The Chinese Economic Miracle – A Triumph for Capitalism or the Planned Economy?

Jonathan Clyne

8 December, 2008

1

Revised and shortened 15 December, 2010

ContentsIntroduction

1. Theory of the Permanent Revolution

2. China’s Economic Structure

State Owned Enterprises

Private Sector

Foreign direct investment

Township and Village Enterprises

The full picture

3. What is a Transitional Economy?

Autarchy v. World Market

State Control over Prices v. Law of Value

Complete Nationalisation v. Commanding Heights

China v. Soviet Union

4.  More about the Laws of Motion of a Transitional Economy

Crisis

Investments

The Command Economy

5. The Class Character of the Chinese State

Has there been a Counter-revolution?

6. Grounds for Claiming China is Capitalist

South Korea, Japan, India, and others

Luxury and Misery

Unemployment

7. Perspectives

2

IntroductionFor almost three decades the Chinese economy has grown faster than any other economy has ever done for such a sustained period. It grew faster than Japan or South Korea ever did, faster than the Soviet Union at its height.1 Moreover, it grew faster than China itself grew in the previous 25 year period. Between 1955 and 1979 the Chinese economy grew at a rapid average rate of almost 7 percent, but between 1980 and 2004 it grew at 10 percent. In per capita terms the rate of growth more than doubled. It also grew more smoothly. During the first 25 year period, the rate of increase of GNP in China varied from plus 21 percent to minus 27 percent, whereas since 1980 it has varied between plus 14 percent and plus 4 percent.2

Poverty increased during the last decades in Eastern Europe, Latin America, South Asia, the Middle East and, not least, Africa, but in China more than four hundred of million people were lifted out of absolute poverty.

Millions of people living on less than $2 a day

1981 2004 ChangeChina 876 452 -424East Asia and Pacific 294 232 -62Eastern Europe and Central Asia 20 46 26Latin America and Caribbean 104 121 17Middle East and North Africa 51 59 8South Asia 813 1116 303of which India 625 867 242Sub-Saharan Africa 296 522 226Total 2453 2548 95Total excluding China 1577 2096 519

The economic miracle reaches deeply into the lives of the vast majority of Chinese. For example: meat consumption increased from 11 kg per capita in 1978 to 52 kg in 2002. That is almost 1 kg per week for every man, woman and child. That is getting close to diet-conscious Swedes’ consumption, but is of course far from hamburger loving Americans’ consumption. However, compared to India’s 5 kg (despite India being one of the world’s major meat exporters) or Pakistan’s 12 in 2002 it represents a significant development.3

In the media all this is attributed to the development of capitalism in China that began with the leasing of land in 1978. But was this really due the spread of capitalism? How could it be that while capitalism internationally has experienced a period of rising instability and crisis since the mid-seventies, China somehow was an exception? That whereas the former Stalinist economies in the Soviet Union and Eastern Europe experienced the biggest peacetime economic decline since the Black Death, the introduction of capitalism has had a completely opposite effect in China?

The answer to all these questions is an emphatic no. There has been no transition to capitalism in China.

1 Economist, 29 September, 2007

2 National Bureau of Statistics, China Statistical Yearbook 2004; National Bureau of Statistics plan report. http://www.chinability.com/GDP.htm3 www.earthtrends.wri.org

3

In this document I show that whatever the intentions of the Chinese leadership, the result of the economic changes they implemented did not weaken the planned economy, but strengthened it. This might appear to be a paradox – the introduction of private property and foreign capital has strengthened a system based on the abolition of the private ownership over the means of production. But if one looks at the Chinese economy dialectically, as a contradictory process, and not in fixed categories, there is no paradox.

1. Theory of the Permanent RevolutionTo grasp the development of China over the last decades one needs to put it in a broad historical context. Trotsky’s theory of the permanent revolution is the key to understanding how poor countries can pull themselves out of poverty at a time when imperialist nations have divided up the world between them.

Before the First World War, Trotsky, Lenin and the Bolsheviks, the Mensheviks and the entire international Labour Movement were in agreement that the historic task facing society in the underdeveloped countries were in essence bourgeois (often called the “democratic tasks” – the creation of a nation state, the separation of church and state, the overthrow of autocracy and the establishment of a constituent assembly, the crushing of feudalism in the countryside). However, there was a sharp line between the Mensheviks on the one side and the Bolsheviks and Trotsky on the other side. The Mensheviks thought that the role of the working class was to follow the lead of the bourgeoisie and assist the bourgeoisie in taking power. After all, it was a bourgeois revolution that was on the order of the day.

The Bolsheviks and Trotsky pointed to the reluctance of the bourgeoisie to fight. They had arrived too late on the historic scene. Due to the investment of foreign capital in modern large-scale factories the working class was strong and organised and a threat to the national bourgeoisie. The national bourgeoisie preferred to hide behind the tsar’s apron, rather than lead a revolution that would leave them without allies against the class they had begun to fear the most. Therefore both Lenin and Trotsky had reached the conclusion that the working class, in alliance with the peasantry, had to take power. And that it was they who had to implement the bourgeois revolution.

But Trotsky went one step further than Lenin and the Bolsheviks in his analysis. He said that once the working class had seized power it would not stop at implementing the bourgeois tasks. The revolution would “grow over” into implementing socialist tasks (nationalisation of the commanding heights of the economy under workers democratic control and management, the creation of large-scale agriculture, an international socialist federation). In that sense the revolution would be permanent.

In the twenties, the budding bureaucracy that was to establish a totalitarian dictatorship in the Soviet Union, lead by Stalin and supported by others such as Karl Radek (previously a supporter of Trotsky), waged a campaign against Trotsky. At the centre of their ideological attack was the claim that Trotsky’s theory was adventurist as it tried to “skip over” the historical stage of the bourgeois revolution. Trotsky answered them. There was no possibility of skipping over a solution of the agrarian question, for example, but with the aid of an international socialist revolution the whole process could be “telescoped”.

However, he was not satisfied with just defending an old theory from 1906. On the basis of the experience of the Russian Revolution he developed the theory further. After the working class has seized power, with the support of the peasants, society does not pass through two independent stages – the first one dealing with the bourgeois (democratic) tasks and then dealing with the proletarian socialist tasks – the tasks are combined.

4

But what does it mean in practice to combine bourgeois and proletarian tasks? How does one combine tasks that can be mutually exclusive? Those are question that cannot be answered in general, but depend upon many specific circumstances.

The model of Lenin, Trotsky and Yevgeni Preobrazhensky, the main economist of the Left Opposition,4 had been that industry would generally speaking be in the hands of capitalists at first, with the exception of the banks and key industries. Through workers control in the companies still owned by the capitalists and the spread of the revolution internationally, the conditions would be prepared for the nationalisation and planning of industry. In agriculture the land was to be nationalized and the big estates were to be turned into model farms. The rest of the land was to be disposed of by peasant councils as they saw fit, but they were to be warned against small-scale farming.5

In practice, things turned out quite different. In the country side it was the program of the Social Revolutionaries, the main party of the peasants, that was implemented by the peasants. This was then confirmed by a decree. All land was nationalised and all land, except those with a “high level scientific farming”, were divided up among the peasants, who were given equal tenure.

Thus, on the land, the balance between bourgeois tasks (dividing up the land) and proletarian (nationalising) was skewed towards the bourgeois tasks. On the other hand, in the towns things were drawn into the opposite direction. The Civil War and the abandonment of the factories forced through the nationalisation of almost the entire industry, but in a completely anarchic fashion. There was very little coordination.

After that things swayed back and forth in the Soviet Union between different combinations of bourgeois and proletarian tasks. By 1933 basically all industry was nationalised and all agriculture collectivised. But that achievement did not in any way mean that even the elementary bourgeois tasks had been solved. All it meant was that their solution was distorted and incomplete: the bourgeois totalitarian undemocratic elements in the workers state were enormously strengthened; a multi-million army of black-marketers, spivs, and crooks was created; national unity was ‘achieved’ by the brutal suppression of nationalities (only to pop up again at the first opportunity); and the agricultural question was ‘solved’ by keeping agriculture in a constant state of backwardness. The Soviet Union and other Eastern European states were not even capable of realising the tasks of the bourgeois revolution, never mind the socialist ones. That was an important reason for their collapse. You cannot cheat history. If you try, history will sooner or later make you pay, which it did when most Stalinist countries collapsed in 1989.

Just like the Soviet Union, China followed the path of the permanent revolution, but in a strange manner. But different circumstances, not least the whole starting point – a peasant-based guerilla army coming to power instead of a bureaucracy usurping a healthy workers state – has meant that China approached the solving of the socialist and the bourgeois tasks with somewhat different combinations. The development of Chinese agriculture shows this.

Originally, in the areas occupied by the guerilla army, Mao and the Chinese CP swayed between a redistribution of the land, and a mere reduction of peasants’ rents, leaving the land in the hands of the landlords (at least those that did not actively fight the CP). After 1949 the re-distribution of land accelerated. But this was more akin to what happened during the French Revolution than the Russian Revolution. The land was not nationalized. Peasants received an equal share of the land together with the title. By the mid-fifties they were encouraged to form co-operatives. They retained ownership, but co-operated with other peasants.

Then came the Great Leap Forward. The scale of the co-operation was drastically expanded and

4 The Left Opposition were the people who gathered around Trotsky to oppose the rise of Stalin and the bureaucracy.5 Vladimir Lenin: The Tasks of the Proletariat in Our Revolution, September 1917

5

Communes were formed: large administrative units that owned the land and decided upon how the work should be organised. And they were instructed to industrialize the countryside. Every commune was supposed to have a small-scale blast furnace. The Great Leap Forward was a complete disaster.

In the early sixties the communes were scaled down and the peasants were allowed to have plots on which they could cultivate things for themselves and for the market. This arrangement had a semi-feudal character to it. In return for working a number of days a week in the landlords (in this case the communes’) fields, peasants could use a bit of the landlords field to cultivate rice or vegetables for themselves or the market. The peasants were forbidden to move to the cities to free themselves. It was very difficult to even get a permit to visit the cities.

In 1978, in a sort of rerun of the French Revolution but with a new twist, the land was again re-distributed among the peasants in equal shares. But this time only in the form of 30-year leases, not ownership. The ownership of the land remains in the hands of the communes. An opinion poll of peasants in 1992 showed that 79 percent opposed and only 14 percent were in favour of a move from the leasehold system to privatisation.6 For them the difference was clear – a move from relative security to complete insecurity.

In order to maintain equality, when for example family sizes change, most communes have re-distributed the land at least once since 1978. Many have done it three or four times. The large number of migrant workers in China is not only a result of rural residents not being allowed to register themselves in the towns. In fact, a rapidly increasing number of urban areas do permit migrant workers to register, which entitles them to social security. But many migrant workers do not want to register themselves as urban workers as it would mean that their families’ share of the land back home in the commune would be reduced.

Due to the delay of the revolution in the advanced countries the permanent revolution has unfolded in a whole number of distorted ways.  It is clear that as far as the political regimes are concerned there are vast differences. Although the class character of the state and the economy are fundamentally the same, who would not prefer to live in Cuba rather than North Korea?

The economic regimes of the Stalinist states have also been very different. Let’s take two examples. The completely autarchic Albania existed side by side with Yugoslavia. In Yugoslavia the means of production were state owned, but companies were run by individual managers. They produced and advertised for the domestic and the world market, and tried to maximize profits. They paid taxes to the state. The state in turn made an investment plan and distributed money to individual companies and appointed the top managers. There was no state monopoly on foreign trade, and the currency was convertible. There was high unemployment, inflation and large regional disparities.

So far it sounds similar to China, but if anything Yugoslavia was more capitalist. There were fewer private enterprises in Yugoslavia, but the peasants owned the land individually and the banks were not run by the central state.

Although Yugoslavia developed far more successfully than autarchic Albania, it never approached the kind of successes and stability that China has had in the last three decades. The main reason to this is that a small country like Yugoslavia can never gather enough capital to create large enough and advanced enough companies that can compete successfully on the world market. Yugoslav companies ended up heavily indebted to western banks. By contrast, western banks are heavily indebted to the Chinese state.

