-reinforcing aspect that has can outlive its usefulness, in which stores don’t flourish because people don’t buy, and people don’t buy because there aren’t good stores.

Why China’s Success?

No one can deny the evidence of a juggernaut over the past thirty years. But it would be wrong to think these growth rates are sustainable or inevitable. China is the world’s most populous country, with a mature civilization extending back into furthest antiquity. It is very proud of reclaiming a long-lost international prestige and independence. Its economy recently passed Japan’s as the second-biggest in the world.

Moreover, at the same time, other poor countries – in South America, Africa and even Asia – with vast pools of cheap labor, have not yet been able to grow as rapidly. Not only other undeveloped nations, but other once-socialist countries, mostly in Eastern Europe, are still suffering from from the collapse of the USSR and have not comparably recovered. Even much heralded  India has less than half China’s per capital income, and much greater inequality.

So having a lot of cheap labor or moving toward a market system, or even both, does not guarantee or explain China’s phenomenal growth – among the most rapid in history. That growth has been a mix of good fortune and good strategy. The Maoist “great leap forward” – China’s experiment with command-style socialism in a predominantly agricultural country was an economic failure. It also resulted in a brutal and repressive era. But, despite these setbacks, the socialist revolution in China had bequeathed,for the first time in history, literacy, education and health care to millions and millions of citizens. Thus it emerged with a huge reservoir of human capital. Into this fertile economic ground, Deng Xiaoping and his reformers planted the seeds of a market socialism. Workers gained big incentives to succeed, while central planners, and strategic industrial policy turned China into the world’s factory.

The transition from agricultural to industrial economic and social organization is an inherently unstable, complex, and often very revolutionary process. It requires massive redivisons of social classes and occupations; of the means and tools of living; and mandates the repeated restructuring of public institutions that support and serve the overall division of work. As Leonhardt remarks: “In important ways Chinese policy follows the classic best practices in economic development: investments in physical capital and education make a society qualitatively more productive and are combined with a huge shift of people from farms to factories. England, Germany, the United States, Japan and South Korea have all followed the model over the last 250 years.”

Risks

But there are significant risks and uncertainty going forward. To continue growing rapidly, China needs to make the next transition, from sweatshop economy to innovation economy. This transition is the one that has proved most fragile and difficult elsewhere, and by no means stable even in advanced economies. Once a country has turned itself into an export factory, it cannot keep growing by repeating the exercise. As Leonhardt’s local Wuqi Communist Party officials point out: You can’t move a worker from an inefficient farm to a modern factory, and modernize the farm to participate in large scale productive agriculture – again.

China cannot even retain its industrial might forever. As a country industrializes, workers inevitably combine, organize and demand their share of the bounty, as is happening in the current labor upsurge in China. Economic history teaches that a rising economy needs to take two crucial steps: manufacture goods that aren’t just cheaper than the competition, but better; and create a thriving domestic market, so that its own consumers can pick up the slack when exports inevitably slow.

Innovation

Getting the innovation engine started and running strong is a big challenge for China. It must change its current share of the worlds top 100 universities far upwards from three. (The U.S. has 53 of the top 100). And its markets must run efficiently enough to both test and deploy successful innovations. This means that in the domain of commodities, highly tuned and competitive markets must be fostered. China is taking a much more directed, and less bourgeois, approach to this problem. So far, its a success.

Failures

Yet there is no iron law that it will reach the next stage. Many of China’s challenges can be ascribed to its stage of development. Japan and the Soviet Union, in different ways, yet both failed at critical points to make the full transition to an innovation economy. While they may seem like unimpressive comparisons today, they once occupied a position much like China’s. They were rising powers that appeared to have found a new model for growth.

The Soviet Union failed to take the next steps following initial success at both industrialization and creating a world class educational system. Japan has not merely slowed down but become a global symbol of economic mismanagement.

Challenges

The United States, for all of its current problems, is still easily the world’s largest economy, in large part because it was the first to successfully make the transition from an industrial economy to a consumer economy, a transition stimulated by higher disposable incomes for working people, itself the product of decades, and waves, of class struggles through its history. Average per-capita Income in the United States remains about six times as high as in China. Though the latter has the size  advantage over other countries, its hard to consider a more consumer demand-driven economy apart from an economic culture rich in  individual choices and preferences. This will indeed be a challenging tiger for market socialism to ride going forward, with or without more political pluralism. No doubt some concessions, even big ones, will be made in this direction –but China is putting a truly original and “Chinese face” on nearly every question.

Bureaucracy

There is another obstacle, perhaps also related to the single party configuration: the government is filled with many officials who have known only industrial-led growth. Reformers will have to persuade their comrades to take significant steps back from the most aggressive industrial policy any country has ever undertaken, a policy that has clouds on the horizon, but has by no means yet failed. China now spends about 50 percent of its gross domestic product on investment – roads, bridges, trains, ports, technology, factories and office buildings. That is the highest share in recorded history. Even during their own impressive booms in the 1960s and ’70s, Japan and South Korea never topped 40 percent. China itself was spending 35 percent only a decade ago.

