China rises and USA falls
The key is state investment in industrial production
On January 28, 2022, the International Manifesto Group held a Webinar on “USA vs China: Whose Economy is Winning?” The Webinar was moderated by Radhika Desai, Convener of the International Manifesto Group and Director of the Geopolitical Economy Research Group of the University of Manitoba, Winnipeg, Canada. It consisted of four panelists: Michael Hudson, Alan Freeman, Mick Dunford, and Michael Roberts. In essence, they documented the economic growth of China and the decline of the USA, and they showed that the key factor is state investment in industrial production.
In introducing the panel, Radhika Desai noted that Marx had anticipated that capitalism would reach maturity in the early twentieth century. When capitalism attained the advanced stage of monopoly capital, inter-imperialist competition emerged, which led to the two world wars of the twentieth century, which some characterize as a continuous thirty years of war and crisis. The post-World War II “golden age” of capitalism was a period of economic boom, in which the United States had sustained economic growth. However, the economic growth was made possible by borrowing from the socialist tool kit, adopting measures of social welfare and full employment. Nonetheless, the economic growth of the Soviet Union was greater during the period.
However, the capitalist system ran into the problem of saturated markets. Believing that the socialist-like measures were the cause of the problem, capitalists freed production and commerce from constraints. The result has been, beginning forty years ago, the emergence of a speculative economy.
Desai noted that the speakers will address the real consequences of the neoliberal turn, shedding light on the background to the statistics that are employed in the Cold War debate. They will make clear why socialism remains a viable option.
Michael Hudson is financial analyst and president of the Institute for the Study of Long Term Economic Trends. He is distinguished research professor of economics at the University of Missouri–Kansas City and professor at the School of Marxist Studies, Peking University, in China. Hudson has served as an economic adviser to the US, Canadian, Mexican, and Latvian governments, and as a consultant to UNITAR, the Institute for Research on Public Policy, and the Canadian Science Council, among other organizations. Hudson has written or edited more than 10 books on the politics of international finance, economic history, and the history of economic thought.
Hudson maintains that the USA is opposed to the integration of Western Europe and Russia, and it is also opposed to the integration of China with Japan and East Asia. Therefore, the USA is imposing an Iron Curtain around Russia and China, with the argument that Western Europe and East Asia belong in the U.S. orbit.
The encirclement of China was initiated at the end of World War II. At that time, the chief U.S. rival was Britain, and the U.S. strategy was to penetrate India and other British colonies. To this end, it prevented England from devaluing its currency and developing its industry to rival U.S. industry, which had emerged from the war in an advantaged position. The USA succeeded in constraining the United Kingdom, and it then turned against the rest of Europe. The U.S. strategy vis-à-vis Europe and Japan was to aid their war recovery through an economic development integrated with U.S. industry and dependent on the USA.
The United States had hoped to repeat this scenario in Russia following the collapse of the USSR. The United States sought privatization and ownership of raw materials export production, thus seeking to promote an industrialization dependent on the USA, similar to Germany and France. But this did not happen. The U.S. foreign policy establishment did not understand the implications of the fact that the Russian economy, characterized primarily by raw materials exportation, was structurally different from the advanced economies of Western Europe.
Similarly, in its relations with China, the trade theory of the Clinton administration looked at the Chinese economy in simplistic terms. It looked at China as a source of labor. It expected that Chinese expansion of its labor-intensive productions would break the labor unions of the USA. It did not see that China was using its expanded trade with the USA to obtain capital for its industrial development. China was following an investment plan similar to the USA and Germany in the late nineteenth century, involving public investment in industry and in subsidizing the needs of the population in such areas as health care and transportation infrastructure. These are the dynamics of industrial development.
In contrast to China, the United States in the 1990s was following a different dynamic, that of finance capitalism. In other words, the United States is deindustrializing. And as a result, its transportation infrastructure is falling apart. With its orientation to finance capitalism, the USA does not need roads and bridges, and it lives in the short term.
Thus, the U.S. economy is post-industrial. It is falling behind China and possibly Russia. Russia has displaced the USA as the world’s leading grain and agricultural exporter. China is displacing the USA as the world’s leading industrial trader. Russia still needs to industrialize more, and to do so it ought to integrate with German and European industrial firms, just as China previously integrated with U.S. firms to accomplish technology transfers.
Now sensing this situation, the U.S. plan is to block technology transfer to Russia and China from their surrounding territories of Europe and Asia.