Before 1989 nobody questioned that Yugoslavia was a Stalinist state. Since “the end of history” we have been inundated with tales about the superiority of capitalism. The propagandists of capital run around the globe trying to find evidence of this. For them any shred will do to prove their point. We 6 Fu Chen: Land reform in China since the mid-1980s, September, 1999

6

need to have a more complex view of things. We need to see beyond the surface to discover the hidden contradictions. We need to understand the essence of a transitional economy. But first we look at the appearance of the Chinese economy, facts and figures.

2. China’s economic structureState Owned Enterprises

The popular image presented in western media is that the State Owned Enterprises, SOEs, are the last remaining dinosaurs of socialism in China, soon to die out. But the industries of the “rust-belt” stubbornly refuse to do just that. A discussion paper with the title Explaining the Persistence of State Ownership in China7 shows that in the past 10 years the number of SOEs has declined dramatically from 84 397 to 29 229, but the share of the SOEs in the industrial sector8 has hovered steadily around 33-34 percent, rising slightly in 2003 and 2004 to 35.5 and 37.0 percent respectively. Considering that industrial production as a whole has increased a lot during period, this actually represents a big expansion of the SOEs. Employment in SOEs fell by 40 percent from 1998 to 2003 at the same time as they maintained their share of GDP.9 This represents a considerable increase of productivity in the SOEs, especially considering that GDP leaped forward during this period. Nineteen Chinese companies, all of them SOEs, are in Fortune Global 500 list of the largest companies in the world in 2005.10

7 By Ken Imai for the Institute of Developing Economies, June 20068 Defined as value-added of  SOEs divided by GDP produced by industrial sector. Figures are prior to upward revision of GDP in 2005.

9 Sean Dougherty and Richard Herd: Fast-falling Barriers and Growing Concentration: The Emergence ofthe Private Economy in China, 16 December 2005

10 Fortune Global 500, 2007

7

The SOEs completely dominate the capital intensive industries. It is difficult to see how Chinese capitalists will ever be able to compete with the resources of the state in these areas. Not even foreign multi-nationals, with all the resources they have at their command, are able to do so.

Even though managers of state firms have some independence in deciding how to dispose over the surplus created by the workers in their industries that does not turn them into capitalists. As Trotsky remarked: “The biggest apartments, the juiciest steaks, and even Rolls Royces are not enough to transform the bureaucracy into an independent ruling class.”11

To fully understand the role of the state sector of the economy it is not enough to just look at what proportion they have of GDP, nor the degree of concentration. It is also important, if not more so, to look at what proportion of investments are channelled through the state sector, because investments are the driving force of the economy. And under capitalism, through the mechanism of the tendency of the rate of profit to fall, the cause of the boom-slump cycle. Fortunately, statistics about fixed-asset investments (investments in buildings and machinery) are also much more accurate and uncontested compared to GDP statistics. They are divided into four periods.

State Investments as Percentage of Total Investments

1981 – 1989 (the “roaring eighties”)                                 78.6 percent

1990 – 1992 (post-Tiananmen Square)                            81.2 percene

1993 – 2001 (the restructuring of the SOEs)                    86.7 percent

11 Leon Trotsky: Writings 1933-34, p. 113

8

2002 – 2005 (post-reconstruction)                                  85.3 percent12

These figures are truly astonishing. They show not only that state the plays an absolutely decisive role in the economy, but also that state investments as a proportion of all investments have increased substantially since the eighties, only to fall back slightly between 2002 and 2005. This confirms that rather than moving towards capitalism in the nineties, China moved away from it. The present financial crisis will certainly raise the state’s share of investments again, possibly to its highest level since 1978.

Private sector

When an American professor of economics travelled to Shanghai in 1998 to do field research he asked a government official to introduce him to some private entrepreneurs. The official gave him a quizzical look and asked, “Are you a Harvard professor? As a Harvard professor why are you interested in those people selling watermelons, tea and rotten apples on the street?”13 Now that was probably an exaggerated view of the insignificance of the private sector, at least outside Shanghai, but it is not that far from the truth. Private Chinese companies produce things like pens, socks, shoes, toys, ties, and Christmas decorations. They are big in the building industry. They employ carpenters, plumbers and electricians, but the largest building industry, which is on the Fortune 500 list, is state owned. This company is called China State Construction and employs 294 000 people. The service sector is a much smaller sector than anywhere else in the world compared to manufacturing. Services, where 55 percent of all private companies are found,14 take care of tourists, catering and haircuts among other things. These are hardly sectors that would be nationalised even in a healthy workers state.

The independence of private companies is limited, as many are to a certain extent dependent on the state for supplies, distribution and even customers. Symptomatic of this is that in a survey in 1995 of 154 private firms where the state had a minority stake of an average of 30 percent it still had an average of 50 percent of the seats on the boards of these companies. Unlike in the west, proxy voting is not permitted at shareholders meetings. This favours those that own many shares. In China, that is often the state.15

In some areas the contribution of private companies can appear to be impressive. 70 percent of the world lighters are made by private Chinese companies in the city of Wenzhou. (Wenzhou, not Shanghai or Beijing, is the real capital of Chinese capitalism.) However, these lighters are produced by 3 000 small firms, some specialising in components, some in final assembly.16 Their specific weight in the Chinese economy does not amount to much. 90 percent of private companies employ less than eight people. Companies like that cannot compete for influence with the giant SOEs.

Shanghai is often presented as the shop window of capitalism in China. But this is nothing more than a successful advertising campaign on the part of the bureaucracy to attract large foreign multinationals for joint-ventures. Although Shanghai is the richest area of China, the indigenous private-sector is among the smallest. Wage income is high in Shanghai, but asset income (income from shares, property, land, bank accounts) is the lowest in the country. Fixed asset investment by the indigenous private sector peaked in 1985 in Shanghai and has declined every year since then. By 2004, it was back to the same level as it was in 1978, in absolute terms.

This is not surprising if one knows that there are many political, regulatory, and financial restrictions on private enterprise. A few examples: Professors, civil servants, SOE managers, and

12 Yasheng Huang: Capitalism with Chinese Characteristics, 200813 ibid14 World Bank: Memorandum of the President of the IBRD on a Country Assistance Strategy for the

People’s Republic of China, January 22, 200315 Yasheng Huang: Capitalism with Chinese Characteristics, 200816 Economist, 18 March, 2004

9

workers for non-profit organisations were not allowed to start businesses on the side; the Shanghai government rigorously enforced zoning arrangements about what areas are allowed to be used for businesses and tightly controls land transactions; in critical infrastructure projects private companies are forbidden.17 It is because of this, not despite it, that Shanghai with its 17 million people has managed to reach a GDP per capita similar to Portugal.

The Shanghai and Shenzhen stock markets have exploded (and then declined), but this does not either represent a transition to capitalism. An overwhelming proportion of companies traded there are SOEs.

It is

also worth noting that Chinese shares are peculiar animals quite different from those in the capitalist world. Chinese shares do not entitle the owner to a share of a company’s assets.18 Thus, even if 100 percent of the shares in a Chinese company were privately owned, the share owners could not move the machines out of the factories and sell them, as they still belong to the state. No wonder Stephen Green of the Royal Institute of International affairs comments: “The stock market has been used to support national industrial policy, to subsidise SOE restructuring, not to allow private companies to raise capital.”19

One of the largest parts of the private sector is agriculture, 12 percent of GDP. This consists of hundreds of millions of peasants that have tiny plots that they lease from the state. The state is their biggest customer and distributor. In 1998 the state tightened its control over agriculture.

Foreign Direct Investment

17 Yasheng Huang: Capitalism with Chinese Characteristics, 200818 Will Hutton: The writing on the Wall, 200719 Economist: 18 March, 2004

10

Foreign direct investment, FDI, is also a part of the private sector. Isn’t that eating its way into the planned economy? Already in the early eighties foreign capital began to arrive from Hong Kong, Taiwan, Macau and to a lesser extent from Malaysia, Indonesia and other parts of the Chinese Diaspora. Some of the capital also came from mainland China to be re-circulated via Hong Kong to take advantage of the privileges offered to foreign companies.

This foreign capital has been used to build factories in China’s Special Economic Zones, SEZ. Companies in these zones enjoy tax incentives and greater independence.20 Many of them import components from abroad, put them together in China, and export them. The whole process bares very little relationship to the development of the rest of China. The technical level of production is not particularly high. They come to the SEZ’ because labour is cheap and because the government builds an excellent infrastructure for them.

In practice they have a license to exploit at will. They employ mainly migrant labour fleeing from poverty in backward rural areas. Many of these migrants are not allowed or do not want to officially register as urban dwellers and therefore have very few rights. They lead a semi-legal existence. They work long hours, and sleep in the factory or in barracks and are subject to all kinds of abuse and harassment by the employers. This is pure imperialist exploitation, with only a limited benefit for China.

Guangdong province, the province around Hong Kong and Macau, has the largest concentration of SEZ’ and is also the area where they have existed the longest. So bad are conditions there that life expectancy has actually declined from 73.9 years in 1981 to 73.27 years in 2000. By comparison the average life expectancy in China as whole has increased by 3.2 years in the same period.21

There are several reasons why the Chinese bureaucracy has allowed these investments, none of which have much relevance to Chinese workers whose needs the bureaucracy is prepared to dispense with.

It is no accident that the SEZs are concentrated around Hong Kong and Macao and the area across the straits from Taiwan.22 The Chinese bureaucracy wanted to integrate these areas economically into China as a preparation for political integration. Above all this reflects the need to complete the formation of an integrated Chinese nation-state. A healthy workers state would also want to integrate these areas into China, but would do so on the basis of the workers and peasants themselves wanting to do so.

They have also used these zones (together with other exports) to acquire a huge foreign exchange reserve. By September 2008 the reserve topped 1.9 trillion US dollars. This is far more than any other government in history.23 In other words, the reserves are being used as a crutch for US imperialism. This is in the interest of neither Chinese nor American workers. But this is not decisive for the Chinese bureaucracy.

Again it is clear that the existence of a bureaucratic dictatorship wastes human and capital resources. A healthy workers’ state would never have allowed FDI in the SEZ on these conditions. And that would not have been much of a loss to the economy as a whole. If workers come to power in China they would immediately transform conditions in the SEZ factories and use the foreign reserves for socialist industrialization.

20 The initial SEZ’ were and are free havens for imperialism. However, since then SEZ’ have spreadthroughout China. The conditions in them vary considerably, as they are decided upon locally. Basically aSEZ has come to mean an area where foreign investment is allowed. Previously foreign investment wasbanned in almost all of China.

21 Sanjay Reddy: Death in China, 200722 Hong Kong was a colony of the United Kingdom from 1842 until 1997. Macau was both the oldest and

the last European colony in China. Portugal administered the region until they handed it over in 1999.23 http://money.cnn.com/magazines/fortune/fortune_archive/2007/05/14/100024842/index.htm

11

But investment by the Chinese Diaspora in the SEZ since the early eighties only tells part of the story of FDI in China. Those investments that the Chinese government considers of importance for the Chinese economy as a whole, and not only as a source of foreign currency and political prestige, are subject to much greater control.

Since the mid-nineties the vast majority of the world’s largest companies have established themselves in China, most as joint ventures with the Chinese state. However, despite all the hype, a lot of foreign companies have encountered problems in China. “Currently, the central government of China, as well as provincial governments, do regulate entry of FDI closely or at least attempt to do so. Entry of foreign firms is often conditioned on the achievement of industrial policy goals as laid out by the state. Foreign firms are most welcome when these goals cannot be fulfilled by domestic firms. The entry of a foreign firm can be subject to numerous conditions, for example, such performance requirements as having to use local suppliers, often designated by the government, or locating in certain areas, or setting up the local operation as a joint venture.”24

The international monopolies have to accept a rate of profit in China that is lower than anywhere else. “A study of American Commerce Department data conducted by a research publication, China Economic Quarterly, showed that direct and indirect profits made by American affiliates in China amounted to $2.8 billion in 2001—less than the $4.4 billion made in Mexico, with a population of just 100 million. Although profitability has undoubtedly improved, many companies are not even covering their cost of capital, much less getting a proper return on their investment. Norman Villamin at Morgan Stanley says that some multinationals deliberately lower the required rates of return for their China operations to wave through projects that would not usually qualify, and charge costs to head office to make the China arm seem more profitable than it is.”25 They simply can’t afford not to have a stake in China – the world’s fastest growing market. The Economist remarked “All too frequently, a short-sighted government seems to regard foreign investment as cash cows to be milked.”26

What is worse for many foreign companies is that they are being out-competed in China by Chinese state companies. As independent private companies, present day state companies might not stand a chance, but as part of a planned economy and with the backing of cheap credit from the state banks, they are doing well. Ningbo Bird and TCL, two state-owned mobile phone producers, have overtaken both Motorola and Nokia in China, despite China being Motorola’s second largest market (and Motorola being the biggest foreign company in China). Procter & Gamble had a good start to their shampoo sales, but were soon undercut by Chinese rivals. P & G’s market share dropped from over 50 percent in 1998 to 30 percent in 2002. Whirlpools’ Chinese adventure ended up with them ending production of their own brands in China, instead a Chinese state-owned company, Kelon, outsourced to them.

