2005,+Sachs,+Chinas+leap+to+21st+century


 * From “Umrabulo”** Number 22, February 2005



By Michael Sachs
How Africa responds to the political and social implications of China's awesome growth and development will be key to securing the continent's future in a twenty-first century world which has China at its heart, writes Michael Sachs.

The People's Republic of China (PRC) is in the midst of a transformation of global significance. From a closed economy in which the state was the only economic actor of significance, China has moved rapidly towards a system that the Communist Party of China (CPC) defines as market socialism, where a sizeable state sector exists side by side with private enterprises and foreign investors. China's leap will lift the most populous country on earth into the heart of politics and economics in the coming century, a reality to which we must all adjust. What lies behind China's success, and what are the implications for the world, particularly Africa?

**'DEVELOPMENT IS THE ABSOLUTE PRINCIPLE'**
Rejecting the 'ultra-leftism' and extreme egalitarianism that characterised the decade of the cultural revolution (1966-1976), Deng Xiaoping inaugurated a new policy in 1978 advancing the slogan: "Development is the absolute principle". Developing the 'forces of production' was established as the paramount objective of all government policy. After fundamental debates about the 'capitalist' versus 'socialist' character of change, Deng's pragmatic ideas had won the day. In a famous aphorism he said, "It doesn't matter if it is a black cat or a white cat, as long as it catches the mouse".

Deng urged China to cross the river of development by "groping with our feet at the stones under the water". Since then, Chinese reforms have advanced one step at a time in a systematic and logical manner that relies on a detailed analysis of objective reality and policy adjustment at each stage of transformation. This experimental pragmatism is described as follows by a government researcher: "Reform will lose direction if there is no opening. If there is only opening without reform, it will be difficult for the country to maintain economic stability and political independence. The so called "gradualist reform" model practiced in China is actually a continuous process of exploration, that is of opening the door a bit, discovering a problem, solving it through reform, and then opening the door yet a bit wider". [Ding, 1998]

Double-digit growth in GDP has been sustained for more than a decade, much of it driven by vast quantities of foreign direct investment (FDI) and public infrastructure investment. The scale of recent development in Shanghai is awesome. In the short space of ten years, the city has become a towering forest of steel, glass and concrete, which dwarfs the teeming humanity working within it. Today, Shanghai bears little visible resemblance to a third world city. The new development area, Pudong district, has arisen with dizzying speed into a vast agglomeration of finance and industry on the east bank of the Huangpu River, which is lined by towering dock cranes that lift US$202 billion worth of trade each year. But it does not end here: awesome plans are in motion to invest billions in social development and economic infrastructure to accommodate the city's growing population, which has already reached 17 million.

**CHINA'S GDP GROWTH IN AN HISTORICAL PERSPECTIVE**


The graph above illustrates the spectacular nature of China's growth, while also placing it in historic context. The stagnation and volatility of GDP per capita during the era of the 'great leap forward' and the 'cultural revolution' forms the backdrop to China's shift towards 'market socialism'.

According to Deng: "In the twenty years from 1958 to 1978, the Chinese society was virtually at a standstill or in a lingering state, and the economy of the country as well as the living standards of the people did not achieve much development and improvement" [cited in Wang, 2000]. In 1982 he told a visiting delegation: "We have been making revolution for several decades and have been building socialism for more than three. Nevertheless, by 1978 the average monthly salary for our workers was still only 45 Yuan, and most of our rural areas were still mired in poverty. Can this be called the superiority of socialism? That is why I insisted that the focus of our work should be rapidly shifted to economic development... Our practice since then has shown that this line is correct, as the whole country has taken on an entirely new look." [Deng, 1982]

But it would be wrong to write off the revolutionary period as an aberration that delayed the realisation of China's potential as a market economy. Rather, it was the revolutionary mobilisation of the people, the radical redistribution of assets (particularly land) and large investments in human capital that laid the basis for sustained and widespread economic development in the recent period. Also of crucial significance was the fact that, prior to the revolution, China had been mired in a century of disunity, chaos and rule by warlords. The Communist Party's achievement was to unite the people around a common programme and construct a powerful and centralised state apparatus capable of safeguarding China's national interests, even in the context of rapid integration with the global economy.

