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Chain-gang economics

”The world is investing too little,” according to one prominent economist. ”The current situation has its roots in a series of crises over the past decade that were caused by excessive investment, such as the Japanese asset bubble, the crises in emerging Asia and Latin America and, most recently, the IT bubble. Investment has fallen off sharply since, with only very cautious recovery.”

These are not the words of a Marxist economist describing the crisis of overproduction but those of Raghuram Rajan, the chief economist of the International Monetary Fund (IMF). His analysis, now more than a year old, continues to be accurate. Global overcapacity has made further investment simply unprofitable, which significantly dampens global economic growth. Global demand has not kept up with global productive capacity. And if countries are not investing in their economic futures, then growth will continue to stagnate and possibly lead to a global recession.

China and the United States, however, appear to be bucking the trend. But rather than signs of health, growth in these two economies — and their ever more symbiotic relationship with each other — may actually be indicators of crisis. The centrality of the US to both global growth and global crisis is well known. What is new is China’s critical role.

Once regarded as the greatest achievement of this era of globalisation, China’s integration into the global economy is, according to an excellent analysis by political economist Ho-Fung Hung (Rise of China and the Global Overaccumulation Crisis), emerging as a central cause of global capitalism’s crisis of overproduction.

China’s 8% to 10% annual growth rate has probably been the principal stimulus of growth in the world economy in the past decade. Indeed, China became the main destination for Asia’s exports, accounting for 31%, while Japan’s share dropped from 20% to 10%.

At the same time, China became a central contributor to the crisis of global overcapacity. Even as investment declined sharply in many economies in response to the surfeit of productive capacity, it increased at a breakneck pace in China. Investment in China was not just the obverse of disinvestment elsewhere. China was significantly beefing up its industrial capacity and not simply absorbing capacity eliminated elsewhere. At the same time, the ability of the Chinese market to absorb its own industrial output was limited.

In the late 1980s and 1990s, trans­national corporations saw China as the last frontier, the unlimited market that could endlessly absorb investment and endlessly throw off profitable returns. However, China’s restrictive rules on trade and investment forced such corporations to locate most of their production processes in the country instead of outsourcing only selected numbers of them. Analysts termed such production activities ”excessive internalisation”. These corporations ended up over-investing in the country and building up a manufacturing base that produced more than China or even the rest of the world could consume.

By the turn of the millennium, the dream of exploiting a limitless market had vanished. Foreign companies headed for China not so much to sell to millions of newly prosperous Chinese customers, but rather to make China a manufacturing base for global markets and take advantage of its inexhaustible supply of cheap labour.

The other set of actors promoting overcapacity were local governments investing in and building up key industries. While these efforts are often ”well planned and executed at the local level,” notes Ho-Fung Hung, ”the totality of these efforts combined … entail anarchic competition among localities, resulting in uncoordinated construction of redundant production capacity and infrastructure.”

As a result, idle capacity in such key sectors as steel, cement, aluminium and real estate has been soaring since the mid-1990s, with estimates that more than 75% of China’s industries are currently plagued by overcapacity, and that fixed asset investments in industries already experiencing over-investment accounted for 40% to 50% of China’s GDP growth last year.

The impact on profitability is not to be underestimated if we are to believe government statistics: at the end of last year, Hung points out, the average annual profit growth rate of all major enterprises had plunged by half and the total deficit of losing enterprises had increased sharply by 57,6%.

The Chinese government can mitigate excess capacity by expanding people’s purchasing power via a policy of income and asset redistribution. Doing so would probably mean slower growth, but more domestic and global stability. China’s authorities, however, have apparently chosen to continue the old strategy of dominating world markets by exploiting the country’s cheap labour. Although China’s population is 1,3billion, 700million people — or over half — live in the countryside and earn an average of just $285 a year, according to some estimates. This reserve army of rural poor has enabled manufacturers, both foreign and local, to keep wages down.

The global crisis of overproduction will worsen as China continues to dump its industrial production on global markets constrained by slow growth.

Chinese production and American consumption are like the proverbial prisoners who seek to break free from one another but can’t because they’re chained together. This relationship is increasingly taking the form of a vicious circle. On the one hand, China’s breakneck growth has increasingly depended on the ability of US consumers to continue their consumption of much of the output of China’s production, brought about by excessive investment. On the other hand, America’s high consumption rate depends on Beijing’s lending the US private and public sectors a significant portion of the trillion-plus dollars it has accumulated over the past decade from its yawning trade surplus with Washington.

This chain-gang relationship, says the IMF’s Rajan, is ”unsustainable”. Both Washington and the IMF have decried what they call ”global macro­economic imbalances” and called on China to revalue the renminbi to reduce its trade surplus with the US. Yet China can’t really abandon its cheap currency policy. Along with cheap labour, cheap currency is part of China’s successful formula of export-oriented production. And the US really can’t afford to be too tough on China since it depends on that open line of credit to Beijing to continue feeding the middle-class spending that sustains its own economic growth.

Thanks to Chinese factories and American consumers, the crisis is likely to get worse.

Walden Bello is executive director of Focus on the Global South and professor of sociology at the University of the Philippines. This edited version of his article first appeared on the Foreign Policy in Focus website (

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Walden Bello
Walden Bello is Senior analyst and co-chairperson of the Board of Focus on the Global South, associate of the Transnational Institute, and adjunct professor of sociology, State University of New York at Binghamton. He is the author of the recently published book Counterrevolution: The Global Rise of the Far Right (Nova Scotia and London: Fernwood and Practical Action, 2019).

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