Hudson views the conflict between China and the USA as a conflict between two systems: the Chinese long-term socialist industrial economy versus the U.S. short-term finance economy. In a conflict between short-term and long-term perspectives, the long-term approach is always going to win; making short-term financial gains has costs in the long term. The USA senses this, but it does not know what to do about it. All it can do is impose sanctions and construct an iron curtain around Russia and China.
What is occurring today is what the USA has feared since the 1970s: that China and Russia would get together. Today the two Asian giants are integrating industrially, financially, and militarily.
China has been accused of profiting from loans to weaker economies. But most of the debts that countries have with China are not loans in the typical capitalist sense: they are equity debts, involving Chinese investment in the infrastructure of the global South countries. China is looking at the benefits of these investments in the long term.
Hudson concluded by saying that the conflict is between neoliberal capitalism and industrial socialism, or as Rosa Luxemburg said, between socialism and barbarism.
Mick Dunford is Emeritus Professor at the University of Sussex, Visiting Professor at the Chinese Academy of Sciences, and Managing Editor of Area Development and Policy.
Dunford began his presentation with the observation that economic growth in the USA and the G-7 has been progressively declining, reflecting a decline in productivity.
Dunford noted that there are four areas of U.S. strength: (1) the military industrial complex; (2) its control of the norms of intellectual property; (3) its privileged position with respect to the hegemony of the dollar; and (4) its capacity to set the rules governing the international system.
China is challenging the USA, Dunford maintains, in these four areas of U.S. strength. (1) China seeks to establish a world of peace and mutually beneficial cooperation, which challenges the central role of the U.S. military-industrial complex.
(2) China will increasingly play a major role in setting intellectual property standards, inasmuch as it is increasingly producing new technologies. China is producing 75% of the world’s new energy components and 60% of the world’s electric vehicles. This indicates, in addition, that China’s high rates of capital accumulation will continue, because new industries are highly profitable.
(3) The internationalization of the Yuan potentially challenges the hegemony of the dollar. And (4) China’s foreign policy initiative toward a pluripolar world of sovereign nations challenges the U.S. ability to set the rules of the international system.
Dunford maintains that China made important gains during its integration with the USA beginning in the 1970s, intelligently utilizing Western loans and equipment. On the foundation of the gains attained, China shifted in 1979 to the Reform and Opening, which was highly successful and led to extraordinary progress, during a time in which developing countries in general made little progress. China had an 8.1% economic growth last year; and its growth rate will continue to be well ahead of the USA, such that China will be the largest economy of the world by 2030.
Dunford characterized the Chinese economic model as “market-driven and government guided.” That is, while the state utilizes competition among producers in the market to drive efficiency in production and to generate greater productivity, the state plans the economy, selecting industries for investment and other forms of stimulation. More than a third of new investments are in the state/collective sector, and it has remained firm in that range. Moreover, state banks and financial institutions have a significant role in the economic plan.
The Reform and Opening had some negative consequences from the Chinese socialist point of view. Privatization led to rural/urban inequality, and ecological damage occurred. And there emerged a cultural evolution that was considered negative. So beginning in 1999, the government re-emphasized the role of common prosperity; and it began to invest in specific regions in order to reverse rural/urban inequalities. A further step was taken in December 2020, when Xi Jinping announced the closing of the “disorderly expansion of capital.” On August 29, 2021, a commentary by Guangman Li described the spirit of the new stage, writing that the capital market will no longer be a paradise for capitalists to get rich overnight, and announcing the crackdown on monopolies, real estate, and financial capital, as well as reform in the distribution system.
Dunford concluded by reiterating that Western hegemony is in decline, and Asia will increasingly shape the emerging polycentric order. The liberal capitalist system cannot address issues of governance and the economic challenges that the world-system confronts. Neoliberalism and neoliberal globalization have run their course, leading to a reassertion of sovereignty by the world’s nations, plus a new path toward South-South cooperation. China’s common prosperity path will ensure continued capital accumulation and economic growth for some time to come.
Michael Roberts worked as an economist in the City of London for various financial institutions for over 40 years. He has written several books including: The Great Recession: A Marxist view (2009) and The Long Depression (2016). He is joint author with G Carchedi of a forthcoming book by Pluto Press: Capitalism in the 21st century: Through the prism of value. He blogs regularly at thenextrecession.wordpress.com.
Roberts observed that, as measured by GDP, China has largest economy in the world, a status it attained around 2015. As measured by market exchange rates, a better measure than GDP, the USA is still ahead of China, but the gap is far smaller. In 1980, the U.S. market exchange rate was sixteen times larger than that of China, but at present, the U.S. rate is 30% larger. By any measure, it looks like China will have the largest economy of the world by 2030, inasmuch as China’s GDP continues to grow at a faster rate than that of the USA.