The Filipino activist and scholar, Walden Bello, captures this well:

"Beijing is tough on foreign investors and has the upper hand in its relationship with the international business community. Yet foreign investors are scrambling to get into China, restrictions and all... In contrast, foreign investors can blackmail other governments to dilute their investment rules... Respect is what the Chinese government gets from investors. Respect is what our governments don't have. When it comes to pursuing national economic interests, what separates China from many of our countries is a successful revolutionary nationalist struggle that got institutionalised into a no-nonsense state." [Bello, 1999]

A number of economic factors can be identified as lying behind China's rapid growth. These include a virtually unlimited supply of cheap and educated labour, well developed human resources, very high rates of saving, a stable and undervalued currency, relatively closed capital markets and favourable geographic location.

But it is the politics of the developmental state that lies behind the Chinese 'miracle'. The state's role in the economy is not simply a function of the size of the public sector, which is growing smaller albeit from a very high base. Rather it is the capacity of the state to lead and direct the economy that is significant. The state is able to mobilise vast resources and direct them to where they are most needed, guided by a long-term vision that informs a set of clear and detailed short to medium term plans. Aspects of this role include:


 * Massive investment in public and economic infrastructure to leverage private investment, both foreign and domestic, toward clearly identified development priorities.
 * The use of non-economic (ie. political) measures to control key prices such as the interest rate, the exchange rate, wages and the prices of agricultural products and domestically sourced natural resources. The state also maintains strategic subsidies and price controls to facilitate poverty alleviation (eg. subsidised micro-credit) and rein in the cost of basic foodstuffs.
 * Facilitation, coordination and direction of private investment across economic sectors and geographic regions, in a manner that builds horizontal and vertical linkages and ensures the transfer and diffusion of technology through strong industrial policies and detailed plans in selected 'pillar industries'.
 * Linked to the above is the directing role of the state in credit and capital allocations, which is achieved through state control over banking institutions. Aligned to this has been a strategic approach to capital account liberalisation, which is required to accommodate the resulting inefficiencies in the banking sector, which include large quantities of non-performing loans.
 * Investment in human capital with a particular emphasis on science and technology, and a sustained commitment to 'learning by doing' (ie. ensuring that foreign investments lead to the transfer of technology and the acquisition of skills amongst Chinese themselves).

At the core of the state's capacity to lead and direct economic development is the leading role of the CPC. The common ideological basis of the Party acts as a powerful countervailing force to the centrifugal tendencies of the market economy. From each village to the central government, in every public institution and parastatal, in every region, city and economic sector, CPC committees ensure that the 'mass line' of the party drives the process of change. Party cadres are regularly trained and deployed to the areas in which they are most needed.

**SOCIAL GAINS (AND STRAINS) OF DEVELOPMENT**
For the vast majority of Chinese there have been rapid and sustained improvements in the material conditions of their existence in a short period of time. Over the last twenty years, China has witnessed a massive growth in per capita income and a significant reduction in absolute poverty. In terms of the national poverty line the numbers of people living in absolute poverty has declined from 250 million in 1978 to only 29 million in 2003, a shift from 30.7% of the population to only 3.1%.

Nevertheless, inequality, relative poverty and unemployment are on the rise, and in 2003 an increase in the number of absolute poor was recorded for the first time. A significant worsening of inequality between urban and rural dwellers is also apparent, a matter of grave concern in a country where 70% of the population still live in rural areas. Furthermore, there are rising disparities between the fast growing eastern provinces, where the bulk of industrial development is located, and the western and central regions, which are the traditional sources of natural resources and agricultural products.

Professor Justin Yifu Lin of the Centre for Economic Research at Peking University believes that one of the reasons for this widening gap has been the suppression of agricultural and natural resource prices, which in turn is one of the factors that has enabled rapid development in the East. In effect the poor provinces have been subsidising accumulation in the richer provinces.

Against the background of these widening inequalities, vast numbers of migrants have left their villages to seek work in the cities. Numbering more than 100 million, these young and relatively educated people increasingly fall between the cracks of society. A form of 'influx control' is maintained, albeit weaker than in the past. State services are provided only to registered 'citizens' of a particular area and denied to 'temporary migrants'. But in some areas migrants already constitute a third of the urban population, exercising powerful downward pressures on wages.