Working conditions are generally quite good and wages relatively high for employees of the big multinationals in China. The Communist Party exercises a great deal of control over foreign companies that are considered decisive for the development of China. Take the example of the giant American computer processor producer Intel’s experience. In a book by Harvard professor Tarun Khanna the work of an American employed at Intel’s lab in Shanghai in 2002 is described: “Work in the lab was rigorous, requiring continual interface with the government. The Shanghai government was not the slow bureaucracy he associated with federal jobs. In China, the government demanded performance and held to aggressive time lines. His boss said, ‘The head members of the local branch of the Communist Party set the deadline and they are reviewing the finished product. You

24 Edward M. Graham and Erika Wada: Foreign Direct Investment in China: Effects on Growth andEconomic Performance, 2001

25 Economist: 18th March, 200426 ibid

12

won’t feel so good saying no to a Communist Party member.’”27

Any government, of a deformed or a healthy workers state, would be foolish not to accept investments and foreign trade on the above terms, even if it means that Kentucky Fried Chicken becomes the leading fast-food chain.

Township and Village Enterprises

The TVEs consist of small and medium sized businesses, some export oriented, mainly in rural towns and village. They have a ragbag of different ownership forms. Some are clearly owned and run by local governments and some are leased to managers who run them for the local government. Others are companies that have been privatised, but included among the TVEs are also many newly started household businesses and “alliance enterprises”, a euphemism for larger private companies.

In 1996, when the TVEs employed the most people they ever have, 60 million people were in TVEs that were collectively owned. A further 51 million were employed in household businesses and only 25 million in other privately run companies. So, all in all, 67 percent worked in the private TVEs, but only 40 percent of output came from there, which reflects the small scale character of the private TVEs.28

In China’s poorest and most backward agricultural areas, such as Guizhou, Henan, and Guangsi, TVEs have an important share of the economy (50-60 percent of gross output value, but in the rich industrial areas, such as Shanghai, Beijing, and Tianjin, they are insignificant (6-12 percent).29

A TVE typically employs around 25 workers in the village enterprises and 75 in the township ones. These workers have worse conditions than in the SOEs. As a whole, the TVEs are a half-way house between the planned economy and capitalism. Unlike the SOEs they do not have privileged access to credit from the state banks. And they are not formally speaking part of the state plan, although they are often dependent on SOEs as both buyers and sellers.

After the overthrow of capitalism there would be all kinds of hybrid companies that are neither purely capitalist nor purely socialist – not only of the multitudinous TVE types, but also co-operatives and other private companies with a high degree of workers control.

The Full Picture

If you put it all together the following picture emerges:

1. About one third of GDP is produced by the SOEs. They are highly concentrated and completely dominate investment. They run the decisive sectors of the economy.

2. About one third of the economy is private. However, the state has a considerable influence on this sector. Firstly a large part is agriculture, which is heavily dependent on the state, and is run by peasant households that do not want to break their dependence on the state. Secondly, the state, although a minority shareholder, exercises a disproportionate influence over many private companies. Thirdly, the state through joint-ventures and other means has a high degree of control over foreign multinationals, and dispenses with them as soon as they can build up a domestic alternative. The residual private sector is very small.

3. About one third of GDP is produced by the TVEs. The majority of this is produced by larger TVEs controlled by local governments. The smaller ones are mainly private and are in the poorest and most backward parts of the country.

If the US government nationalised the 1000 largest manufacturing companies, they would have approximately the same control over the American economy as the Chinese state has over the 27 Tarun Khanna: Billions of Entrepreneurs: How China and India are reshaping their futures and yours,

200728 Yasheng Huang: Capitalism with Chinese Characteristics, 200829 ibid

13

Chinese economy. If in addition, the US state owned all the biggest banks and financial institutions (and almost only lent money to state companies), and a large slice of the service and building industries, not to mention all the land which farmers till, and introduced a five-year plan, almost nobody would deny that a planned economy had been introduced in the USA. The Economist, despite its panegyrics to private companies, concurs that the commanding heights of the economy are in the hands of the state.

“State-owned enterprises are much more concerned to maintain patronage and employment than to generate profit, and even the best are not globally competitive. China’s fledgling private businesses, by contrast, have shown astounding growth and produced the country’s first crop of wealthy entrepreneurs. But they are still too small to offer an effective counterweight to the state sector.”30

But to most people it appears that even if China is not capitalist yet, the economy is at the very least rapidly moving towards capitalism. And there seems to be a case for that. In the past thirty years there has been a dramatic increase in the number of private TVEs (both privatised and newly started ones), privatised SOEs, and economic free zones where both Chinese capital from the Diaspora and multinational operate. So what is the point in arguing about whether or not China is already capitalist, if it is just a question of time?

However, that is an incorrect view. China is not moving in the direction of capitalism, despite the increased private ownership of the means of production (for a period of time). Appearances can deceive. And they often do when the facts are filtered through the far from objective media. If the facts are put in relationship to basic Marxist theory a different picture emerges. To see what direction the Chinese economy is moving, one must understand the dynamics of a transitional economy.

3. What is a Transitional Economy?A transitional economy is the economy which is established after capitalism and landlordism is abolished, and before there is a real socialist economy. It is common that one’s view of a transitional economy is coloured by how things were in the Soviet Union, Eastern Europe and China. It is easy to draw the conclusion that a well functioning transitional economy equals how things were run then, minus the dictatorship, plus workers’ control and management. In fact, things are more complex than that. In Stalinist states the economy is deformed, compared to the socialist model economy, in a much broader sense than that the plan was decided upon and implemented bureaucratically. Apart from the lack of workers democracy it was deformed in at least three more aspects: not participating on the world market, abolishing market prices, and nationalising more than the commanding heights of the economy. This document will show that the removal of these deformations is the real cause of the Chinese economic miracle, not the introduction of capitalism.

Autarchy v. World Market

Already in 1848 the Communist Manifesto mentions the development of a world economy. That was perhaps rushing a bit ahead of events, but certainly by the end of the 19th century that was the case. Economies of scale and specialisation on a world scale raised the productivity of labour extensively. And have continued to do so ever since, except for during the world wars and the depression in-between.

If India is better at producing plastics than China, and China better at producing silk than India, it is to the benefit of both countries that they concentrate on what they are best at. India should create a big plastic industry that covers the needs of both countries, and China a big silk industry. It is a waste of resources and leads to higher prices if India and China each have small industries in both fields.

30 Economist, 18 March 2004

14

Of course, things are not quite as simple as that in a world dominated by imperialism. The head-start that large companies from the advanced countries have, means that they can destroy domestic industries and agriculture before they have a chance to develop. These companies gear the development of a country to their own needs, regardless of the consequences it has for people there. Half of Senegal’s agricultural land is used to produce peanuts for margarine factories in the West, at the same time as people are starving as they cannot survive on subsistence farming on the rest of the land. Mexico has been flooded by cheap corn from the USA after Mexico joined NAFTA. Millions of poor peasants have become destitute and are forced to work illegally in the USA.

In order to develop the economy and not be crushed by imperialism, a planned economy in an underdeveloped country has to isolate itself. At the same time that hinders its healthy development. The economy inevitable tends to stagnate. Here lies the fundamental economic and social problem of ‘socialism in one country’.

The Stalinist bureaucracies in China, the Soviet Union and Easter Europe were forced to close the economy in order to survive. However, being dictatorships they went much further than that. Each national bureaucracy feared the other and was intent on building up their national prestige. Their reliance on their own national economies was extreme. After the Sino-Soviet split, trade was next to nothing between the two countries. In the seventies, long before European integration was as large as it is today, trade within COMECON (Council for Mutual Economic Assistance, a sort of East European EU) was less than within the Common Market. Healthy workers states would have completely integrated all their economies for the benefit of all, even if the economies were at such a primitive level that they could not compete on the world market.

The previous period of closed economic development put China in a completely different position to what it had before 1949. By 2001, when China joined the WTO, the flow of imports and exports increased drastically without China's industry being crushed by foreign competition. Instead many Chinese commodities have out-competed products from the advanced capitalist countries. There has been a tendency for the advanced countries, especially the USA, the mightiest imperialist power on earth, to try and protect itself from Chinese exports. In that situation trade barriers can be dispensed with. Instead the planned economy can reap the benefits from participating more in the world division of labour.

In most third world countries tariff barriers are needed. Cuba has achieved miracles compared to other Latin American countries in providing good health care, education and a reasonable standard of living for all. If Cuba opened itself up to the world market today many of the gains of the revolution would be destroyed. But if it does not, Cuba is doomed to trail behind in the epoch of world trade, a world market, and a world economy. If workers took control over the economy and began to manage it democratically, it would not fundamentally change things. Of course, it would be a shot in the arm for the economy, sweeping aside many bureaucratic hinders and corruption, but even then Cuba could not compete on the world market and the economy would still be in a straight-jacket. For Cuba this dilemma can only be solved by spreading a planned economy throughout the Americas.

To demand import controls in advanced countries is completely reactionary. It would lead to a break-down of the economy. Import controls were the main reason why the recession of the thirties turned into a depression. It is one thing to protect nascent industry before it has become enmeshed in the world economy; it is an entirely different matter to cut of all the threads which connect highly developed industries with the world economy. In addition, the demand for import controls turns the focus of the working class away from combating its own bourgeoisie and home-grown imperialism, towards blaming other imperialists. This splits the working-class along national lines.

It could be argued that while foreign trade is a good thing for a planned economy it should be under the complete control of the state. However, the decisive question is not that the state controls all

15

international trade right down to the smallest piece of chocolate. The point is that state ownership of the means of production must be the dominant mode of production, and thus the state has the decisive influence over foreign trade.

China has increasingly used some of its reserves to buy capitalist companies abroad (and companies that were previously state owned in for example Vietnam). It does this to get hold of cheap raw materials and to defend and widen its share of the world market. This export of capital, to for example Africa, might appear as imperialism in the eyes of some, not least because the Chinese government is supporting all kinds of horrid regimes in Africa. Yet, this does not either change the basic functioning of the economy. Mao supported his share of brutal regimes too, for example Pinochet in Chile.

If the United States became socialist, US investments abroad would not be handed over to the bourgeoisie or to workers’ cooperatives or to the bourgeois state in any country. They would be part of the US planned economy. Of course, the situation for workers in these companies would be radically changed. Wages and working conditions would be rapidly improved; workers control and management would be introduced. They would be shining examples that would inspire workers of the world to carry out the socialist revolution. But they would still be part of the US state sector. Nor would a socialist USA stop exporting capital in order to secure the supply of essentials to the planned economy. Therefore it is only logical that a deformed workers economy, at least a non-autarchic one, also has its international investments that are part of the state sector, although the situation for the workers there, as for those at home, is far from satisfactory.

Breaking away from near autarchy and integration into the world economy has resolved one of the contradictions of the deformed planned economy. It has made possible a huge development of the means of production. But it has also created new contradictions. There is the contradictions between participating in the world economy and the bureaucratic character of the regime, which expresses itself in Chinese “imperialism”, the exploitation in the SEZ’, and the huge foreign reserves. This contradiction can only be solved by the working class taking power in China.

Then there is the contradiction between imperialism and the planned economy per se. The more integrated the Chinese economy becomes in the world economy, the more China will be effected by the cyclical nature of capitalism and speculation. And the spread of private ownership over some of the means of production in China itself threatens to undermine the whole planned economy. This contradiction has to be resolved by socialist revolutions in a series of other countries.

State Control over Prices v. the Law of Value

The second deformation of the planned economy that has been resolved in China in the last decades is the abolition of state control over most prices.