But reference to GDP ignores population size, and for some questions, GDP per capita is a more appropriate measure, inasmuch as it is a statistical measure of living standards. By this measure as well, although the gap is far greater, China is closing the gap and will catch up to the United States in the foreseeable future. During the period 1960 to 1980, China’s GDP/capita was 5 or 6% that of the USA; during the past decade, China’s per capita GDP has been 20 to 25% that of the USA. If current trends continue, China will catch up to the USA in GDP per capita by 2060.
Life expectancy is a widely used indicator of standard of living. In 1960, China’s life expectancy was 45 years, far below the U.S. figure of 70 years. But in 2017, the life expectancy in China was 75 years, while that of the United States was 77 years, and it had been declining slightly in the last few years.
The World Bank Index has created a Human Development Index, a somewhat mystical statistical measure that combines a healthy life, knowledge, and standard of living. From 1990 to 2019, the Human Development Index of the USA increased by 7.1%, while that of China increased by 52.5%.
Poverty is measured in various ways, and a single measure across the world is problematic. Roberts decided on an income below $5.5 per day. By that measure, 2% of the U.S. population is poor, in contrast to 30% in China. However, the poverty rate in China is far lower than that of India (80%) and peer economies of the global South. Since 1990, China has lifted 900 million persons out of poverty.
China likely will continue to close the gap with the United States, because it has much higher labor productivity and growth in real wages. Moreover, China produces elements necessary for 30% of manufacturing, so that other countries rely on Chinese imports to manufacture. The U.S. dependency on imports for manufacturing is increasing, while Chinese dependency is in decline.
World power rankings indicate that China and the USA are at similar or reducing levels with respect to foreign assets, control of currency, and GDP. But U.S. power is far greater with respect to military spending and control of international banking. These are the two areas in which the USA still has power: its ability to use or threaten to use military force; and its ability to cut off financial assets when other countries get out of line.
Roberts concluded his presentation with the observation that in July 2021, Xi Jinping warned the people that the Soviet Union collapsed because the Communist Party of the Soviet Union became detached from the people, turning itself into a privileged group of bureaucrats oriented to protecting their own interests. Such unfaithfulness to revolutionary values is the ever-present threat to the socialist projects of the world, not their state-directed economies, which have consistently moved from strength to strength.
Alan Freeman is co-director, with Radhika Desai, of the Geopolitical Economy Research Group at the University of Manitoba. He was an economist at the Greater London Authority between 2000 and 2011. He wrote The Benn Heresy, a biography of British politician Tony Benn, and co-edited three ebooks on value theory. He is honorary life vice-president of the UK-based Association for Heterodox Economics and a Vice-Chair of the World Association for Political Economy.
Freeman observed that GDP is not the best measure, but Western analysts and commentators make use of it to falsely claim that China is a threat and is inevitably leading the world to war. Many Western analysis invoke the theory that the rise of one power provokes unbalance in the international system. This is a dangerous theory, because it suggests to Chinese leaders that they should not seek economic ascent, and it suggests to leaders of both nations that war between them cannot be avoided, for it is a natural phenomenon related to the rise and fall of imperial powers. In reality, the rise of China is not the reason for the fall of the USA, which has been self-inflicted by erroneous policies that are not rooted in an understanding of the factors that drove the previous U.S. rise.
World War II, and not the New Deal, was what got the U.S. economy out of the Great Depression. At the height of the war, 85% of investment was made by the state; it was this government spending for war that produced the growth of the U.S. economy and the post-war U.S. hegemony. Therefore, Freeman calls World War II “a socialist war.”
However, the slump of the 1970s called for adjustments in the world-system. One possible road was that proposed by the Brandt Commission, involving developing the global South, expanding the welfare state, and using the resources of the state to promote economic development. But the United States embarked on another road, that of neoliberalism, with the result that the USA and the countries of the global North have experienced a consistent economic decline for the past seventeen years.
Before the 1970s, investment was in sync with growth, in that investments, especially government investments, promoted growth. But after 1970, investment responds to the lack of growth, and accordingly, it was detoured to finance. Here we arrive to the real source of the decline of the USA, namely, the decline in state and private investment in production.
This connection between investment and economic growth is logical. The only way to increase production is to invest in production, and increased production is the driver of economic growth.
The post-1970 turn to investment in finance was driven by a desire to maximize profit. As the rate of profit declines, capitalists see that they do not get good returns in their investments in production. So they turn to investments in speculative financial asserts.
The turn to finance capital is evident in the statistics: since 1980, the percentage of investment in unproductive financial assets has gone from 40% to 80%. This is what led to the crisis of 2008 and the present crisis. It has nothing to do with the rise of China.