Severe strains are also emerging in relation to health care for the poorest, while education appears to be increasingly inferior for those still mired in poverty. In part this reflects significant problems of fiscal decentralisation in China, where municipalities have considerable financial autonomy. Fiscal transfers from the centre to under-financed municipalities and regions (funded on a project by project basis) have had an impact, but the lack of fiscal capacity in poorer districts has taken a severe toll on services.

According to government the number of workers employed in state owned enterprises (SOEs) has declined from 74 million to 36 million over the last twenty years, as the SOEs have been forced to adjust to a market environment. The PRC expects the development of new economic sectors to begin mopping up surplus workers who have been laid off in the course of rapid economic restructuring. In addition, a number of active labour market policies are deployed to ameliorate the worst effects of unemployment and promote self-employment and small business. The laid off workers from the SOEs are given particular attention. They maintain a contract with their former employers, have access to subsidised loans and are given a 'minimum living allowance', while government has dedicated programmes to assist with re-employment.

While state intervention to mitigate the worst features of poverty and unemployment are strong, the Chinese clearly believe that it is economic growth that will provide the final solution to these problems. The CPC aims that by 2010 China should quadruple its GDP in order to become 'a relatively well off society' and by 2050 the project of modernisation should be completed. Assuming that developments continue along the same path it is quite possible to imagine that these awesome feats will be accomplished well before the target dates.

But the pace and scope of China's transformation will undoubtedly generate new tensions and challenges within Chinese society. Whereas countries such as Britain and Japan transformed themselves into industrial societies over a period of 150 years, China expects to complete its modernisation process by the year 2050, in half that time. Britain (and others) industrialised with the help of colonies, which provided cheap raw materials on the basis of forced labour and also enabled the mass migration of their surplus populations of the poor and unemployed to distant lands. China enjoys none of these 'benefits'.

Already, the process of 'opening up and reform' has led to massive and rapid changes in Chinese society. New productive and social forces are likely to pose serious problems to future political and social stability, even assuming that growth continues apace. But perhaps the greatest danger of a systemic crisis would be presented by a slow down in growth.

**A QUIET RISE AND A NOISY DECLINE?**
Given the abundance of labour and current low levels of GDP per capita relative to developed countries, there is no objective reason why China should not continue to grow rapidly for at least another two generations. This would mean that the PRC is destined to become the largest economy in the world by the middle of the twenty-first century. Razeen Sally of the London School of Economics regards China's growth and global integration, together with that of India, as an epoch-making event:

"What makes the crucial difference to economic globalisation today, and probably for the next half century, is the dramatic opening of first China and then India. They are the world's second and fourth largest economies respectively (at purchasing-power parity): China accounted for 12%, and India 5.7% of global GDP in 2002. Together they are home to 40% of humanity...

//"With still low levels of per-capita income... they have the potential for stellar catch-up growth rates for decades ahead. Their integration into the world economy, still in its early stages, promises to be more momentous than that of Japan and the east Asian Tigers, and perhaps on par with the rise of the United States as a global economic power in the late nineteenth century."// [Sally, 2004, emphasis added]

Already the fate of the global economic system hangs precariously on Chinese and Asian developments, with global growth in the coming decade depending to a large degree on continued Chinese expansion. What is more, the single most significant imbalance in today's global economy is the US's vast current account deficit, which must be balanced by equally vast capital inflows from the rest of the world.

In order to consume more than it produces (which is the logical corollary of the current account deficit) the US must continue to attract inflows of foreign savings. A large and rising share of these savings comes from China, which, in order to maintain its currency on par with the dollar, must buy US dollars. Already in 2002 China was the second largest foreign holder of US long-term debt securities, accounting for $165 billion, or 6.5 percent, of total foreign holdings [IMF, 2004]. United States imports too are increasingly sourced from China. During the recent recovery of the global economy the structure of US imports changed significantly with imports from China growing by 52 percent between 2001 and 2003 [UNCTAD, 2004].

