David Harvey | The Significance of China in the World Economy

David Harvey, The Significance of China in the World Economy, in The Anti-Capitalist Chronicles, Pluto Press, 2020

On January 2, 2019, after the stock market had 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 (down by 6 percent), and the following day, the stock market that had already lost a lot of money declined by another 2.5 percent. The interesting thing about this was that it was Apple computer sales in China that triggered the problem. Apple computers are, of course, made in China, but Apple also has a significant market there. The main official explanation for the problem was that the consumer market in China was softening for a number of reasons. The main cited reason was the Trump assault upon tariffs. But the other, which came in the small print in later reporting, was stagnation in China’s consumer market.

But when we look more closely, we find that Apple computers were declining in popularity and that Apple’s share of the China market had been reduced to a mere 7 percent. The other 80 percent was covered by Chinese computer companies with names like Huawei, Xiaomi, Oppo, Vivo – companies that nobody had ever heard of outside of China. Most of these companies had existed only in name in 2010. There has been a huge increase in Chinese production of iPhones, computers, and the like, and that huge increase is producing at a much lower cost with much easier operating systems well adapted to Chinese uses. Many Chinese cities, and I had experienced this myself at first hand, went from a cash economy to a cashless economy in just three years, and an easily utilized Chinese-made iPhone was the instrument. I couldn’t even pay for a cup of coffee with cash.

I mention this because China’s presence and significance in the global economy is underrepresented in many contemporary accounts of what’s going on in the world. Yet, as evidenced by the Apple case, what is happening in China is going to be determinant for global capitalist development in general. In fact, it has already been determinant, particularly since the crisis of 2007–08. Capital, and capitalism in general, was rescued from collapse into depression in 2007–08 by an expansion of the Chinese economy. We also need to come to terms with the sheer size of the Chinese economy and the rapidity of its transformation. The fact that in three years, major cities in China went from a cash economy to a cashless economy is an example.

But let us begin with the size of the Chinese economy. It is now the second largest economy in the world by conventional measures of GDP. If you take the purchasing power parity measure, which is based upon what a local currency can buy, then the Chinese economy is the largest economy in the world. If the Chinese economy flourishes, then the rest of the world flourishes. If the Chinese economy goes into a recession, then this has a tremendous impact upon the evolution of capital.

The other side of this, which is important from an anti-capitalist standpoint, is that China is still committed to its Marxist position. It is still governed by a Communist Party, and while many people will say the Communist Party is in fact a capitalist class party, it is still a nominally Communist Party in which the thoughts of Marx, Lenin, Mao, Deng Xiaoping, and now Xi Jinping, are cited as central to their ambitions. The last party congress declared that they plan to be a fully socialist economy by the year 2050. 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. This is to be accomplished through the agency of the Communist Party. The declaration made very clear that there is no chance of democracy right now, that the continued 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.

For those of us interested in the future of socialism, I think we need to take what is happening and planned in China seriously. We need to keep two questions in mind: to what degree does the future of socialism depend on what is happening in China, and if so, what kind of socialism will it be? The second question is: will the future of socialism worldwide be determined by what might happen in China, by this programmatic transformation of its economy towards a supposedly socialist economy with Chinese characteristics?

I think that for anybody on the left, we should pay attention to these questions 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. This competition is not only economic it is also political and cultural. This is one of the things that the Trump administration has brought into the forefront of our consciousness. We need to think about China in a more coherent way.

I’m not an expert on China. I wish I knew much more about it, I wish I knew the language. I have been there a few times, and I have read a great deal. I try to follow what’s going on particularly in the financial press. But I have to say that I have not got a very clear answer to the questions that I have posed. I do not have a clear analysis of everything that is happening there. China is obviously a very complicated society, but there are nevertheless certain things that stand out for me as I seek answers to crucial questions.

The first thing is that the big transition occurred in 1978, when Deng Xiaoping and a group of young people got together, looked at the situation and in effect said: “We have to change something, and we have to change it in ways that are going to allow us to increase productivity in the economy dramatically.” At that time, the Chinese economy was stagnant. And they were faced with the following situation: the World Bank in 1980 estimated that 850 million people were living under conditions of abject poverty in China and conditions were not improving. So that was one thing.

The other was that China was surrounded by countries that were developing very fast, and improving their standards of living very quickly. Japan had done so, South Korea had done so, and even more important, Taiwan, which the Chinese considered as part of China, had done so. Hong Kong, which at the time was nominally 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 pretty wealthy, and you had a stagnant economy on the Chinese mainland itself.

The Party leadership saw this was a very threatening situation, leaving aside the attacks that might come from imperialist powers directly. They realized, as Marx put it, that the world of freedom begins when the world of necessity is left behind. 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. It was in that context that they decided to introduce one of those elements into the economy which was going to become critical in the years to come. They were going to force economic entities to compete with each other to increase productivity. The mechanism was to introduce market forces into the economy.

