Download China at Crossroads: The “Neoliberal Model” versus the “Golden

China at Crossroads: The “Neoliberal Model” versus the “Golden Age Model”?
Dic Lo
SOAS, University of London
December 2014
Abstract
This paper posits that Chinese economic transformation since the turn of the century has tended
to converge to the Golden Age Model (GAM). Characteristic of the model is rapid productivity
and wage growth, underpinned by “Big Business, Big Labour, and Big Government”. Yet,
because of its fundamental deviation from the Neoliberal Model (NM), there is no certainty that
this direction of transformation will continue to prevail in the future. Much depends on the rivalry
between the political-economic forces behind the two models.
Keywords: China, economic transformation, Golden Age Model, neoliberalism
1. Introduction
“Rebalancing” and “restructuring” are the key words that have been at the heart of the discussion
over the directions of Chinese economic transformation. Behind this discussion, however, there
lies a rivalry between two different models for understanding and informing the transformation.
These models, namely, are the Neoliberal Model (NM) associated with the Washington
Consensus and the actual, prevailing model in China that strongly resembles the Golden Age
Model (GAM) of the advanced capitalist countries in the 1950s-1970s. The outcome of this
rivalry will be of fundamental importance for China and world development in the foreseeable
future.
This paper analyses the dynamics, and actual developmental performance, of the process
of Chinese economic transformation since the turn of the century. On this basis, it seeks to clarify
the developmental implications of the rivalry between the alternative scenarios as represented by
the two indicated models.
2. Trends of Development
Viewed from a long-term perspective, and in terms of its structural dynamics, Chinese economic
transformation over the era of market reforms can be divided into two periods. In the first half of
the era, from the late 1970s until the early 1990s, economic growth was mainly driven by a
process of labour-intensive industrialization. From the early 1990s until the present time, i.e., the
second half of the reform era, a process of capital-deepening industrialization has been the main
driving force of economic growth. It is especially worth-noting that, in the latest sub-period of
2005-2012, capital deepening appears to have accelerated.
The transition from labour-intensive to capital-deepening industrialization is associated
with a trend of unabated acceleration in productivity growth. As can be seen from Table 1, in the
period 1978-1992, the average rate of growth of per-worker real GDP was 6.72% per annum. In
the subsequent period of 1993-2012, for fully twenty years, the rate increased to reach the very
high level of 9.39% per annum. Again, the latest sub-period of 2005-2012 is marked with
especially fast productivity growth, reaching an average of 10.13% per annum.
[Table 1]
The productivity improvement has been translated into rises in the living standard. Table
2 indicates the real growth rate of total consumption and investment. In the period 1978-1992, the
average annual real growth rate of consumption (deflated by the consumer price index) was
8.73%, which was close to the investment growth rate (deflated by the investment price index) of
8.87%. Entering the period 1993-2004, consumption growth remained at a similar rate of 8.49%,
amid the acceleration of investment growth to reach a high rate of 12.28%. Thereafter, in the
period 2005-2012, consumption growth also accelerated to reach a high rate of 11.28%, although
not as high as the 14.11% rate of investment growth. At any rate, looking at the long-term trends,
it is justified to say that an average annual real growth rate of consumption by 9.24% for the
entire period of 1978-2012 cannot be judged as unsatisfactory. The record in 1993-2012 and
especially in 2005-2012 indicate that the capital-deepening path of economic growth has been
associated with an acceleration, rather than a slowdown, of consumption growth.
[Table 2]
The productivity improvement has also been associated with an enhanced capacity of the
economy in job creation, defying the capital-deepening character of the growth process. In the
Chinese statistical system, agricultural labour is assumed to be in full employment. To verify the
job creation capacity of the economy needs to look at the transfer of labour from agriculture to
industry and services. Again, it is precisely in the years 2005-2012 that there was an
unprecedented record of labour transfer. In eight years’ time, the agricultural share of employment
decreased by a hefty 13.3 percentage points. This was mainly accounted for by the acceleration of
labour absorption by the secondary sector (i.e., industry plus construction), whose employment
share increased by 7.8 percentage points over the same period. The fact that there was still a
serious problem of urban unemployment was due to the even faster pace of urbanization during
this period: agricultural employment on average decreased by a hefty magnitude of 11.87 million
people a year, compared with the figure of 2.86 million a year in 1993-2004 and that of a net
increase of 7.42 million a year in 1978-1992.