The idea that market prices should be abolished under socialism and replaced by state decided prices was not the invention of Marx, Engels, Lenin or Trotsky, but Stalin. Trotsky was completely opposed to it. In The Revolution Betrayed Trotsky defends the need for market prices for both ordinary commodities and the commodity of commodities – money. (In Marxist theory market prices are determined by the amount of socially necessary labour expended in their production).

“(Stalin’s) obedient professors managed to create an entire theory according to which the Soviet price, in contrast to the market price, has an exclusively planning or directive character. That is, it is not an economic, but an administrative category, and thus serves the better for the redistribution of the people’s income in the interests of socialism. The professors forgot to explain how you can estimate real costs if all prices express the will of a bureaucracy and not the amount of socially necessary labour expended. In reality, for the redistribution of the people’s income the government has in its hands such mighty levers as taxes, the state budget of expenditures for 1936, over 37.6 billion Roubles are allotted directly, and many billions indirectly, to financing the various

16

branches of economy. The budget and credit mechanism is wholly adequate for a planned distribution of the national income. And as to prices, they will serve the cause of socialism better, the more honestly they being to express the real economic relations of the present day.

Experience has managed to say its decisive word on this subject. ‘Directive’ prices were less impressive in real life than in the books of scholars. On one and the same commodity, prices of different categories were established. In the broad cracks between these categories, all kinds of speculation, favouritism, parasitism, and other vices found room, and this rather as the rule than the exception. At the same time, the chervonetz, which ought to have been the steady shadow of stable prices, became in reality nothing but its own shadow.” (Emphasize added)

Trotsky leaves no doubt about the need for market prices under a planned economy. In order to arrive at a market price each factory begins by setting its own prices. Then, through the mechanism of supply and demand prices will eventually approximate the socially necessary amount of labour that has gone into the production of the commodities produced in every factory. By contrast, in the command economies prices were set at the top by a combination of guesswork and negotiation. First, the experts would guess at what prices should be, then there would be negotiations with the government and competing ministries. Out of this mess prices would emerge. Apart from corruption, “directive” prices cause all kinds of distortions and wastages in the economy. A classic example of this was when peasants fed bread rather than grain to pigs. That was logical as long as bread had a lower “directive” price than grain.

A general fixing of prices was the bureaucracy’s response to a problem that any backward isolated planned economy is confronted with – the need for primitive socialist accumulation. This is a phrase coined by Preobrazhensky. He drew a parallel to what Marx called the primitive accumulation of capital whereby the bourgeoisie, by fair means and foul, transferred the wealth of the aristocracy into its own hands, and then used it for developing the means of production.

Preobrazhensky explained that it was not enough to take control over the commanding heights of the economy, as had been done after the October revolution. For a period of time the peasantry (and even the urban petit-bourgeoisie) had to be allowed to develop capitalism, so that a part of their surplus could be transferred to develop socialist industry. Instead of simply expropriating it by violence, Preobrazhensky proposed that one of the main methods of doing this would be by fixing the prices in favour of industry.31 When industry had developed sufficiently (or after a successful revolution in an advanced capitalist country) cheap tractors, separators, mills and so on would be available. Then the basis could be laid for large scale cooperative and state farms and the end of primitive accumulation.

In 1928, when there was the threat of chronic famine in the cities due to rise in agricultural prices, and political threat, from the newly rich bourgeoisie and wealthy peasants, Stalin adopted a large part of the programme of the Left Opposition. However, he implemented price controls in the same bureaucratic way that he implemented many of the other demands of the Left Opposition like collectivisation and a five year plan. Instead of carefully fixing a few prices at reasonable levels, he imagined that market prices could be abolished and fixed by decree instead. In the same way Mao thought that he could industrialize by command when he initiated the catastrophic “Great Leap Forward”.

In the bourgeois media the term ‘command economy’ was often used to describe the Stalinist economies of the Soviet Union and China. For once their terminology is more descriptive than the one that Marxists have traditionally used. Effective planning presupposes that you get some kind of feedback to your plans, from prices, from workers, and from experts. But the main feedback the central planners got in the command economies was from frightened lower bureaucrats who told the

31 Yevgeni Preobrazhensky: New Economics, 1926

17

higher bureaucrats what they wanted to hear.

Trotsky ridicules the bureaucracies attempt to do plan without proper feedback from market prices.

“If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace – a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy.”32 (Emphasis added)

In 1978 the Chinese state fixed prices for 100 percent of all transactions of producer goods, 97 percent of all retail sales, and 93 percent of all farm commodities. By 2003 this had fallen to 10 percent, 2.6 percent, and 1.9 percent respectively.33

Market prices, no more than participating on the world market, have changed the basic character of the Chinese economy. But it has enabled the planned economy to function better. In the deformed planned economy directive prices had, initially, a rough job to do – transferring wealth from agriculture into the construction of state owned heavy industry. This laid the foundation for a more advanced economy. But as the economy became more sophisticated the need for market prices becomes more, not less, important. It is difficult to develop a plan that guesses at the real costs of several hundred commodities, but it is impossible to develop a plan that has to estimate the cost of millions of commodities.

Having market prices as the basis of the economy should not be confused with a passive adaption to the market, such as occurs in capitalist countries. The aim of the plan must be to intervene and change prices in a socially and economically desirable direction. To a certain degree even capitalist governments do this with taxes and subsidies. But they lack the most important tool – control over investment. In the sixties and seventies, inspired by Keynes, some governments, such as the British and Swedish ones, tried to influence investments. But because they did not control the commanding heights of the economy their room for manoeuvre was very restricted.

By contrast, in a planned economy the state can change prices dramatically. If it is considered advisable to raise the price of Ferraris and decrease the price of buses, then the government can increase investment in bus factories and decrease investment in Ferrari factories. To think that you can achieve the same thing at a stroke of the pen, by fixing prices, is bound to lead to corruption, a black market, and low productivity.

However, there is obviously no guarantee that the present regime in China will change real prices for the benefit of the majority of the population. On the contrary, as long as there is no democratic workers control over the state, there will be other priorities that dictate the state’s price policies.

Complete Nationalisation v. Nationalisation of the Commanding Heights

The third deformation of the planned economy that the Stalinists implemented was the almost complete nationalisation of everything regardless of whether or not it was mature for nationalisation.

In a planned economy, what should be the criteria for nationalisation of an industry and its integration into a central plan? That labour is socialised. Quite often the word ‘socialisation’ is used instead of ‘nationalisation’ to signify the taking over of a company by the state, but in this document the word socialisation does not refer to how the means of production are owned. Instead it is used in

32 Leon Trotsky: The Soviet Economy in danger, 193233 OECD working paper: Sean Dougherty and Richard Herd: Fast-falling barriers and growing

concentration, 16 December, 2005

18

the sense that Lenin used it: labour is socialised when many different physical production processes develop into an integrated whole which is a long and arduous process regardless of the mode of production. Under capitalism socialisation is intertwined with the concentration and centralisation of capital. Lenin describes the whereby production is socialised.

“The socialization of labour by capitalist production does not at all consist in people working under one roof (that is only a small part of the process), but in the concentration of capital being accompanied by the specialization of social labour, by a decrease in the number of capitalists in each given branch of industry and an increase in the number of separate branches of industry – in many separate production processes being merged into one social production process.“34

Another way of expressing this is to say that social production means many people producing many things for many people, whereas private production is few people producing few things for few people. The socialisation of production under capitalism is an enormously progressive thing. But it also gives rise to the main contradiction of capitalism – between the social character of production and its private appropriation. This contradiction leads to economic crisis, unemployment, the wasting of resources and inequality.

Decisions made by large companies, and a few key small ones, have an important effect upon the whole economy. But the bosses of these companies act only in their own interest and not in the interests of the many who are affected by their decisions. Individual capitalists will sack workers when their profits decline in order to restore profits. If this only affected a few workers in an isolated place it wouldn’t matter much. But if a large company sacks many, the subsequent reduction in workers purchasing power will reduce profits for other capitalists as they will be able to sell less. The whole system spirals out of control into recession. In a similar manner, because some US banks wanted to make huge profits by giving sub-prime loans to house buyers in the USA, there have been consequences for the whole world economy. Only the nationalisation of the largest companies and the planning of the economy can prevent the cycle of booms and slumps, and speculative bubbles.

But the nationalization of private production in the Soviet Union and China lead to a different contradiction – the contradiction between the private character of production and social appropriation. Millions upon millions of small entities that are not connected to each other have to suddenly have all aspects of their production and sales co-ordinated, without having access to the help of the market for doing this. This leads to the creation of a huge bureaucracy, a stifling of individual initiative, and dialectically to less control over the general plan, and stagnation. A government decree does not mean that is possible to jump over the whole time consuming process of the socialisation of production.

In 1975 there were 200 000 individual or family businesses in China compared to over 80 million people employed.35 In Sweden, one of the most monopolized capitalist countries, there are more than 750 000 small companies compared to a working population of less than 5 million.36 There can be no doubt that in a backward country such as China only a small proportion of all the people employed in 1975 in the state sector worked within the technical and organisational structure of genuine social production.

Due to the backwardness of China there was no alternative (short of a successful socialist revolution in an advanced capitalist country) between 1949 and the seventies. The genuinely socialised (in the sense that Lenin describes) part of the economy was so small in 1975, as it is in Cuba today, that to privatize the non-socialised sector at that time would have crushed state ownership of the socialised economy.

34 V. I. Lenin: What the 'Friends of the People' Are, 1894 35 State Statistical Bureau of China, 199736 Företagarförbundet och SEB: Småföretagare olika som bär, 14 november 2007, And www.scb.se

19

In a healthy workers state, the working class can allow small businesses, even in poor countries. The economic weakness of the socialised sector can, to a certain extent, be compensated for by the social strength of a working class in power. Small businesses will be run more efficiently than if they are part of the central plan. Many would be co-operatives, but many would be owned individually or by families, and some would be joint-stock companies.

As production becomes more social, and the size of businesses expands, they will be more and more integrated into the planned economy. Initially this happens through the state becoming their biggest customer and supplier, and finally through nationalisation. This has even happened in China recently. The private soft drinks company Wahaha (Laughing Child in English) grew and grew to such an extent that the Shangcheng regional government decided that it was entitled to a controlling interest in it. And they took it. Today, Wahaha is China’s largest soft drinks producer and distributor.

In a healthy workers state the possibility of nationalising companies would be sanctioned by law. As would the right to private ownership over the means of production for small-scale production and distribution. A workers state is not a lawless state. If co-operative, small private businesses, joint-ventures and other non-socialist property forms are to be allowed to exist, they should have a legal status. That China has not had such laws previously, despite the existence of several 100 000 small businesses even before 1978, reflects the capriciousness of the bureaucracy more than anything else.

Under socialism, the working class has the power to smoothly incorporate companies into the state sector as their production becomes more and more socialised, not least because of the incentives that can be offered to private owners. Most people would probably prefer to be part of a flourishing collective, as long as their ideas and talents are appreciated and they are guaranteed a high standard of living.

If workers had taken power in China in the mid-seventies, and even if the revolution had spread internationally, they would still have had to change the character of the economic plan. Privatisation on the scale that has been done in China in the last three decades would not have been an option for a democratic workers state. It would have been necessary to allow peasant families to lease land, just like the bureaucracy did in 1978. It would also have been necessary to give villages, towns and regions a greater say in running things. And many of the smaller state enterprises would have been better off being run outside of the state plan, many as co-operatives.

The socialised urban sectors of the economy are still state owned and planned, but now the private sector, which mainly exist in the most backward rural areas of China (except for foreign companies), is privately owned and run. This proportionality is one of the final reasons why the planned economy works better now.

The Stalinist bureaucracy in China could not achieve an efficient transition to a more balanced economy. Instead there has been a brutal and wasteful process of privatisation. In the future, there will be a heavy price to pay for re-establishing proportionality in a bureaucratic way. Either the bureaucracy itself, like Stalin in 1929, will crush the private sector again; or parts of the bureaucracy will become absorbed into the rising capitalist class and together with them implement a capitalist counter-revolution, like in Russia after 1989; or the tasks of the working class will have been made more difficult when it seizes power.