In so doing, of course, they did consult with Western economists. Milton Freedman 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 will find very few people who have studied Marx very carefully in economics departments. Most economics departments are staffed with people who got PhDs from MIT, Stanford, and places like that. Neoclassical economics is very well understood in China, so their method of analysis of the economy started to shift, their policies started to shift. Marx’s political economy is considered a branch of philosophy not economics.

This transformation was astonishingly successful. If you take any of the other countries that moved out of communism or socialism into capitalism, such as those in the ex-Soviet empire, then they all went through a period of chronic and often catastrophic economic disaster from which they have yet to fully recover. China, on the other hand, developed very rapidly. The World Bank estimated by 2014 that the 850 million people in abject poverty in 1980 had fallen to 40 million. Most recently, China plans zero poverty in the country by 2022. Whatever you may think of this, there is no question that the standard of living of people in China, their access to commodities, goods, and so on has increased very substantially. This has been an astonishing achievement. But it has not only done that. It has also developed completely new ways of living.

Daily life in China has been revolutionized through rapid urbanization. By the time you get to the 1990s, there are hundreds of cities which have more than a million inhabitants. You now see a rate of urbanization which is about 15 percent per year, and a tremendous migration of populations from rural areas into the city. There are estimates in the 1990s, for example, that something like 300 million people had actually moved from the countryside into the cities over the last ten or 15 years. By comparison, the total migration from Ireland to the United States was maybe 30 million people spread over a century. When we start to compare what has happened in China with what has happened elsewhere around the globe, then the speed of transformation and scale of transformation in China is enormous, something never ever seen before in human history.

Consider one of the crucial means by which global capitalism was saved by China from total collapse in recent times. In 2007–08, you get the global crisis. This crisis crashes the consumer market in the United States, which meant that those companies and those countries feeding the US consumer market are in recession. China, it is said, lost around 30 million jobs in 2007–08 in the export industries. There was tremendous labor unrest in China during that time. There are reports on the numbers of incidents of labor protest in China, and during that year, a lot of companies went bankrupt. Many of the companies didn’t pay wages that they owed for six months. Many unemployed people were left on the streets with nothing.

There was a tremendous crisis for China. But by 2009 a survey was done by the IMF and the International Labour Organization (ILO) to answer the question: “What was the net job loss from the crash of 2007–08 across the world?” The net job loss in the United States was around 14 million people. But the net job loss in China was only 3 million. Somehow or other, China had created 27 million jobs in one and a half years. That is absolutely phenomenal. When I first saw this I said “nobody has ever heard of this before.” But when I read further I found that China right throughout the 2000s was already creating 20 million jobs a year. There was a huge transformation in employment already in motion and they had simply doubled down on that to deal with the crisis.

Now, in 2007–08, 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 a process that had begun in the 1990s. They expanded infrastructural investments, particularly in the built environment. I have a graph I often use to illustrate this, which is the consumption of cement in China. If a lot of cement is consumed it means there is a lot of construction going on. China after 2007–08 tripled its consumption of cement to the point where between about 2009 and 2012, they consumed far more cement in two or three years than the United States consumed in one hundred years. Now, living in the United States, you know there is a lot of cement consumed, but China was consuming at an astonishing rate, and they were building almost without cease and without limit. 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 had around 15,000, maybe now they have around 20,000 miles of high-speed rail. All of this takes a lot of materials, so China boomed in terms of its infrastructure investment.

If you remember what happened after 2007–08, there was a proposal in the United States 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 infrastructures.” 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 was pursued in the United States, a politics of austerity took hold in Europe, and a politics of austerity was promoted in Japan. You have this politics of austerity in the rest of the capitalist world saying: “The crisis of 2007–08 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 the debt and get the economy back onto a good basis.” And then you look at what that meant for countries like Greece, and you see the appalling results of that 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, there is 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. 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 in indebtedness, or whatever way.” 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, you need materials to build. One of the consequences was that all of those countries and all of those economies that were supplying raw materials like iron ore and other minerals to China came out of the crisis of 2007–08 fairly quickly. Australia, for example, provides a lot of mineral resources to China. Latin America experienced the crisis, but not as badly as you would have thought in normal circumstances. Countries like Chile were sending copper like crazy to China, the rest of Latin America was sending soybeans and minerals. That is what I mean by China saving the global economy in 2007–08.

China’s astonishing 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 2007–08. But as I have indicated, a lot of it was debt financed. And the debt limit was exceeded. The second thing that happened was that China was not only using debt financing, but was having to expand its internal consumer market. They had to build the consumer capacity within the Chinese economy. Now, this is something that is important globally, because the interest of foreign capital is not only in using China as a place to produce low-cost goods, it is also an interest in China as a consumer market.