The observable trend of rising urban wage rates might be a main reason for the
acceleration of migration. As is shown in Figure 1, in the first two decades of the reform era, the
growth rate of real urban wage rates persistently lagged behind that of per-capita real GDP. It is
basically from the turn of the century onward that the situation has been reversed. The growth of
real wage rates now substantially exceeded that of per-capita GDP, although both tended to first
move upward and then gradually downward. This trend of rising wage rates is likely to have
acted as a strong inducement for rural-urban labour migration. The situation of worsening urban
unemployment in recent years, therefore, is not purely a negative development. What is needed is
a more balanced pattern of compensation for rural and urban labour, which, in turn, might imply
the need for further policy intervention. On the positive side, the trend of rising wage rates, in
conjunction with the fast productivity and employment growth, suggests a healthy pattern of
economic and social development.
[Figure 1]
Achieving the twin targets of sustained rapid economic growth and compensationenhancing employment expansion has always been the prime objective of China’s state leadership
and the demand of the society as a whole. From the analysis above, it is evident that the twin
targets have been basically achieved since the turn of the century. This is in contrast to the
situation in the first half of the reform era, where rapid economic and employment growth was
associated with sluggish growth in labour compensation. The transition from labour-intensive
growth to capital-deepening growth since the turn of the century has substantially speeded up the
growth in labour compensation, while sustaining – indeed accelerating – the rapid productivity
and employment growth.
3. The Structural-Institutional Nexus
The transition from labour-intensive growth to capital-deepening growth is consistent with the
persistently rising share of investment in aggregate expenditures since the early 1990s. It is easily
observable that industrialization in the period 1978-1992 was mainly consumption-led, whilst that
in the period 1993-2012 was mainly investment-led. As is shown in Figure 2, the share of
aggregate expenditures accounted for by consumption was typically 10 percentage points lower in
the years of the latter period than in the former period. The opposite was true for the change in the
investment share of aggregate expenditures, albeit to a lesser extent – in connection with the fact
that net exports changed from mostly deficits in 1978-1992 to surpluses in 1993-2012. Again, the
latest sub-period of 2005-2012 is marked by a continuous decline of the consumption share and a
very substantial rise in the investment share.
[Figure 2]
What has accounted for the rising share of investment, and the prevalence of the capitaldeepening growth path? Apart from anything else, the persistent predominance of the state sector
in the economy is discernibly the main driving force. Chinese economic transformation since the
turn of the century has clearly demonstrated this predominance – so much so that it has come to
be known as “state capitalism/socialism, Chinese style”. The trend of evolution dubbed guo jin
min tui (the state sector advances, while the private sector retreats) testifies to this situation.
Public finance in China has always been geared to promoting productive investment. Elsewhere it
has been shown that industrial policies have played an important role in serving this same state
orientation, particularly in terms of promoting investment in infrastructure and technological
innovation (Lo and Wu 2014). It has also been shown that state-controlled banks, which have
been the predominant part of the Chinese financial sector as a whole, have been instrumental in
promoting rapid growth in productive investment (Lo, Li, Jiang 2011).
Ultimately, the predominance of the state sector rests on the pivotal role of state-owned
enterprises (SOEs) in the economy. For, after more than three decades of market reforms, what
have remained of SOEs are mostly capital-intensive, large-scale enterprises. Compared with
Chinese economic entities of other types of ownership, SOEs by nature are in a much better
position to fit with the prevailing path of capital-deepening growth.