China v. the Soviet Union

If the Soviet bureaucracy in the 1950’s had implemented the same measures as the Chinese bureaucracy, they would have had a rapid economic development instead of stagnation and death by elephantiasis.  In the fifties, the Soviet economy was at a similar level of development as the Chinese in the seventies. In fact, after the death of Stalin, the new Soviet leader Nikita Khrushchev did make moves in a ‘Chinese’ direction. Just like in China the reforms began in agriculture by

20

encouraging peasants to cultivate more on their own plots. They were also given passports so that they could move from the countryside to the cities. This was followed by a program of giving regions a greater say in the running of the SOEs and the use of the profit motive in the SOEs. But Khrushchev was cut short, deposed, and eventually replaced by the archetype of a lumbering dim-witted bureaucrat – Leonid Brezhnev.  The reasons for this can be found in the different histories of the two countries and a different international situation.

The deformed workers state in the Soviet Union was born on the broken bones of the aristocracy, the bourgeoisie, the petit-bourgeoisie, the peasants, the kulaks, the working class, and the entire generation of Bolsheviks that had led the October Revolution. There were plenty of people around who had every reason to want to bring down Stalin, if given the chance. And as soon as Stalin had consolidated his power, the USSR was plunged into a World War that cost the lives of 20 million Soviet citizens. Soviet victory over Nazi Germany was achieved through a heroic struggle of the population, but also through the ability of the state industries to churn out huge amounts of military hardware. This was shown at the Battle of Kursk which, together with Stalingrad, was the turning point of the whole war. It was the biggest tank battle in history.

The Cold War, inter-continental missiles, and the atomic race followed. Towards the end of the Cold War the US and the USSR could each destroy the planet many times over.

All this formed the character of the state and the mentality of the bureaucracy in the Soviet Union. The whole economic plan was biased towards heavy industry because of the need for a huge armaments industry. This industry was by its very nature very centralized. Even in the eighties half of all industrial production was connected to the needs of the military. Arms were one of the few industrial products that the Soviet Union exported on a big scale.

By contrast, the deformed workers state in China was the result of a long guerilla struggle. For twenty years the guerilla army administered liberated areas before taking power in Peking. They had given land to the peasants and although it was probably an exaggeration to say that they were “like a fish in water” with the population, they were undoubtedly popular. They had to rely on the active support of the population in order to survive. After the guerilla army finally conquered the cities and installed itself as a state in Beijing it distributed the remaining land to the peasants and after four years it introduced a successful first 5-year plan.

The Great Leap Forward almost certainly dented the popularity of Mao and the bureaucracy, but the mere fact that Mao was not afraid to mobilize workers and peasants for his goals shows how different the regime was from Stalin’s. He repeated this feat on a grander scale during the Cultural Revolution a few years later when he mobilised millions in a struggle against rival bureaucrats.

Mao’s military defence strategy was different to Stalin’s. Only a small part of industrial production was for the military. The idea was to rely on a huge army. Even today China has by far the largest army in the world, despite having only a handful of troops overseas. Mao’s idea was that the enemy was to be lured into the country were in a sort of advanced guerilla war, with the aid of the population, the enemy was to be annihilated.

The Great Leap Forward can be seen as part of this strategy. The creation of self-sufficient communes, producing both agricultural and industrial goods, throughout the country meant that unless the enemy managed to take control of absolutely every part of the country, it would relatively easy to start to counter-attack. Although the excesses of the Great Leap Forward caused a disaster and a subsequent retreat, the basic commune structure survived. And Chinese agriculture and industry developed on a much more de-centralised basis than in the USSR.

Thus, psychologically and economically, China was prepared when Deng Xiaoping, one of the few leaders of the guerilla struggle still alive at the end of seventies, launched a series of reforms. These went beyond what Khrushchev had attempted. The success of these reforms encouraged them to go

21

further and faster. By the late eighties they were moving too fast. A far too rapid transition to market prices caused massive price rises and widespread dissatisfaction. Eventually, that led to the beginning of a popular uprising against the regime. It was one thing for the bureaucrats under Mao to mobilise popular movements for their own causes, but it was an entirely different thing for independent movements to develop. At Tienanmen Square, the bureaucracy crushed the movement decisively. And could do so because the bureaucracy could still play a role in developing the economy rapidly. However, they also slammed on the brakes of the capitalist train, and even partially reversed it.

In the eighties the market economy made big strides forward, mainly through the development of millions of small companies that operated outside the plan and where located in rural areas, the so called Town and Village Enterprises, TVEs.  Thus, in keeping with Maoist traditions, modern day Chinese capitalism has its origin in the country-side, not the cities. That is also its weakness.

After Tienanmen Square a whole series of restrictions were placed on private companies. And they remained in place throughout the nineties. Not a single new “liberalisation” took place in the nineties, and some of the measures of the eighties, such as easy access for private companies to state credit and more or less informal private credit dried up. Instead state credit was strongly centralised and private financiers were executed.

The “four-wheel drive policy” of supporting township, village, “alliance”, and household TVEs equally was abandoned. A new law, passed in 1997, concerning the TVEs stresses the primacy of collectively owned TVEs. That was merely codifying a practice that had been implemented for some time. Since 1995 the TVEs role in the economy has been frozen. In the urban areas, due to a huge increase of fees, there was a sharp decline in the number of self-employed businesses from 32 million in 1999 to 24 million in 2004.37

The whole economy was geared towards restructuring the most important SOEs so as to make them competitive on the world market. Formally many of them were turned into joint-stock companies in order to raise capital, but the state retained majority control. Money was sucked out of all other parts of the economy and poured into modernizing the largest companies.

Much emphasis has been laid on the privatisation of the smaller and medium sized SOEs following the implementation of the policy of “grasping the large and letting go of the small” decided upon at the 15th Party Congress in 1997.  But what is seldom mentioned is that it was the smaller and medium size SOEs that stood for a big majority of the losses of the SOEs. In effect losses were privatised.38 Some people made profits from picking over the bones of these companies, but their role in the economy was and is marginal.

In 1989, 1991, 1995, and 1997 the government passed legislation to support and strengthen the large SOEs. They were given tax and debt relief, import licenses, greater access to domestic and overseas licensing facilities, and substantially increased operating powers. The economic sectors that these SOEs were allowed to cover expanded to include the whole economy.39 In 2005, management buy-outs of large SOEs were forbidden. The bureaucracy brought in large multi-nationals to help them with re-structuring the SOEs. It was this recipe that enabled the large SOEs to compete on the world market and for the state to accumulate a gigantic foreign reserve. Before 2000 China either had only a small surplus or a deficit in its current account. The government succeeded in modernising the state sector, but under the rule of the bureaucracy the necessary restructuring was done at the expense of sacked workers and heavy taxes on the rural population.

Even this year, the government has taken further steps to stop the large SOEs ending up in private

37 Yasheng Huang: Capitalism with Chinese Characteristics, 200838 ibid39 ibid

22

hands. SASAC (State-owned Assets Supervision and Administration Commission), the state assets watchdog, is banning SOE management staff from owning any shares at all in SOE affiliates and subsidiaries. Staff investment is also banned in companies involved in business similar to that of the SOEs. SOE senior and middle management are required to transfer their shares or resign from the posts within a year of the publication of the new rules. The new rules also stipulate that stake of all employees put together in large SOEs should only be a minority shareholding in order to maintain the companies nature as SOEs.40

The Soviet bureaucracy clung onto the un-reformed Stalinist command economy long after it had passed its best before date. Contradictions built up below the surface leading to stagnation, an acute economic crisis and, in the end, when they opened up to the world market, the whole system imploded. The “plan” simply disappeared under its own weight and the battering of the world market. The Soviet Union disintegrated. And because the demoralised working class offered no alternative, the only ones that could step into the economic shambles after the collapse were ex-bureaucrats, black-market gangsters and imperialist companies. None of them could do anything else than plunder the country. China developed in an entirely different direction because it never succumbed to capitalism.

4. More about the Laws of Motion of a Transitional EconomyIn Capital Marx dissected capitalism and laid bare its driving forces. Preobrazhenski, in his book New Economics, began the job of doing the same thing for a transitional economy.

Capitalism is an anarchic system. Every producer produces commodities independently of and in competition to others. Yet there is something that binds the whole system together. It might be invisible, yet there is still a hand that steers the whole system. That is the law of value – all commodities are on average exchanged at their values, the socially necessary labour time that goes into the production of commodities. This is the basic principle that decides the allocation of resources, and the production and distribution of commodities. Counter-posed to this is the planning principle – conscious decisions and choices steer the economy.

In a very simple economy, like a more or less self-sufficient farm, the planning principle rules (in its primitive form). Once the economy becomes more complicated, with thousands of commodities produced for unknown people in unknown places, the law of value takes over. After a while – the negation of the negation – the economy becomes simpler again. Capitalism concentrates production and distribution into huge organised global structures that, with the aid of advanced technology, make it again possible to get an overview. Once these huge structures are nationalized and removed from the anarchy of competition, the planning principle can again reign supreme.

But there is no reason to assume that nationalisation will only take place when the entire economy is organised into giant trusts. On the contrary, the power of the working class is such that nationalisation of the major monopolies can, and does, take place long before that. Thus, both laws continue working side by side for a long period of time. Both struggle for dominance. That struggle, fought with both economic and political means, is the main contradiction that determines the law of motion of a transitional economy.

Even under capitalism, the planning principle exists side by side with the law of value. Through workers’ struggle many countries have a national health service, and even within individual monopolies there is a plan, although a very insecure and insufficient one. After the working class has taken power and nationalised the commanding heights of the economy, the planning principle becomes dominant, but the law of value continues to exist. Only a tremendous development of the productivity in the state sector will finally settle the question.

40 http://www.chinadaily.com.cn/china/2008-10/09/content_7091945.htm

23

Preobrazhenski expressed the laws of motion of a transitional economy on a high theoretical level, but Trotsky described how Lenin had already formulated the basic idea on a practical level.

“He presupposed that the concessions and the ‘mixed companies,’ that is, enterprises based upon the correlation of state and private capital, would occupy a major position in the Soviet economy alongside of the pure state trusts and syndicates. In contradistinction to the state capitalist enterprises – concessions, etc., that is – Lenin defined the Soviet trusts and syndicates as ‘enterprises of a consistently socialist type.’ Lenin envisioned the subsequent development of Soviet economy, of industry in particular, as a competition between the state capitalist and the pure state enterprises.

(…)

Lenin conceived that the attainment of this goal [the complete statification of the economy] would require the successive labours of two or three generations [emphasis added] and, moreover, in indissoluble connection with the development of the international revolution.”41 (Emphasis added)

The Soviet Union completely “bypassed” an economic development that Lenin thought would be necessary for generations. The Soviet Union paid a heavy price for that. China is not making the same mistake.

In China today the state owns the commanding heights of the economy and through the use of the state banks, the state budget, and the five-year plan it can decide upon the what direction the economy should take. The state planning body, the NDRC (National Development and Reform Commission) drafts the five-year plan that is then approved by the Communist Party. The SASAC controls the flow of investments to the SOEs and tries to make sure that the economy runs along the lines laid down by the five-year plan. SASAC was established in 2003 as a means of strengthening the central governments control over the economy.

The Chinese government does more than control the flow of investments. They also appoint the top managers. When the government thought that the managers of the two mobile and the two fixed telephone line companies were spending too much time competing with each other they switched the managers around, forcing them to take each other’s jobs, so that they would learn to co-operate better.

In the command economies the state tried to do far more than control investment and set qualitative targets about what areas of the economy should be developed. The state made quantitative targets for the whole economy. So many cars should be produced at such and such a price and such and such a colour; so much steel with so many different dimensions and qualities; so many tomatoes for so many workers. This is an extremely cumbersome method of planning that would not even be possible to implement well in advanced economies. It requires decades of technological development to achieve. It means just-in-time production married to instant monitoring of the flow of stocks at distribution points and conscious consumer feedback. The outlines of these possibilities can be seen in parts of the advanced economies today. The phenomena of the last decade – widespread computerisation and the internet – are essential building stones.

The main reason for planning is to abolish the anarchy of the market. That is, abolish the competition between large privately owned companies, and replace their competition with a general plan. The central state should not be involved in details which should be taken care of lower down the line. This is more or less how things function in China today.