Now, the massive demographic trends arising from industrialization started put tremendous pressure on pay. This year’s strikes at a Honda plant in Guangdong Province led some companies to lift wages more than 20 percent. Twenty-eight provincial governments increased their minimum wage between 12 percent and 32 percent. At the same time, returns on the massive capital investments required to propel the industrialization transformation are starting to decline – another sign (some loss of efficiency) that a paradigm shift is coming. Leonhardt quotes a local Communist Party official in Wuqu:

“We realize this kind of growth is not sustainable. It’s not the kind of problem like a financial crisis. But if such inefficiencies accumulate for quite a long time, you reach the point where, suddenly, maybe things burst.”

Gradualism

China’s gradualist approach to economic policy has been a big part of its success. The country avoided the turmoil that some of Eastern Europe experienced when it switched almost overnight to a market system. China has also escaped the fate of old-style centrally planned economies like Cuba’s, because, in addition to China's sheer size, Deng and his followers were more pragmatic than ideological. If something worked – if it led to growth and jobs – they usually favored it. To create these jobs, the  state relied  heavily upon subsidized companies, especially manufacturers that export goods. Some of these subsidies are direct and obvious, like those now benefiting China’s clean-energy industry. But most are subtler. For example, the government holds down the price of coal, oil and other natural resources, which tends to benefit coastal exporter at the expense of interior provinces that produce the resources. It also sets a ceiling on interest rates, which also biases saving against individual savers in favor of capital-intensive businesses that borrow to expand. 

The Price of Labor and Currency

An over-emphasis on capital an export, can indirectly suppress the price of labor, too. An old labor-registration system called hukou has long treated many migrants who move from distant provinces to cities to work as if they were illegal immigrants. Basic benefits – free schooling, pension, health insurance – are often unavailable to people who work outside their native regions.

China has kept its currency artificially low to enhance exports. Leonhardt writes, “The renminbi has roughly the same value today as it did in 1990, relative to a basket of other currencies, which is remarkable considering how much faster China’s economy has grown than the world economy. The low renminbi holds down the price of Chinese-made goods in other countries, increasing exports. But it also means that foreign-made products are more expensive within China than they would otherwise be. In effect, China’s government is deliberately reducing the buying power of its own consumers to subsidize its exporters.”

Making big transitions in lifestyle and culture and vast re-divisions of labor and consumption and wealth without social upheaval, or at least keeping the upheaval from reaching warfare, is the evolutionary test every surviving civilization, indeed the planet, must take and pass. China must increase its consumption, and it will. However, some of the alleged “unfair competition” charges from the US are rubbish. American companies have mightily benefited and reaped the whirlwind in profits from their Chinese investments and the low exchange rate on both labor and supplies produced there.

Inequality

Another obstacle is growing income inequality. The subsidies that China showers on its corporate sector have been crucial to building an industrial economy. But they have also led to a  concentration of income. The rich receive a much larger share of the national income than they did a few decades ago. Leonhardt reports that this year mainland China and Hong Kong had 89 billionaires, while Japan, with an economy almost as large as China’s and per-capita income several times higher, had just 22.

Education has already played an under-appreciated role in China’s rise. For decades, Chinese children have spent more years in school than their peers in other countries; among the world’s many cheap laborers, China’s have been uncommonly skilled.

The next step is to educate people not just for factory work but for the white-collar work that would be a growing part of a consumer economy. Much of that work requires a full high-school education, if not college too. Today 55 percent of China’s adult population has graduated from high school (compared with less than 10 percent in India). But only about 5 percent of Chinese adults have a college degree of some kind.

Since 2008

The centerpiece of the government’s recent efforts to transform China’s economy was the stimulus program announced in 2008. Relative to the size of the economy, the stimulus was more than twice as large as America’s. It focused on infrastructure, mostly highways, trains and housing. Infrastructure spending is heavy-duty investment that plays off China’s existing strengths.

When tens of millions of workers were losing their factory jobs at the depths of the global recession, the government was able to put many of them back to work quickly on construction projects.

Building infrastructure is not the same as fostering a consumer economy, but it  can help. The new apartment buildings going up in hundreds of cities will employ workers now and will later become homes for rural migrants.

Leonhardt has a fitting close to his report on China’sefforts to build a new economy:

[T]here is an intriguing parallel to the United States: Both the world’s largest economy and its latest challenger need to remake themselves. As [a Party official] bluntly told me, “You are facing transformation, too.” The United States needs to shift away from debt-financed consumption with little long-term benefit and toward investments that can create good-paying jobs, like education, infrastructure, energy and scientific research. China needs to invest less and consume more — to keep growing rapidly and, in the process, to stimulate economic growth around the world. In both countries, significant changes are necessary to create more sustainable growth. And in both countries, they inspire fierce internal opposition.

The best outcome would be for both countries to reshape their economies gradually, benefiting both. In neither country will it be easy.

Photo: Streets of Shanghai, China. (by lyng883, courtesy Flickr, cc by 2.0)