I mentioned in the beginning that the Chinese market was terribly important to Apple, even though it is no longer doing well in that market. There are some other companies that do tremendous business in China. For instance, Starbucks is reputed to have more cafes in China than it does in the United States. If Trump messes around too much with the Chinese I can just imagine them putting restrictions on Starbucks, so you may see US firms in general having a hard time doing lucrative business in China. Some US automobile firms are already running into complicated relations with the Chinese authorities. This may be one of the ways in which China can create a counter-movement to Trump’s tariffs. The China market for automobiles is now the largest in the world and US companies cannot afford to be excluded.

The internal market in China is growing, but it needs to grow 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 money to invest in that housing. To do that, they need to be able to borrow. Before 2007–08, there was very little easily accessible mortgage finance in China. But when this huge building process began they had to create new instruments so that people could finance the purchase of housing. The financial sector has to be expanded to lend to companies to build housing and apartments at the same time as it has to expand to accommodate consumers to purchase the housing and the apartments. This means that financial institutions have to be strengthened to back this whole process.

In the Cultural Revolution, before 1978, banks basically did not exist in China. After 1978, banking came back into the picture very fast. Particularly after 1995 or so, the banks started to play a much more vigorous role in Chinese society. The four largest banks in the world are now Chinese. You go from a situation in 1978 when the Chinese banks don’t exist to a situation where they have the four largest banks in the world – the fifth largest bank is a Japanese bank and the sixth largest bank in the world is J.P. Morgan. In the United States, 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 we can show. These banks are lending money to developers, and they are also lending money, of course, to consumers. The Chinese economy is financializing at a very rapid rate. This is another key respect in which the Chinese economy is being transformed radically at an unprecedented speed.

The Chinese also now recognize that you cannot build a vigorous economy if the only form of industrialization you have is the low-wage, high labor content forms of production. The Chinese now plan to transform to an economy producing high-value goods by capital-intensive means. This is where the new Chinese computer companies suddenly come into the picture. Again, notice the speed with which this has happened. A lot of Chinese entrepreneurs, scientists, and engineers had training in the United States. Many of them had worked for Apple and Google and in the computer companies, like Microsoft. An interesting debate occurred within China about if they could create the equivalent of a Chinese Silicon Valley. And if so, how could they do it?

One of the big misunderstandings about China is that everybody in the West thinks of it as a highly centralized economy. It is not. It’s an incredible machine in which centralization and decentralization work together. Essentially, the Party in Beijing proposes something. The rest of the country responds in a totally decentralized and localized way. People try to find their own distinctive way to respond to what it is that the central government is asking. The central government proposes, while the locality disposes. Decentralization is a very significant tool for perpetuating centralized power.

The method the Chinese use is if they have got a problem, then it gets farmed out in a certain way. All of the localities, the cities, and the regional governments are invited to help solve the problem. If one locality solves the problem, then the central government instructs everyone to adopt this model solution to the problem. This whole system means that you need local entrepreneurs who are going to be very active. It seems that the localities are very insulated from each other. They form competitive entities within the totality of the Chinese state, and they compete intensely with each other.

The mayors of a local city do not 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 have done. At the end of four years, there is a spreadsheet that measures achievements: how much did you grow the local GDP? How did you do in terms of ensuring social harmony? I was recently told that the spreadsheet is now about forty items, when it used to be about seven or eight. But a key measure is “how much did you grow the local economy?”

As a local mayor, you have four years to grow the local economy. If you do a good job, and you grow it really well, and you maintain social harmony, then you may be offered a position elsewhere. This way, you can go up in the Party hierarchy. You may even end up in the central committee in Beijing. But, in those four years, you’ve got to go like gangbusters to try to make things happen. You would be free to work not only on ideas or problems coming from Beijing. You could seize upon any idea which seemed to work locally and, if successful, you might hope that Beijing would look favorably upon it and reward you. But there have been some obvious cases where the Party has disapproved and local officials have been reprimanded, demoted, or even put in jail.

A couple of entrepreneurs who had experience of Silicon Valley proposed to the City government of Beijing to create a space in the city for hi-tech innovation, and to build incubators for new electronics and hi-tech companies. Local governments can easily clear a space since all the land is state property. Beijing in just six months evicted everybody from a particular area in the city and created a space called “the avenue of the entrepreneurs.” They created a new organization to facilitate the start-up of incubator spaces, and they put in all necessary support facilities. They brought together all the services you might need. Beijing was having problems of very high rents on spaces. So the government invited the start-ups rent-free. Imagine that in New York or London.

This initiative was highly successful. It became an entrepreneurial space which was extremely competitive, characterized by what they call “a copy-cat culture.” There is little if zero respect for intellectual property rights in that space. If somebody had a good idea, other people would steal it immediately. So, if you have a good idea you have to act upon it very fast, because if you didn’t act on it fast, somebody else would take it. This was an extremely dynamic situation. In this particular space in Beijing, companies started to develop all kinds of new phone systems, new structures for utilizing them. You would go through the different phases of innovation, diffusion, implementation in a very short space of time.