Primitive socialist accumulation is an important weapon of the planning principle in the early stages of its battle with the law of value. After the initial expropriation of the commanding heights of the economy the wealth of the older modes of production, mainly capitalism, is gradually transferred to

41 Leon Trotsky: The Class Nature of the Soviet State, 1933

24

the socialist mode. Although they have may have little or no understanding of this, the Chinese bureaucracy is implementing it in practice. They allow private capital to buy shares in the state sector – without giving it any control. They set up joint-ventures where the foreign multinational provide capital and technology, but have to accept a low rate of return.

On the surface there appears to be a convergence of interest between the Chinese bureaucracy and foreign and domestic capitalists. But below the surface there is a struggle between two irreconcilable systems, regardless of what side some sections of the bureaucracy seem to be on for the moment. This new ‘Cold War’ expresses itself only partially in an arms race. It is mainly seen in the trade war between the USA and China. This trade war could potentially be even more damaging than the Cold War. It could plunge the whole world into a new economic depression which could spread barbarism far and wide.

Possibly sections of the Chinese bureaucracy want to transform themselves into capitalists. Maybe it is greed for ownership that has pushed them towards the policies that they have implemented, but regardless of the intentions of the bureaucracy, the SOEs and the economic plan are the decisive elements in the economy. The Chinese economy is closer to the classical model of a transitional economy than the old command economy ever was. Again, this is the reason for the Chinese economic miracle rather than the development of capitalism.

Crises

China also lacks another decisive characteristic of capitalism – a boom/slump cycle. Ever since capitalism first became the dominant mode of production in a country, it has been accompanied by crisis of over-accumulation. These crises, which were already documented in the Communist Manifesto, can appear every ten years or every five years. They can be deep or mild, but they continuously reappear. They are essential for the functioning of capitalism. The increasing world division of labour has meant that the periodic crisis of capitalism expresses itself as a world crisis. But the Chinese economy was completely unaffected by the world recessions of 1991-1993 and 2001-2003. In the recession of the early nineties China grew by 9.2, 14.2, and 13.5 percent respectively. The figures for the following recession were 8.3, 9.1, and 10.1.42 India, by contrast, showed step declines in growth during the two world recessions.

In the first recession of the new millennium China was clearly integrated in the world economy, but the government counter-acted the effects of the world downturn with a program of massive investments. The US government also pumped huge amounts of money into the economy through arms expenditure. Thus China and the US both helped ‘save’ the world economy from a deep recession. However, the result was very different in the US and China. The US slumped, mildly, but ended up with two giant deficits, a falling dollar, and US competitiveness on the world market declined. China did not slump, increased productivity, took shares in the world market, and increased its trade surplus. That is a result of the fundamental differences between the two modes of production.

In 1989 and 1990 the Chinese economy also behaved in the opposite manner to the world economy. At same time as the advanced capitalist countries had one of the highest growth-rates since the early seventies, growth in China slowed to around four percent. This was the lowest rate of growth since 1976. But this was not a capitalist crisis, but due to the government trying to introduce market wholesale prices too hastily in 1988, causing high inflation and panic buying. The government slammed on the brakes by cancelling large investment projects. Another reason for the decline in the growth rate was that foreign investment fell off after the events at Tienanmen Square Massacre in June 1989. Even in a planned economy the plan can go wrong, but that is due to mistakes that can be corrected and not an inevitable result of the system.42 National Bureau of Statistics, China Statistical Yearbook 2004; National Bureau of Statistics plan

report. http://www.chinability.com/GDP.htm

25

For over twenty years the Chinese government has been continuously warned that the economy is overheating. And the prescription for ‘overheating’ is always the same – more capitalism. Already in 1988 one economist wrote that “After the Chinese Communist Party embarked on economic reform in 1978 China’s macroeconomic performance was quite satisfactory until the autumn of 1984. Since then, however, the Chinese economy has run into ‘economic overheating’”43 Most economists cannot understand that a transitional economy can sustain a much higher and even rate of growth than capitalism. As long as the planned economy dominates there will be no crisis of over-accumulation.

A few more experienced bourgeois commentators have begun to understand this, if only purely empirically, and have begun to give a completely different meaning to the word ‘overheating’, and the expression ‘business cycle’. An article published in the Asian Wall Street Journal in 2004 called China is still far from being a Free-Market economy44 describes the Chinese economy:

“For veteran China watchers, the current business cycle bears an uncanny resemblance to previous episodes of overheating since 1979. Generally, the Chinese business cycle tracks the country’s political cycle closely. The Communist party convenes its national congress every five years (the latest one was held in 2002). Each congress determines leadership changes both at the top and, more importantly, at the provincial level. Just as the party derives its legitimacy from economic performance, central and provincial elites eager to demonstrate their ability and secure their jobs are motivated to turn in the best possible growth in what is China’s closest equivalent to an election year in the West.

In an economy in which the ruling party controls the state, which in turn allocates about half of the fixed-asset investment, the effects of such political calculation on economic growth can be astonishing. Chinese data show that the growth rate in the year when a party congress is convened is significantly higher than in the preceding year. There were six Communist party congresses from 1977 to 2002. Except for 1997 (probably due to the East Asian financial crisis), the annual growth rate in the “congress years” (1977, 1982, 1992, 1997, and 2002) was, on average, 4.32 percent higher than that in the preceding year. In 1992, for example, the growth rate was 14.2 percent — 5 percent higher than the 9.2 percent registered in 1991.”

One should add that Chinas’ investment cycle since 1978 is almost identical to what it was during Mao’s rule.45

Investment

Despite being hit harder than ever by the fall in global demand during the crisis that began in 2008, the Chinese government managed to repeat the same trick as it did during the East-Asian crisis in 1997 and the world recessions of 1991-1993 and 2001-2003. Through a massive dose of state investment the effect of the international financial crisis will be counter-acted. With a two year plan of investing nearly $600 billion it begins to rival the $700 billion US government plan in size, despite the Chinese economy only being a fraction of the US economy. But the effect will be very different.

The US government is basically just borrowing money to throw into the black hole created by speculators. Huge amounts of money are being absorbed into the banking system merely to prevent it collapsing and bringing the whole capitalist system down with it. Sooner or later when the government has thrown enough money at them the bankers will regain “confidence” and the system can begin to function relatively normally again. But US capitalism will be enormously weakened

43 Ryutaro Komiya: Macroeconomic development of China: “Overheating” in 1984–1987 and problemsfor reform, 1988.

44 Minxin Pei, 24 August, 200445 Thomas Rawski: China reform watch: Turning point, 2001

26

after this. The Chinese and many others that have lent money to the US will prefer to spread their risks in future. And the US government will be left with a whopping deficit.

The Chinese, on the other hand, will be able to use their reserves. They might need to complement that with increased government borrowing, but that is from an internationally very low level. Chinese banks are not in trouble. On the contrary they are in a better shape than for a long time. China is one of the few countries of the world where bank lending, as a proportion of GDP, has gone down during the past five years.

At the end of the crisis China will be sitting there with the results of the gigantic stimulus package: new and better railroads, airports, harbours, and power grids; upgraded machinery in the factories; more affordable social housing and higher social security; an improved health service and education system; higher average incomes, and for the peasants – a higher minimum purchase price for grains.

In the first six months of 2008, China accounted for one-third of global GDP growth.46 Since then China’s share has risen and the IMF expects China, despite a fall in the growth rate in China to 8.5 percent, to account for half of world growth in 2009.47

Of course all is not sunshine. The private toy and shoe manufactures are falling like ninepins under the impact of the world crisis (and the private Chinese toy manufactures penchant for adding poison to their toys). Those that have speculated in fancy houses in Beijing and Shanghai and on the stock exchange will take a hit. But these things are not necessarily a bad thing, especially not the latter.

Toys and shoes account for less than 5 percent of China’s total exports. China has shifted from being a typical third world exporter (labour intensive commodities and raw materials) to challenging imperialism on its own ground. Exports of machinery and transport equipment are almost half of all exports and are still rising at an annual rate of more than 20 percent in volume terms.48

In any case, the Chinese economy is primarily driven by domestic consumption and investment. Between 2005 and 2007, net exports contributed only two to three percentage points to the increase in GDP, whereas domestic consumption added eight to nine percentage points. The latest figures show exports to be even less significant.49 So even if exports will fall, China will still have substantial growth. However, it seems that while the rate of growth of exports will definitely fall, exports in absolute terms will still grow considerably as China picks up market shares in a falling world market. In the first ten months of this year exports were 21 percent higher than a year ago, compared with growth of 26 percent during the equivalent period of 2007.50

The key reason why the Chinese government can go ahead with its stimulus program is neither that the banks are in reasonable shape nor that the government has a pile of foreign reserves. A government in a capitalist country could not implement such a program, or only very partially, even if it wanted to and had the financial advantages of the Chinese government. A capitalist government cannot control the flow of investments.

The basic Keynesian idea that if there are unused resources in the economy (labour, factories, and raw materials) then the government should pump money into the economy in order to get itgoing is correct, even if it means borrowing money or printing it. As the economy gets going taxes go up and borrowed money can be repaid or, if it is printed, the increased money in circulation will be mopped up by increased production. The problem is that this can only work in a planned economy where the state owns the means of production.

46 Economist, 11 October, 200847 Economist, 15 November, 200848 Economist, 13 November, 200849 Economist, 16 February, 200850 Economist, 16 February, 2008

27

In a capitalist economy if money is given to workers in the midst of a crisis, say in the form of tax rebates, the capitalists will not use this as an opportunity to increase production and invest. Instead they will use the opportunity to further suppress workers wages, to make sure that the value of labour power remains unchanged, or lowered.

On the other hand if the money has been given to the capitalists they will certainly not bother to invest, but take the money and jack up their profits. Why should they invest when they can’t even use existing capacity?

Either way production and investment will not take off. If borrowed money is given to either workers or capitalists, the state will be left with greater debt; if they printed money there will be inflation.

However, in reality, things are not quite so extreme. Workers wages will probably not be pressed down completely to their value if money is given to them. There will be resistance. And, if money is given to capitalists, some will invest. So Keynesianism will have some effect, despite leakage into the pockets of capitalists. That is what happened in 2002-2003 when the US government pumped more (borrowed) money into the economy than at any time since the Second World War. Financing the war against Iraq gave Halliburton and other companies huge profits, and “saved” the world economy from a deep downturn, but not from a recession. But there was no “multiplier effect”.

Keynes idea was that for every pound the government pumps into the economy it would set off a virtuous circle of consumption, employment, investment, consumption… resulting in a multiple of pounds production. The so called “multiplier effect”. But in the real world of capitalism there is a “divider” effect. For every pound the government spends only a fraction results in real investment, most of it is siphoned off into profits which is more likely to be spent on a new bout of speculation than anything else in the present epoch.

If the state directly invests money into public projects, that would have a more significant effect. There would be a smaller leakage into profits. But in a planned economy such as China’s where the state simple decides where the overwhelming majority of investments should be made there really is a multiplier effect.

Much might look like capitalism in China, but the economy does not have a boom/slump cycle.

The Command Economy

Because of the complete collapse of the economies of the former Soviet Union and other Eastern European countries since the introduction of capitalism, it is easy for the old command economy to appear in a kind of nostalgic shimmer. One forgets just how rotten and inefficient it was. Just one quote is sufficient to bring back the true image of how things were.

“If the director can get away with producing only a few styles of shoes, he will have long production runs and be able to cut costs. If he can bias his production toward small-size shoes and away from large ones, he can save on leather inputs. Finally, although the state sets the prices for his shoes, different styles will yield him different profit mark-ups. The director can try to specialise in those styles which offer the highest profit.

‘How far the director can go in all this depends on his bargaining position. In the past, this position has been good, indeed. Always less has been produced than the customers would buy. Thus, wholesalers have been fairly easy to deal with; since they could sell anything, why antagonise the producer in a sellers’ market? Only the final customer complained bitterly about the results of this system.’ (David Granick, The Red Executive, p. 34.)

Trotsky pointed out that to portray economic growth purely in terms of volume is like attempting to demonstrate the strength of a man on the basis of chest measurement alone. The purely quantitative

28

approach to targets led to the production of the heaviest and most cumbersome vehicles, so that a given number of tonnes would meet the target; or so many thousands of shoes would be produced, but all left-footed.