This characteristic is especially visible in the industrial sector. Due to the process of
market reforms and especially the drive of mass privatization in the mid-1990s, the share of
value-added of SOEs underwent a secular trend of decline from 78% in 1978 down to the lowest
level of 33% in 1998. Thereafter, the share has stabilized and has actually registered a substantial
rebound, to the level of 39% by 2010. Together with the output of mixed-ownership enterprises
that were indirectly under state control, by 2010, the state sector probably accounted for almost a
half of the total industrial value-added in China. In the same year, the capital share of SOEs in
Chinese industry remained at a high level of 42% whilst the employment share declined to a low
level of 14%. It is clear from Figure 3 that there has emerged a pattern of division of labour in
Chinese industry where SOEs, compared to non-SOEs, are more concentrated in capitalintensive, large-scale industries. In 2010, for instance, the capital-labour ratio of SOEs was 4.35
times of that of non-SOEs.
[Figure 3]
Outside of industry, in the rest of the Chinese economy, the pivotal role of SOEs has
hitherto appeared to be firmly established. The annual survey by the business association China
Enterprise Confederation reveals that, in 2012, up to 62% of the largest 500 firms (both industry
and non-industry) by sales values were SOEs. Of the top 40 firms all but one (number 39) were
SOEs. The sales value of SOEs within the top 500 was on average 2.78 times that of non-SOEs.
Moreover, in the same year, 86 Chinese firms (mostly SOEs) entered the rank of top 500 in the
world. This number was 24 more than Japan’s and was equal to the combined number of
Germany, the UK and France.
Back to the broader picture of “state capitalism/socialism, Chinese style”, in addition to
promoting productive investment, state orientation towards constructing a welfare state has been
evident and indeed has made tremendous progress since the turn of the century. Within ten years’
time, in 2003-2013, a publicly-funded healthcare system was (re)established to cover almost the
entire population. Provision of affordable housing for the urban low-income people, mostly
immigrants from rural areas, has also been on the government agenda. Most far-reaching, there
has emerged a new policy line that emphasizes labour compensation-enhancing economic growth,
rather than growth based on “cheap labour”. Policy measures of this nature have included
increasing protection of labour rights, the enforcement of proper employment contracts, the
implementation of minimum-wage legislation, and the promotion of the establishment of trade
unions.
It is of note that, before the turn of the century, the Chinese state leadership had basically
adopted a laissez faire approach towards labour employment, particularly outside the state sector.
This is evident in the declining influence of the only existing, official trade union, the All China
Federation of Trade Unions. Union members as a proportion of the total of employees with the
secondary and tertiary sectors decreased from 49% in 1981 to 29% in 2000 (Figure 4). The
situation has changed since then. As a proportion of the total of employees with the secondary
and tertiary sectors, union membership climbed back to a level of 36% in 2005 and further to
50% in 2010. The rebound in unionization owes much to the enforcement by the central
government of the stipulation that enterprises of all types of ownership are required to allow for
the setting up of unions or for workers joining unions. This requirement has for a long time been
sternly resisted by local governments, private employers, and most notably foreign capital-funded
enterprises. Yet, from the point of view of the state leadership, this is essential to the promotion of
collective bargaining over labour compensation. And collective bargaining is, in turn, considered
to be indispensable for reversing the trend of decreasing labour’s share in the national income.
[Figure 4]
On the whole, the prevailing structural-institutional nexus in the Chinese economy
deviates fundamentally from the neoliberal ideal of the free market economy. Yet, the paradox is
that the nexus has simultaneously achieved the following outcomes, all on unprecedented scales:
rapid output and productivity growth, rapid expansion in consumption, rapid increases in job
creation, and rapid rises in the wage rate. All these have provided the necessary material
conditions for broader social development: the fundamental enhancement of the power of labour,
the reconstruction of a publicly-funded comprehensive healthcare system, and the acceleration of
the process of urbanization. Thus, the assertion that this nexus must be dismantled, and that China
must take the neoliberal policy prescriptions for its future economic transformation, does not
appear to be convincing at all.