This created the equivalent of a Silicon Valley, and it was done in about three years. But it had a very different philosophy and culture than Silicon Valley. In Silicon Valley, for example, stealing other people’s ideas is not good. Here is how Kai-Fu Lee in his book on AI Superpowers: China, Silicon Valley and the New World Order describes it:

Silicon Valley’s entrepreneurs have earned a reputation as some of the hardest working in America, passionate founders that pull all-nighters in a mad dash to get a product out, and then obsessively iterate that product while seeking the next big thing. Entrepreneurs there do indeed work hard, but I spent decades deeply embedded in both Silicon Valley and China’s tech scene, working at Apple, Microsoft, and Google, before incubating and investing in dozens of Chinese start-ups. I can tell you that Silicon Valley looks down-right sluggish compared to its competitor across the Pacific. China’s successful internet entrepreneurs have risen to where they are by conquering the most cut-throat competitive environment in 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 start-up scene is a trial by fire, like a day spent as a gladiator in the Coliseum. The battles are life or death and your opponents have no scruples.

This is the world which creates these new companies, which did not exist before 2010–11, but which then suddenly swept in and took 40 percent of China’s market in mobile phones almost overnight. 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 is no defense of intellectual property rights internally within China, and not very much respect for intellectual property rights outside of China. Lee 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. I sometimes visit Nanjing. The second year I was there, I went to the local planning office to see a huge exhibition which was about creating a Silicon Valley culture in Nanjing. The central government, when they looked at what happened to the entrepreneurs in Beijing, basically turned to all of the cities in China and said: “Do this.” The implication being that China is going to move into high-tech, artificial intelligence, and many other high value-added activities. This is what is now happening.

The situation is captured in the Apple story that I started with. Chinese competition in this field has in short order become so fierce, and so good, that the United States is seriously threatened. For instance, one new big company is Huawei. A chief executive officer of Huawei was arrested in Canada at the behest of the United States for trading with Iran. The United States has been fiercely attacking the company on security grounds. There is obviously something going on here which is rather more than just simply a trading with Iran kind of problem. Huawei has engaged with a great deal of innovation.

The fifth generation of communication systems – 5G – which can handle mass data is now about to be installed. Huawei has been way ahead in developing 5G network technology. Other companies can’t compete technically. The United States has argued that we should not invest in this technology because it will allow the Chinese government to listen in on everybody’s conversations. The network is not, it is said, secure. There can be no guarantee that this network will actually work in a way which will be insulated from utilization by the Chinese government. This is the argument the US government is making, and on that basis the United States is banning the utilization of Huawei 5G technology. Some countries have followed suit, subsequent to US pressure. Australia and New Zealand have done so, the United States is trying (unsuccessfully) to convince the Europeans. In fact, the British have recently accepted limited application of Huawei’s technology. But most of the rest of the world is taking Huawei technology. It is better quality and cheaper.

Again, notice the speed of change. In 2008 we thought of China as a country and an economy which was the workshop of the world based upon low-wage labor. It still is a very important low-wage industrial economy. But since 2008, China has suddenly moved big-time into this area, and within the space of about eight years, has positioned itself to be a major competitor in high-tech industries. If you take the ten top high-tech companies in the world, four of them are now Chinese. That was not the case in 2008. This is the Chinese model in motion. It is very fast, it is very quick, it is backed by government and has the advantage of massive scale. It has mixed in within it strong government interventions, but it’s also highly decentralized so that an entrepreneurial culture has become absolutely central to what you might call the “gladiator capitalism” which is emerging in the Chinese context.

Now, I think that 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 1980s we would be talking about Japan, or we would be talking about West Germany as it was at the time. These were the prime economies and everybody had to do what the Japanese were doing, so everybody started talking about “just in time” production systems, and all the rest of it. By the time you get to the 1990s, Japan has fallen into crisis, Germany is mixed up with reunification. Who is the top dog in the 1990s? Well, we have the Washington Consensus which is basically the United States emerging in the Clinton years as a growth economy with a dot-com boom. The United States reasserts its position as the top dog economy. US intellectuals announce “the end of history” and say, “everybody has to be like us, because we have got the answer to how capitalism should or should not be.” Then there is the economic crash of 2001, followed by the housing bubble and then the crash of 2007–08. By then the question of who is top dog and who everybody should copy is becoming an interesting global question in a highly competitive and unstable scene. Different regional hegemons seem to be in formation. There is 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 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 is 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 finding a way to remove labor from the production process, and this is I think the big, big question: what is going to happen to labor? The answer to that question will tell us the degree to which the Chinese Communist Party truly believes in socialism.