A French economist once characterised this kind of relationship as follows:

//"If I had an agreement with my tailor that whatever money I pay him returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him." [Jacques Rueff, cited in The Economist, 2004] He was not referring to China, but to the Bretton Woods system of fixed exchange rates that prevailed for thirty years after the Second World War. And indeed, some economists regard the relationship between China and the US as similar to the old Bretton Woods system: "Once again, America is at the centre of the system. The old periphery consisted of Europe and Japan, which used undervalued currencies, supported by capital controls and the purchase of dollar reserves, to rebuild their economies after the war. But the new periphery is made up of China and other Asian economies which, it is argued, also peg their currencies to the dollar at artificially low rates."// [The Economist, 2004]

Unlike the Bretton Woods system, however, these arrangements have not been explicitly negotiated, and the vast global imbalances we have described cannot be sustained. The question is not if, but when and how, the inevitable unwinding of this global disequilibrium will take place: in an orderly and negotiated manner, or through a series of volatile and unpredictable shocks.

What is certain is that, as these economic imbalances 'unwind', they will do so against the political backdrop of the emergence of a new global super-power. Rather than a simple acceleration of current imperatives toward 'globalisation', the scale of Chinese integration ("on par with the rise of the US as a global economic power in the late nineteenth century") points to a revolutionary transformation of the global system.

Indeed, the emergence of the US as an economic power ultimately led to a transfer of global leadership from the then hegemonic power, Britain, and a thorough reconfiguration of global capitalism. But whereas the transition from British to US world hegemony was facilitated by a common language and culture (indeed the US itself was an offspring of British capitalism) there are no such cultural factors to lubricate the likely transfer of leadership from the US to China.

The Chinese believe that it would be much better if its 'rise' were a peaceful and quiet one. The CPC says: "China's national development will contribute to world peace and stability; and world peace and stability will contribute to China's national development." But Giovanni Arrighi argues that the prospects for global peace, versus the possibility of protracted conflict, hinge more on the willingness of the US to accept the transfer of hegemony: "If the system eventually breaks down, it will be primarily because of US resistance to adjustment and accommodation. And conversely, the US adjustment and accommodation to the rising economic power of the East Asian region is an essential condition for a non-catastrophic transition to a new world order." [Arrighi and Silver, 1999, cited in Arrighi, 2004] The real cause for concern, therefore, is not China's quiet rise but America's noisy decline. On this score, the quagmire into which the US has voluntarily plunged itself in Iraq does not bode well. As a result of US strategy since the 11 September 2001 attacks it is likely that it will not primarily be a direct challenge between China and the US that poses the greatest threat to global peace and stability, but a 'clash of fundamentalisms'. On the one hand, Anglo-Christian fundamentalism aligned with the most reactionary elements of US capital will staunchly resist the ebb of American power. On the other hand an equally reactionary Islamic fundamentalism will seek to answer the global crisis by taking the Muslim world back to an imagined past and thus turn the clock back on modernity itself [Ali, 2003].

In this context, China could well emerge as a moderating force. In sharp contrast to both the US's unilateral aggression and right-wing Islam's rejection of universal values, China believes that its national interest is objectively aligned with multi-lateralism and world peace.

**CHINA, AFRICA AND SOUTH AFRICA**
These global transitions form the strategic context in which South Africa must consider its relations with the PRC. Politically, there is much to gain from a strengthened bilateral cooperation. China regards South Africa as a strategic partner in building multilateralism and strengthening the position of the South in the global order. South Africa too knows that in order to succeed in its national development a fundamental reordering of the global political and economic environment is required. Already China has made clear its commitment to these goals by investing significant development assistance in the African continent, deploying peace-keepers in Liberia and cancelling US$1.27 billion worth of debt owed by Africa.

China is also the only developing country that is a permanent member of the UN Security Council and its voice in world economic and political forums will become increasingly stronger. China too clearly recognises the importance of the African bloc in multilateral forums [Alden, 2004]. Given that it has opted for 'market socialism' rather than American-style free market fundamentalism, China's voice may also give impetus to new and heterodox approaches to the resolution of development problems facing the post-colonial world.

China's economic interest in Africa has grown significantly over the last ten years: trade with the continent has almost doubled while Chinese firms (both private and state-owned) have made significant investments in a range of African countries. These are focussed on China's national priorities including securing its access to raw materials, such as oil, cementing its ties to African states through significant infrastructure and construction investment, and ensuring food security through the purchase of agricultural lands and enterprises [Alden, 2004].