The USA responded to its decline in production and GDP by taking it out on the rest of the world, by waging economic war on the global South. From 1980 to 2005, the ratio of the GDP of the global North to the GDP of the global South has increased fourfold. The nations of the North adopt economic policies that drive the growth rates of other countries down, to compensate for their own limited growth. During the period, the global South had real growth rates higher than the global North, but economic policies were driving the prices down. If you produce more and more agricultural products and minerals, but the price goes down, your increased productivity does not enable your economy to grow, as it naturally would. (The nations of the global South refer to this phenomenon as the declining terms of exchange, seen as a central component of today’s North-South exploitation).
Thus, Freeman concludes, a new colonial division of the world has emerged, based on income. China, however, is showing that the U.S. war against the world can be stropped.
What can be done?
If we look at the competition between the USA and China as a game, it looks like the USA has already lost the game. Critical policy decisions were made in the late 1970s in both countries that set them on a course that guaranteed a Chinese win. Even if the USA were to suddenly change course, it appears to be too late in the game.
Since 1980, the USA has embarked on an aggressive imperialism: a sustained economic war against poor nations, wars and military interventions in defense of U.S. interests, and economic sanctions against more than forty countries of the world. When we see that the USA is set on a course to lose the game of international economic competition, we are able to understand that aggressive imperialism is nothing other than a desperate attempt to compensate for continuous economic losses.
How should the U.S. Left present this reality to the people? The general tendency of the wisest elements of the Left is to focus on the imperialist aspects of the U.S. strategy, condemning the military and economic wars and the moral double standards. Although true, such correct criticism of policies so central to American identity and American foreign policy presents an unpatriotic image before the people. Inasmuch as patriotism is a pervasive sentiment, this unpatriotic trap must be avoided.
I believe that we of the U.S. Left should turn the unpatriotic accusation on its head. The turn of the U.S. capitalist class to financial speculation was not only self-interested, uncreative ignorance. It also was profoundly unpatriotic. U.S. capitalists betrayed our nation when they did not invest in our country. They betrayed the people when they took the profits made through the labor of working people and invested it in short-term financial speculation, ignoring the long-term need of the nation for continued industrial development and the employment that it implied. They took from the people the foundations of their pride in and love for the nation, in spite of its moral defects, which the people were making progress in correcting.
In this betrayal, they had the support of lackey intellectuals, who invented terms like post-industrial economy and service economy to cover up the treason of the capitalists. These notions, supposedly scientific, confused the people by obscuring the importance of industrial productivity as the foundation for public investments in education, health, and human needs and for economic prosperity.
Perhaps the issue should not be framed as winning and losing. Rather than saying, “The USA has lost the game with China,” perhaps we should say, “The world needs to move beyond the competitive games among powers.”
In the context of an alternative framing of the issue, a useful starting point is Hudson’s characterization of a conflict between two systems, and reference by the panelists to China’s foreign policy perspective, in which China is seeking to establish a world of peace and mutually beneficial cooperation. Building on these notions, we ought to explain to the people that a world of competing imperialisms is no longer possible; that we must work with other nations in the construction of a world based on respect for the sovereignty of nations and mutually beneficial trade among nations; and that such principles have been proclaimed by the peoples of the world since the 1950s. I have written in a previous commentary of an alternative world-system in embryo, being forged by China and the socialist nations of Latin America with the support and participation of progressive nations and the Non-Aligned Movement, which I named as “an option forged by humanity in defense of itself”
Why should the American people participate in the construction of a more cooperative world? Because, in the first place, it is necessary for human survival and for world peace and prosperity. Secondly, because we are in essence, in spite of our limitations, a generous people, capable of seeing and listening to others. And because, in addition, the universal values being proclaimed by the emerging alternative world order constitute the full expression of the values expressed at the founding of the American republic, a historic event that is much appreciated by the peoples of the world.
Sign the new socialist manifesto
The Geopolitical Economy Research Group supports the initiative of the International Manifesto Group, which has written a socialist manifesto, “Through Pluripolarity to Socialism.” The Group invites all who agree with its broad thrust to sign it, to encourage colleagues and comrades to sign, and to encourage progressive organizations to discuss it. You can find the manifesto here.
A free subscription option is available, with capacity to read, send, and share all posts. A paid subscription ($5 per month or $40 per year) enables you to make comments and to support the costs of the column; full subscribers ($40 per year) also receive a free PDF copy of my book on Cuba and the world-system.
Follow me on Twitter: Charles McKelvey@CharlesMcKelv14