The absolute mess and chaos was indicated by the crazy proliferation of ministries of all kinds. In the machine-tool sector alone there were no fewer than 11 separate ministries – the Ministry of General Machine Building, the Ministry of Heavy Machine Building, etc. In transport there were five ministries, and so on. There were many examples of the problems caused by this situation. For example, natural gas was discovered in Central Asia. But in order to commence exploitation, they had to obtain the signatures of 27 different ministries and departments. This took seven years, after which the gas had been lost.”51

Compared to that, the exposure of the plan to a bit of market forces is much to be preferred, although of course the addition of workers control and management would be even better.

5. The Class Character of the Chinese StateIn The Revolution Betrayed Trotsky, leaning on Marx and Lenin, develops the contradictory character of the state apparatus in a transitional society.

“A socialized state even in America, on the basis of the most advanced capitalism, could not immediately provide everyone with as much as he needs, and would therefore be compelled to spur everyone to produce as much as possible. The duty of the stimulator in these circumstances naturally falls to the state, which in its turn cannot but resort, with various changes and mitigations, to the method of labour payment worked out by capitalism. It was in this sense that Marx wrote in 1875:

’Bourgeois law … is inevitable in the first phase of the communist society, in that form in which it issues after long labour pains from capitalist society. Law can never be higher than the economic structure and the cultural development of society conditioned by that structure.’

In explaining this remarkable line, Lenin adds: ‘Bourgeois law in relation to the distribution of the objects of consumption assumes, of course, inevitably a bourgeois state, for law is nothing without an apparatus capable of compelling observance of its norms. It follows (we are still quoting Lenin) that under Communism not only will bourgeois law survive for a certain time, but also even a bourgeois state without the bourgeoisie!’

This highly significant conclusion, completely ignored by the present official theoreticians, has a decisive significance for the understanding of the nature of the Soviet state – or more accurately, for a first approach to such understanding. Insofar as the state which assumes the task of socialist transformation is compelled to defend inequality – that is, the material privileges of a minority – by methods of compulsion, insofar does it also remain a ‘bourgeois’ state, even though without a bourgeoisie. These words contain neither praise nor blame; they name things with their real name.

The bourgeois norms of distribution, by hastening the growth of material power, ought to serve socialist aims – but only in the last analysis. The state assumes directly and from the very beginning a dual character: socialistic, insofar as it defends social property in the means of production; bourgeois, insofar as the distribution of life’s goods is carried out with a capitalistic measure of value and all the consequences ensuing there from. Such a contradictory characterization may horrify the dogmatists and scholastics; we can only offer them our condolences.”

Traditionally the old Stalinist States were described as “deformed workers states”. This is an apt description, but it is easy to confuse a description with an analysis. There are not three categories of states: workers states, bourgeois states, and deformed workers states. There are only two categories

51 Ted Grant: Russia: From Revolution to Counter-revolution, 1997

29

– workers states and bourgeois states – both which contain various amounts of each other. Before the revolution the state will be bourgeois with certain elements of a workers state, for example nationalized industries, national health service, state nurseries; and after the revolution there will be a workers state with elements of the bourgeois state such as bourgeois distribution, bourgeois law and bureaucracy.

Even with a healthy workers state, the bourgeois parts of the state will wither away only on the basis of the development of the productive forces. In fact, the state as such withers away. As Engels put it, “State interference in social relations becomes, in one domain after another, superfluous, and then dies down of itself. The government of persons is replaced by the administration of things, and by the conduct of processes of production. The state is not ‘abolished’. It withers away.”52

However, if the revolution is isolated in a backward country the elements of the “bourgeois state without a bourgeoisie” within the workers state can acquire such a scope that they form a hardened crust on the workers state that can only be blown away by a political revolution. That is the difference between a deformed workers state (a description that was not formulated until after Trotsky’s death) and a healthy workers state. Politically it is a decisive difference.

What then is the ‘workers’ part of the ‘deformed workers state’? Simply, that despite everything else being bourgeois, the state is based on a mode of production where the public ownership of the means of production is dominant. That is all. Not the symbols of the state, not the speeches and intentions of the leaders, not equality, not justice. And in China state ownership and the planned economy is still decisive. Even if all the leading layers of the bureaucrat wants to be a capitalist that will not transform the character of the state.

In a discussion at the 11th congress of the Bolsheviks in March 1922 Lenin declared that the state sector should learn to successfully compete and trade with the private sector. He said that it was not enough for communists in administrative positions to have the right intentions. They had to learn how to run state businesses, how to buy and sell on the domestic and the world market. Only in that way could the state sector be strengthened and survive and eventually destroy the capitalists in Russia.

The Chinese bureaucracy appears to have taken Lenin’s advice seriously. They are busily developing the state sector so that it can compete. Since the seventies the state sector in China has undergone an expansion in absolute terms unprecedented in history. But it has also risen in proportionate terms. In 1978 the SOEs created about one tenth of GDP (the rest was mainly created by the agricultural communes). Thirty years later that has risen to a third. And today many are equipped to face international competition.

We cannot look into their brains and discover what their real intentions are, but at the present time it is far from likely that the millions of members of the Chinese Communist Party want to go over to capitalism. Why should they? Most likely there are even less bureaucrats that want capitalism than want to return to the old command economy. Those that have lost out on the changes over the past decades logically would prefer to go back, rather than advance into the unknown.

Because the economy continued to surge ahead the bureaucracy remained stable and its self-confidence did not diminish, if anything the opposite. There was no major power struggle when Deng died in 1997. De facto power passed over to Jiang Zemin, former party chief in Shanghai, who had been General Secretary of the Communist Party of China since 1989 and President since 1993. He was in turn replaced by Hu Jintao in 2002-2003 without much fuss and bother.

The only major power struggle in China in the past thirty years was in 1989 when Zhao Ziyang, general-secretary of the Communist Party, was deposed. Hailed in the west for his “support” to

52 Friedrich Engels: Anti-Duhring, 1878

30

students during the Tiananmen Square protests, he was the most pro-capitalist of all the Chinese leaders. When he was party secretary in Sichuan he advocated privatising SOEs that were making huge profits. After losing power in 1989, he spent fifteen years in house arrest before dying in 2005.

In fact, the only major confrontation was the Tiananmen Square protests in 1989. But in the main that was not between pro-capitalists and anti-capitalists, but between on the one side workers and students fighting for better living standards and democratic rights and a leading group of the bureaucracy on the other side. If there were pro-capitalist forces involved in that conflict, as there is some evidence for claiming, they were out there in the streets trying to capture the leadership of the movement and lead it towards capitalism, as pro-capitalist sources managed to do successfully in for example East Germany and the Soviet Union during and after 1989.  The movement was heavily defeated by the bureaucracy, but that did not strengthen the capitalist counter-revolutionary forces. On the contrary.

In the Soviet Union there really was a counter-revolution. That process was very different to what has been going on in China. In the Soviet Union there was a long period of economic stagnation. The bureaucracy was transformed from a relative into an absolute fetter on the development of the means of production. The counter-revolution was kick-started by an acute economic crisis. Then there were several violent conflicts between different wings of the bureaucracy – the attempted coup and the occupation of the parliament. But those conflicts pale in comparison to the attacks against the working class. Meat consumption fell from 61 kg in 1992 to 51 in 2002.53 But that was the least of it. Mass sackings and the destruction of people’s living standards, social security and health were like a war. Average life expectancy fell dramatically. A comparison between the present size of the population and what could have been expected, if population growth had continued at the same rate as it had done under Stalinism, shows that the casualties amount to millions. That was the price for establishing capitalism in the Soviet Union. Just because it was a one-sided battle, the working class was too demoralized to offer any real resistance, does not make it “cold”. It is not less violent to get stabbed in the back than having a fistfight.

6. Grounds for Claiming China is CapitalistTo understand China one must get to the essence of the matter – who owns and controls the commanding heights – and not get caught up in apparitions. This becomes clear when one looks at some of the things that have been raised in the discussion.

South Korea, Japan, India, and others

China’s development has been compared to a whole number of countries that have or have had a large degree of state interference in the economy. However, despite superficial similarities to workers’ states, the decisive sectors of the economy are and have been in private hands. And that makes them fundamentally different to China.

South Korea

When the military took power in 1961 they established The Economic Planning Board, whose task was to implement a series of five year plans. The banks were nationalised. But the task of the Board and the banks was not to support SOEs, but the Chaebols, large privately owned companies. In 1984 the 10 largest Chaebols accounted for 67 percent of GNP. US imperialism permitted and even encouraged South Korea to grow by centralising the economy and giving state assistance to private companies, because South Korea was in the frontline of imperialism’s struggle against Stalinist regimes. They also gave South Korea massive aid and extraordinarily favourable export conditions, at the same time as it was allowed to have extensive import controls. All this gave South Korea a unique possibility to leap from backwardness to becoming a modern industrial nation. But there

53 www.earthtrends.wri.org

31

were no SOEs.

Japan

Japanese industrialisation was begun by the feudal state when it decided to create an arms industry in order to be able to withstand colonialist interventions. However, the real beginning of Japanese industry was the development of the textile industry by private owners at the end of the 19th century. A classic development. Yet, because the Japanese bourgeoisie arrived late on the scene it needed considerable help from the state, something that has persisted right up to the present day. But industry was completely dominated by private capital. It was organised in a similar manner to the Korean Chaebols. Originally the Japanese Chaebols were called Zaibatsu. When the Americans occupied Japan they tried to dismantle these powerful competitors, but they reformed and became known as Keiretsu. Six Keiretsu completely dominate the Japanese economy.

India

The bourgeois papers often lump China to India together when they try to prove that third world countries can develop by using capitalist methods. It is true that capitalist India has grown at a relatively fast rate. For the last four years growth has been 6.9 to 9.7 percent a year. The average for the past 25 years has also been a fairly impressive 6.1 percent.54 But it is an entirely different kind of growth to that which has taken place in China. Poverty has increased in India, despite the high growth rates.

The Chinese state has undertaken huge investments in infrastructure. The building of super-fast magnetic trains and trains to Tibet that travel through the Himalayas with pressurized cabins has just been the tip of the iceberg. Despite India’s infrastructure in many regards being ahead of China’s in the eighties, very little has been done since then and for many years now it has been falling further and further behind China’s.55

India has the classic growth of a country dominated by imperialism. Foreign capital and a few native capitalists develop the outer edge of the country. With an endless supply of cheap labour, a small part of the country becomes part of the world economy. But those parts become divorced from the rest of the economy, which remains in dire straits. Thus, 87 percent of employment in Indian manufacturing is in companies with fewer than 10 employees, compared with only 5 percent in China.56 Due to the different character of the economy income inequalities are also larger in India. In 2002, 70 percent of urban Chinese households earned between $2000 and $7500 per year. In India, 74 percent earned less than $2000. But 6 percent earned more than $7500. Whereas in China only 1 percent earned more than $7500.57

It should therefore come as no surprise that India’s response to the world financial crisis is very different to China’s. The heavily indebted Indian government plans of boosting India’s miserable infrastructure with the help of private capital will be shelved for the meanwhile. And in complete contrast to China, India’s exports have dropped like a stone – down 15 percent in October 2008

54 IMF: World Economic Outlook Database, 200755In 1989 India had more paved roads and a longer railway track (both electrified and non-electrified) than China.(Yasheng Huang: Capitalism with Chinese Characteristics, 2008). Fifteen years later, China had 30 000 km of expressway, ten times as much as India. (Economist, 3 March 2005) Twenty-one years later, China's trains were the world's fastest, its network of tracks the longest and its expansion plans the most ambitious. By 2012, just four years after it began its first high-speed passenger service, China will have more high-speed train tracks than the rest of the world combined. (Washington Post, May 12, 2010) In 2004, China had six times as many mobile and fixed-line telephones per 1 000 people than India. In India 61 percent of manufacturing firms own generators compared to 27 percent in China, reflecting the unreliability of power supply in India. In China power costs 39 percent less. (Economist, 3 March 2005)56 Economist, 13 October 200757 Economist, 3 March 2005

32

compared to a year earlier.58

Others

During the sixties and seventies a number of other third world capitalist countries also had a high degree of state intervention in the economy and, for a period of time, relatively high growth rates. They were held up as alternative models to the Stalinist states. One such country was Tanzania. Under the rule of Julius Nyerere, Tanzania even called itself a socialist country, but the private share of GDP was nearly 90 percent. Another country was Brazil. There the private share of GDP was 94 percent. Growth in both countries faltered after a few years. 59

Luxury and Misery

A transitional economy does not, even in a relatively underdeveloped country, have to have the grey appearance of the old Stalinist states. The availability of luxury goods, advertisements, colourful packaging and more than one type of toothpaste do not mean that capitalism has won. All that will continue to exist to a certain degree even in the healthiest transitional economies.