4. Rivalry between the Two Models
The structural-institutional nexus of the Chinese economy, depicted in the preceding section,
appears to embody a range of important attributes of the Golden Age Model (GAM) of the
advanced capitalist countries in the 1950s-1970s. The central character of the model is rapid
productivity and wage growth. And its institutional underpinning centres on the three main pillars
of “Big Business, Big Labour, and Big Government” (Bowles et al. 1985; Glyn et al. 1990).
Put in analytical terms, the structural dynamics of this model manifests itself in two
related realms. First, in production, it requires parallel growth in the capital-labour ratio (K/L) and
labour productivity (Y/L). Second, in distribution, it requires parallel growth in Y/L and the wage
rate (w). These two conditions combined imply stable labour share (wL/Y) and capital share
(rK/Y) in output, and, by extension, parallel growth in consumption (C) and output (Y). The result
is a stable profit rate (r), which is the foundation – at least for a capitalist(ic) economy – for
sustained investment growth and thereby economic growth.
What will happen if the required conditions do not hold? In the realm of distribution, a
balance tipping to w could lead to profit squeeze, while that tipping to Y/L could lead to underconsumption or over-accumulation. Either way, the result could be investment stagnation and
hence the slowdown of growth. In the realm of production, Y/L growth is a necessary, but not
sufficient, condition for K/L growth. To sustain the necessary condition requires enhancing work
intensity and gaining economies of scale, along with truly technological change. To make it a
sufficient condition requires restrictions on allocation outlets of resources that are alternatives to
productive investment.
It is at this point that the structural dynamics requires a particular set of institutional
arrangements as its underpinnings. Both for enhancing work intensity and gaining economies of
scale, there requires the existence of “Big Business”, i.e., large-scale enterprises in oligopolistic
markets. But “Big Labour”, i.e., collective bargaining, would then be needed as a countervailing
force – in order to ensure wage growth catching up with productivity growth (and hence
consumption growth catching up with output growth). Insofar as wage growth lags behind, “Big
Government”, i.e., the welfare state, will need to come out as the remedy. Government promotion
of productive investment, and restriction of alternative allocation outlets, is also needed insofar as
productivity growth is insufficient to induce productive investment.
Clearly, the GAM is a far cry from the market fundamentalism of the Neoliberal Model
(NM) that has prevailed in our times, i.e., the era of globalization. This former model is not just a
matter of entailing intensive and extensive state intervention in the economy in the form of “Big
Government”. It is a system of outright suppression of the working of “factors markets”, defying
the requirement for flexibilities in the labour and capital markets. In particular, the era of
globalization is also an era of financialization, where speculative financial activities have gained
increasing predominance in the economy. The requirement for providing capital the maximum
freedom to move around in pursuit of maximum profitability, and hence the freedom to dissociate
itself from the productive sector, is antithetical to the GAM (Glyn 2006; Wade 2008).
In China, neoliberal resistance to the depicted, production-oriented structural-institutional
nexus takes the form of the sporadic emergence of financial bubbles. This reflects the inclination
of capital to evade state restrictions on speculative activities and, more fundamentally, to
dissociate itself from production in order to pursue short-term profits. Particularly in recent years,
amid the Great Recession worldwide and the slowdown of domestic economic growth, this
inclination has reached its zenith.
A trend of development in this regard is the ballooning property bubble. This can be
gauged by looking at the trend of expansion of total fixed-asset investment (FAI), which broadly
encompasses property investment (PI) and gross capital formation (GCF). More precisely, by
definition, FAI = (GCF – SSI – IAI) + PI + IV, where SSI = small-scale investment, IAI =
intangible asset investment, and IV = inventory investment. Given that SSI and IV are of very
small magnitudes in recent years, the difference between fixed-asset investment and gross capital
formation can thus sever as a somewhat under-estimated measure of property investment. As can
be seen from Figure 5, before 2004, GCF persistently exceeded FAI by a substantial margin. The
situation has been reversed since then, with FAI in excess of GCF reaching a gigantic magnitude
of around 30% of GDP in 2013. Conversely, the fact that the GCF-GDP ratio remained basically
unchanged in the years 2009-2013 suggests that bubble-type property investment might have
crowded out productive investment, and this might have in part accounted for the slowdown in
economic growth in recent years.