Flows of Chinese savings, both private and official, could become increasingly important to the African continent, while political alignment on a number of key global concerns, such as US unilateralism, make the political imperatives of our relations with China very strong. But these political imperatives for close cooperation could come into tension with the economic consequences of China's emergence. For South Africa, and for Africa as a whole, the economic implications of China's growth and the consequent reconfiguration of the global economy are somewhat contradictory.

On the one hand, China's growth is likely to sustain a global boom in the prices of primary commodities that are produced in Africa. Already, the prices of commodities such as steel, coal, other minerals and agricultural raw materials have risen significantly on the back of Chinese demand. Also significant are the indirect consequences of China's rapid growth. For example, although China is the world's largest coal producer, the scale of its own consumption has reduced the quantities of Chinese coal available for export, thereby putting upward pressure on global prices [UNCTAD, 2004].

On the other hand are the global consequences of increasing Chinese domination of labour-intensive manufactured products. China's unparalleled capacity to supply these goods at lower cost will significantly reduce their prices on world markets. While South African and African consumers would benefit significantly from these lower prices, the consequences in terms of employment could be significant. 'Hollowing out' of domestic industries is a strong possibility, especially for sectors relying on unskilled labour [IMF, 2004].

**CONCLUSION**
There is much that South Africa could learn from Chinese growth, particularly the unifying and directing role of the developmental state. But the character of South Africa's political economy means that wholesale replication of a Chinese 'model' is simply not possible. Indeed, in the context of our democratic constitution, it is impossible (and undesirable) for South Africa to replicate the coercion of both labour and capital that continues to form a key component of this model. South Africa's development must rely to a much greater extent on the construction of a 'shared vision' through the mobilisation of consent.

At the same time, the political and economic implications of China's growth and development cannot be avoided or ignored. South Africa's integration into the global economy has historically been driven by 'Anglo-American' capital, and a hegemonic shift towards the East will have momentous consequences for the politics and economics of African development as a whole. How we balance the economic and political imperatives implied by this shift will be key to securing our future in a twenty first century world with China at its heart.

Michael Sachs is research coordinator at ANC headquarters and participated in an Alliance visit to study China's growth and development during September 2004. This article reflects his views alone.

**REFERENCES**
Alden, Chris: Comments on China - Africa relations at the IGD/SAIIA SACU-China FTA Workshop, Johannesburg, 28-29 September 2004

Ali, Tariq: The Clash of Fundamentalisms: Crusades, Jihads and Modernity, Verso (2003)

Arrighi, Giovanni (2003): Rough Road to Empire, revised version of a paper presented at the conference "The Triad as Rivals? U.S., Europe, and Japan" Georgetown University, Washington, D.C., April 25-26, 2003.

Bello, Walden: China at 50: A view from the South, downloaded from Focus on the Global South web page: www.focusweb.org/publications/1999/, on 19 October 2004

China Facts and Figures: New Star Publishers, Beijing, 2004

Deng Xiaoping: We Shall Concentrate on Economic Development; September 18, 1982, Selected Works Volume III.

Ding Ning Ning: A Candid Discussion about China, Mimeo, September 1998

IMF: International Monetary Fund: China's Emergence and its impact on the Global Economy, Chapter II of World Economic Outlook, April 2004,

Lin, Justin Yifu: Interview with the author and other delegates, Peking University, Beijing, 23 September 2004

Sally, Razeen: China's Trade Policies and its integration into the world economy, Paper prepared for the IGD/SAIIA SACU-China FTA Workshop, Johannesburg, 28-29 September 2004.

The Economist: The Dragon and the Eagle: A survey of the World Economy, 2 October 2004.

UNCTAD: United Nations Conference on Trade and Development: Trade and Development Report, 2004

Wang Mengkui (Ed.): China's Economic Transformation of 20 Years, China (Hainan) Institute of Reform and Development, Foreign Languages Press, Beijing, 2000


 * Article by Michael Sachs from Umrabulo No. 22, February 2005, http://www.anc.org.za/ancdocs/pubs/umrabulo/umrabulo22/china.html**