Nor do gross inequalities, bad working conditions, corruption and pollution signify the victory of capitalism. All that existed in the old Stalinist regimes (as did luxury goods, but only in special shops reserved for the bureaucracy). Many Stalinist regimes, although probably not the Chinese one, had greater income inequalities than for example Sweden, which certainly is completely dominated by the capitalist mode of production. This is how the situation in the Soviet Union is described after the Second World War:

“After the war, differentials continued to widen. Direct bribes were introduced called pakety (packets) in the higher state and party institutions. On a monthly basis higher officials received a packet containing a large sum over and above their salary. These were special payments paid through special channels, not subject to tax, and kept totally secret. ‘As for members of the Politburo and Stalin himself,’ relates Medvedev, ‘the cost of keeping them does not submit to calculation. The numerous dachas and apartments, the huge domestic staff, the expenses for their staff and guards rose to millions of roubles yearly. As for the cost of maintaining Stalin, that nearly defies calculation.’ (Medvedev, Let History Judge, p. 843.)”60

During the last thirty years, inequality has increased in China. In the eighties that happened mainly in the country-side due to a burst of “free enterprise” there. But in the nineties, in line with primitive socialist accumulation, the government taxed peasants and the TVEs heavily in order to finance the development of the large SOEs. The pace of rural development slowed in terms of income, health and literacy and the gap to the cities widened. In the beginning of the new millennium literacy and life expectancy actually declined in some parts of the country-side, only to pick up again in recent years.61

However, the average level of health continued to improved, because of the influx of people into the cities. For example the infant mortality rate fell from 41 per 1 000 live births in 1978 to 30 in 2002.62 In 2003 a new medical insurance was set up that covers 80 percent of rural areas.63

A similar story is told about education. After the breakup of the collectives the cost of education soared for peasants as schools were closed down or privatized, but despite that the adult illiteracy rate fell from 37 percent in 1978 to less than 5 percent in 2002.64 And in 2003 the first nine years of

58 Economist, 22 November, 200859 World Bank: Bureaucrats in Business, 199560 Ted Grant: Russia – from revolution to counter-revolution, 199761 Yasheng Huang: Capitalism with Chinese Characteristics, 200862 World Bank: Country Brief on China, September 200663 Economist, 13 October, 200764 World Bank: Country Brief on China, September 2006

33

school were made free.65

More than 135 million Chinese in the most backward rural areas of China still have consumption levels below a dollar per day, often without access to clean water, arable land, or adequate health and education services.66 However, in the last five-year plan all agricultural taxes were scrapped and subsidies increased. A separate problem is the millions who are still legally classified as rural inhabitants, but live in urban areas. Many of them live in very bad conditions.

For the past fifteen years the increased inequality is mainly a question of the gap between the country-side and the town increasing because the standard of living in the cities is developing much more rapidly than the villages. This is reflected in China’s gini-coefficient, a usual method of measuring inequality, passing India’s (which is supposed to mean that India is more equal than China) although neither Shanghai nor Beijing has the vast festering slums that characterize Mumbai and New Delhi. Actually, even during the mass sackings from the SOEs from 1995 to 2002 equality sharply increased in the urban areas, as measured by the gini-coefficient.67 The 2008 UN report called the State of the World’s Cities claims that Beijing is the city with the highest level of equality in the world. And although GDP per capita in Shanghai is more than five times national GDP per capita, urban disposable income per capita is considerably less than twice the national level. Interestingly, equality, again measured by the gini-coefficient, also increased in the rural areas during the second half of the nineties, reflecting the greater restrictions on the private sector after Tiananmen Square.68

In any case, treating the rural areas well has never been a hallmark of a transitional economy under the dictatorial control of a bureaucracy. Millions died during the Great Leap Forward. In the thirties, when the Soviet Union had its fastest growth rates, the lives of peasants were reduced to absolute misery by collectivisation, and life was terrible for many others too.

Unemployment

Not even unemployment need signify capitalism. There are many unemployed in China today. But these people are not a reserve army of labour pressed out of jobs by economic crisis. The working class in China has grown uninterruptedly in the past decades. There are now hundreds of millions of more workers than there were 30 years ago. An estimated 30 million workers have been sacked from the SOEs since 1998, and 8.7 million of these have not found re-employment.69 Employers often prefer to employ younger more pliable workers from the countryside. However, that does not change the basic equation – the size of the working class is increasing year by year. And unemployment is mainly due to people leaving bad conditions in the countryside at a faster rate than they can be absorbed into the urban working class.

If China were capitalist, the reserve army of labour would have kept down wages. But urban income has risen by an average of 14 percent a year since 1978.70 That, just like China’s GDP increase in the last three decades, is an increase unparalleled in history. The wage increases have been partially eaten up by increased costs for health, education and housing. Nonetheless the increase in living standards is very big. Wages have risen because the bureaucracy decided to keep down social unrest by sharing some of the benefits of economic growth with workers. Only in an economy dominated by a planned economy can huge wage rises coexist with unemployment. In the anarchic capitalist system every individual capitalist is just out for his own benefit. If he can force wages down by threatening with unemployment he will do so, never mind what the social consequences are.

65 Economist, 13 October, 200766 World Bank: Country Brief on China, September 200667 Yasheng Huang: Capitalism with Chinese Characteristics, 200868 ibid69 ibid70 Economist, 18 March, 2004

34

8. PerspectivesOne of the consequences of Trotsky's theory of the permanent revolution is the idea that capitalism cannot close the gap between the third world and the advanced capitalist countries. Since Trotsky formulated his theory this has been born out in practice, with the exception of only a few countries - Taiwan and South Korea.

If China has achieved record growth for the last thirty years because capitalism and trade on the world market was gradually introduced, then Trotsky's theory must be dumped. China is not some minor country that imperialism can make an exception of for political reasons – to keep “communism” at bay. US imperialism could allow South Korea and Taiwan to develop to protect the US against China, but they do not want China, one of the world’s largest economies, to challenge the might of US imperialism. They are not making any soft trade deals with China, nor are they funnelling massive amounts of aid to China. On the contrary, the US, as could be expected, is making more and more belligerent sounds against China. And not only sounds, they have stopped China buying American companies and slapped tariffs on Chinese imports. Clearly China has been treated worse, not better, than many third world countries.

Yet despite this China thrives, because it is not competing on the world market on the same terms as US imperialism. Against mighty multinationals it pits not puny little domestic companies, but the power of the Chinese state. This, and only this, can explain why China wins its battles on the world market and unlike the countries of the ex-Soviet Union is not reduced to penury by imperialism. China's development theory has confirmed Trotsky's theory.

The Chinese economy will continue to develop rapidly for some time. It will overcome the present financial crisis. But that does not mean that China will not undergo huge social convulsions in the coming period.

A planned economy even with a healthy workers state is not a stable economy due to the central contradiction – between the law of value and the planning principle. It is a big step forward from capitalism, but it is not socialism, which can only be established on a world scale and only after many years of development of the means of production. Nor can there be a stable society in a transitional economy. Class struggle is not abolished after the revolution, even when the revolution has won in all the advanced capitalist societies. But the odds are stacked heavily in favour of the working class. If the working class has political power then the economy can relatively peacefully grow over from a transitional economy to socialism.

In China the working class is not in power. Therefore the bureaucracy is riding a tiger. It has unleashed some of the potential of a genuine transitional economy. But without having the massive weight of working class in control, social conflicts are bound to increase. It will have to come to a showdown between the working class and the bourgeoisie. The bureaucracy is balancing between the two classes (just like it is balancing between the law of value and the planning principle). But both the working class and the bourgeoisie are being strengthened.

This is the opposite of the situation of when the bureaucracy came to power either in Russia in the twenties or China in 1949. Then both the bourgeoisie and the working class were weak, not to say practically wiped out. Although the economic growth increases the prestige and wealth of the bureaucracy, it is in fact undermining its whole raison d’être. The bureaucracy is becoming weaker; hence there is also a much bigger openness in China today. This has nothing to do with the development of capitalism as the media in the west claims. The bureaucracy is being squeezed by the rising tide of the class struggle between the bourgeoisie and working class. Contradictions are already mounting within the bureaucracy. The Communist Party, with its millions of members, will be deeply affected by the struggle between opposing class forces.

35

The parasitic layers of the Chinese bureaucracy are guided neither by theory nor the interests of the working class, but by greed, prestige and the desire for power. It is the battle of class forces which decide in which direction they move. It is the pressure from capitalism and imperialism worldwide on the one hand, and the Chinese working class on the other hand that has determined the whole peculiar development of the Chinese economy.

Two themes have dominated the policies of the bureaucracy for decades – that the Chinese economy should become ‘modern’ and fear of ‘social unrest’. They have zigzagged between these themes, just as they balance between classes. They have not made a choice based on an ‘intelligent’ analysis of what happened in Russia. The Russian disaster is of secondary significance. If anything, that was a warning to them not to let capitalism become the dominant mode of production.

Theoretically, it cannot be excluded that some sections of the bureaucracy could eventually, in co-operation with capitalists in and outside of China, push China into capitalism. This would be a disaster for China, for the workers and peasants and for many bureaucrats too. The worst excesses of the economic free zones would become the norm, rather than the exception. If China became capitalist its chances of standing up to foreign capital would be even smaller than the Soviet Unions’ were after the fall of the Berlin Wall. In 1990 the Soviet Union’s GDP was estimated by the CIA as being between 44 and 49 percent of the USA’s.71 In 2006 Chinas GDP was 18 percent of the USA’s.72 A transition to capitalism would mean, just like in the Soviet Union, the collapse of many SOEs, TVEs and even urban private companies.

If capitalism would become the dominant mode of production in China it would be bad news for most Chinese. After three decades of rising living standards, they would have to accept a decline. To achieve this, the capitalists would have to openly confront the working class. The bureaucracy has tried to avoid this time and time again since the Tienanmen Square. Today they would face a working class that is many times larger and stronger. For the new generation of young workers and students the defeat of 1989 is ancient history. The working class in the Soviet Union was demoralised by decades of stagnation and shoddy goods. Many, after an initial hesitancy, thought that capitalism could offer a bright future. The Chinese working class can already see that it is not the availability of fancy commodities that is the problem, but the money to buy them, and that workers in the completely capitalist sector have worse wages and working conditions than the ones in the public sector. Over the last years there has been a rising curve of struggle. The working class is feeling its strength. It will not hand over its achievements to the capitalists without a serious struggle.

Workers throughout the world are looking towards China and wondering what is going on there. Bourgeois economists and reformist leaders use China as an excuse to privatize. In West Bengal, the CPI (M) government claims it is following the Chinese road to success when it prepares the way for foreign multinationals by slaughtering peasants. The CPI(M) leadership is destroying the party. Let us say to these China ‘fans’ that we also want rapid growth, so we should all agree to start by nationalising and planning the 1000 largest companies in every country.

China proves that the planned economy, even with a serious bureaucratic deformation, is superior to capitalism (and the Stalinist command economy). For three decades it delivered an average growth rate of 10 percent. But a planned economy in a healthy workers’ state with workers democratic control and management over production would without difficulty achieve much more. In China today, enormous resources are wasted due to corruption, competition between bureaucrats in the

71 Abram Bergson: How big was the Soviet GDP? March 199772 CIA World Fact Book. From the point of view of comparing living standards it is better to compare PPP,

Purchasing Power Parity, adjusted GDP. According to the IMFs adjusted figures for 2007 China’s PPPGDP is just over half of the USA’s (see http://www.imf.org/external/pubs/ft/survey/so/2008/RES018A.htm), but when comparing the ability to compete on the world market basic GDP is more accurate.

36

state sector, and inequalities. A fall in the rate of increase of productivity in recent years is a clear warning that these problems will increase as the economy becomes more complex, if the initiative and creativity of the working class is not harnessed in production. A world socialist federation, using even greater economies of scale and specialisation, and above all abolishing the cost of the military and war, would easily spread a multiple of the Chinese growth rate worldwide.

37