[Figure 5]
The judgement that the property investment boom might have been a bubble is reinforced
by looking at the evolution of the so-called “aggregate financing to the real economy” (AFRE).
This indicator encompasses the net increase in bank loans as well as a wide range of alternative
forms of financing, carried out by a wide range of non-bank financial institutions. In comparison,
because most big banks are under much tighter government controls, controls over bank lending
are also much tighter than other forms of finance – although shadowing banking by the banks has
also become a serious issue in recent years. It is thus to some extent reasonable to infer that, in a
relative sense, bank lending is more supportive of productive investment and less prone to be
involved in financial bubbles. This being the case, the evolution indicated in Figure 6 suggests
that an increasingly significant proportion of financial resources have been allocated to the non-
productive activities. Whereas the increments of net bank lending as a proportion of GDP has
remained at basically the same level of around 15% throughout, ARFE as a proportion of GDP
has increased from 16.71% in 2002 to 22.23% in 2008 and further to 30.44% in 2013. Put another
way, and taking into account of probably a sizeable proportion of bank lending also leaking out of
productive investment via shadow banking, at least half of ARFE probably has been allocated to
non-productive uses in recent years. No wonder, therefore, there have been complaints from
productive enterprises of widespread shortage of financial supports since 2011.
[Figure 6]
The danger imposed by the property bubble is not only a tendency of crowding out
productive investment but also a tendency towards debt and financial crises. It is precisely
because of this latter danger that the current Chinese government, which came to power in early
2013, has oriented its policy line towards “deleveraging” and “restructuring”. One influential
interpretation of this policy line has it that it is the productive sector, rather than the financial
sector, that has caused the current predicament. It is claimed that the attractiveness of productive
investment has tended to diminish due to demand imbalances and factors market rigidities
associated with the prevailing capital-deepening growth path. It is further claimed that
fundamental financial liberalization should help to both correct the imbalances and promote better
allocation of resources. Thus, a re-orientation of the structural-institutional nexus of the Chinese
economy towards the NM, after all, the only correct direction (Dorrucci et al. 2013; IMF 2013;
World Bank 2012).
Note that the IMF and World Bank publications just cited were in fact co-authored by
these Washington institutions and sections of the Chinese government. The orientation towards
neoliberalism is evidently shared by a wide spectrum in the domestic social, economic and
political establishments. The challenge from all these neoliberal forces, domestic and
international, pushes to the forefront the question as to what social-political conditions will be
needed for sustaining and improving upon the existing GAM structural-institutional nexus. It is
well-known what underpinned the GAM of the advanced capitalist countries in the 1950s-1970s
was social-democratic politics. A political arrangement containing similar attributes might thus be
needed for China – particularly for preventing the neoliberalization of state power and policy
orientation, for preventing the financialization of state-controlled economic entities, and for
preventing the bureaucratization of the state sector as a whole.
5. Conclusions
The Washington Consensus view on “rebalancing” and “restructuring” in the Chinese economy
focuses on substituting internal demands for external demands, and, within internal demands,
substituting consumption for investment. It is claimed that such rebalancing can only be achieved
via neoliberal reforms, particularly via systematic liberalization of internal and external finance.
And it is promised that such rebalancing will make Chinese economic growth more sustainable
(and social development more equitable), thus avoiding the so-called “middle-income trap”.
What has actually happened deviates fundamentally from the Neoliberal Model. Since the
turn of the century, the prevailing capital-deepening path of economic growth has been associated
with accelerating productivity and consumption growth, as well as accelerating employment and
wage growth. In the institutional dimension, this growth path has been mainly underpinned by the
working of the state sector, i.e., the nexus of the government (industrial policies and the welfare
state), state-owned enterprises and state-controlled banks. Essentially, this structural-institutional
nexus embodies a range of important attributes of the Golden Age Model, which had its three
main pillars known as “Big Business, Big Labour, and Big Government”.
The rivalry between the two models in China has reached an acute stage in recent years.
State policies in line with the Golden Age Model – promoting productive investment and labour
compensation – have made significant achievements, particularly in terms of withstanding the
adverse impact of the worldwide Great Recession. Yet, the policies have been increasingly
resisted and hijacked by speculative financial interests (including sections of the state itself) in the
form of redirecting financial resources to the bubble sectors. By causing the precipitation of
financial resources, and threatening to generate financial crises, the speculative interests clearly
seek to reshape state policies in pursuit of the Neoliberal Model.
This rivalry thus puts Chinese economic transformation at a crossroads. The outcome will
be of fundamental importance not just for China itself but also for the broader world, given the
fact that China has already become a world-significant centre of production, holder of financial
resources, and carrier of outward direct investment.
References
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Occasional Paper Series no. 142, Frankfurt am Main, European Central Bank.
Glyn, A., A. Hughes, A. Lipietz and A. Singh (1990) ‘The rise and fall of the Golden Age’, in S.
Marglin and J. Schor (eds.) The Golden Age of Capitalism: Reinterpreting the Postwar
Experience, Oxford, Clarendon Press.
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University Press.
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Table 1. Average Annual Growth Rate (%) of Real GDP and Employment
(a)
(b)
Real GDP
Employment
9.83
1.50
8.33
1978-1992
9.39
2.67
6.72
1993-2012
10.14
0.74
9.39
1993-2004
9.87
0.97
8.90
2005-2012
10.53
0.40
10.13
1978-2012
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook 2013.
(a)-(b)
Table 2. Average annual real growth rates of consumption and investment
Consumption
Investment
9.24
11.28
1978-1992
8.73
8.87
1993-2012
9.60
13.01
1993-2004
8.49
12.28
2005-2012
11.28
14.11
1978-2012
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook 2013.
Notes: Data are consumption and investment (i.e., gross capital formation) components of GDP
by expenditures approach.
Consumption growth is deflated by the consumer price index; investment growth is
deflated by the investment price index.
Figure 1. Growth of per-capita real GDP and real urban wage rates (5-year moving
average)
Sources: National Bureau of Statistics, China Statistical Yearbook and China Statistical Abstract,
various years.
Note: A = per capita real GDP; B = urban real wage rate.
Figure 2. Composition of GDP by expenditures (%)
Sources: National Bureau of Statistics, China Statistical Yearbook 2013.
Note: C = final consumption; I = investment; NX = net export of goods and services.
Figure 3. Shares of SOEs in output, employment and capital of industry total
Sources: China Statistical Yearbook, various years.
Note: V = industrial value-added, K = net value of fixed assets, L = number of employees.
Note that a significant proportion of non-SOEs are also with state agents as the ultimate
owners-controllers.
Figure 4. Proportion of unionized workers (%)
Sources: National Bureau of Statistics, China Statistical Yearbook, various issues; All China
Federation of Trade Unions, China Statistical Yearbook of Trade Unions, various issues; and
http://www.china.com.cn/2011/201103/03/content_22041017.htmhttp://www.china.com.cn/2011/201103/03/content_22041017.htm, accessed 16 June 2012.
Note: Figures are the number of members of All China Federation of Trade Unions divided by the
total number of employees in the Secondary and Tertiary sectors.
Figure 5. Gross capital formation and fixed-asset investment
Sources: National Bureau of Statistics, China Statistical Yearbook and China Statistical Abstract,
various years.
Note: I = gross capital formation; I' = fixed-asset investment; Y = GDP.
Figure 6. Net increments of aggregate financing to the real economy and bank lending
Sources: People’s Bank of China, China Financial Yearbook various years, and PBC website.
Note: F = net increment of aggregate financing to the real economy; C = net increment in bank
lending; Y = GDP.