Introduction
A vast number of social scientists consider the opening of the Chinese economy inaugurated by Deng Xiaoping in 1979 to be the clear sign of a capitalist-oriented restructuring of the national economy (Hart-Landsberg and Burkett 2005; Harvey 2005; Chu 2010), which is alleged to have transformed China into an appendix of the US-led global capitalist economy (Petras 2006; Ho-Fung 2009; Lotta 2009; Panitch and Gindin 2013). The ostensibly incontrovertible evidence brought forth to prove the subordinated character of Chinese capitalism is the fact that, beginning in the second half of the 1990s, the super-exploitation of Chinese labour has guaranteed the capitalist centre a regular supply of cheap goods which effectively contributed to boost the volume of profits and increase wages in the already developed countries.
The incorporation of China into the world system would therefore appear to reflect the process of peripheral integration described by Samir Amin, the fundamental character of which consists in the imposition upon the periphery of a development process that generates a structural oversupply of low-wage labour that compresses the cost of exports to the centre, thereby meeting the latter’s accumulation needs. According to Amin (1976, 133–197), the lower rewards of labour in the periphery ultimately reflect an unequal international specialisation which is manifested in the distortion of the periphery’s productive structures towards low-value-added branches of activity, together with the use of modern production techniques in these branches. This implies that the price of goods imported from the periphery is immensely lower than what it would be if the same goods were manufactured in the centre. Such cost-saving exclusively benefits the core economies, as it creates mounting opportunities for increasing investment in new technologies, thereby buttressing their position in the international specialisation of production.
Logically, it follows that, if international trade is the link that reproduces the extreme polarisation in the world’s scientific, technical and productive potential, then the overthrow of the extremely exploitative international division of labour must imply the ‘delinking’ of less developed countries from the global circuits of trade. Indeed, the early proposals for ‘delinking’ are in line with the above conclusion: in the mid 1980s, Amin (1985) suggested that the liberation of the periphery requires a disconnection from the First World in favour of the strengthening of trade and financial links with countries which have already had successful social revolutions. With the collapse of the Soviet bloc, however, the viability of such a strategy has been reduced to a limited set of countries such as North Korea and Cuba that would entail an almost complete autarkic isolation from the economic processes of the world economy.
Not surprisingly, since the early 1990s, Samir Amin had been attempting to render his anti-systemic stance coherent with the less developed countries’ objective need to intensify their trade relationships with advanced capitalist countries. In this new context, it is suggested that peripheral countries can erode the basis of the centre’s economic domination by means of a new form of delinking strategy aimed at ‘controlling internal accumulation and subjecting their foreign relations to this accumulation’ (Amin 1990, 173). In this framework, the governing classes of the periphery shall actively insert their countries into the world trade system with the strategic aim of achieving a gradual growth in the level of the population’s scientific and technical sophistication. This will eventually allow emerging countries to build industrial modern systems which are geared towards the penetration of oligopolistic technology markets and the appropriation of a share of technological rents that nowadays are fully appropriated by the centre. This is the alpha and omega of Amin’s argument for delinking as a means of offering peripheral countries the opportunity to develop their economies without falling into dependency.
Amin concluded that China’s governing class is better equipped than others to follow this developmental strategy. As he pointed out:
the pattern of China’s integration in the global system is … simultaneously complementary with and in conflict with the centers. Complementary in the sense that the export of manufactured goods is benefiting from cheap labor … . But that is not the whole picture, it’s half of the picture. The other half of the picture in the case of China is … constructing a national integrated modern industrial system. (Amin and Bush 2014, 109)
This article seeks to prove the correctness of Samir Amin’s view regarding the delinking strategy pursued by China. We argue that the Chinese authorities have been playing a crucial role in improving the country’s domestic technological capabilities, underpinning a sustainable rise in the wages of the Chinese working class in the long run. We will show that, although China still has a long way to go to gain a comparative advantage in technology-intensive and capital-intensive industry (Cai 2012, 58), the economic policies pursued by the national government have been setting the preconditions for generating a structural change towards a technology-led growth pattern. This is offering China the opportunity to challenge the dominant position of the international monopolies over high-value-added sectors, which will eventually allow China to gradually narrow the wage-gap vis-à-vis the highly developed capitalist countries.
The article is structured as follows. After outlining the logic that underlies the appropriation of value through unequal exchange to the benefit of the capitalist centre, in the second part, ‘The roots of unequal exchange in Samir Amin’s theory’, we discuss the mechanisms that cumulatively reproduce the economic conditions that structurally impede the development of peripheral countries. In the third section, ‘Is China delinking itself from the chain of capitalism’, we assess the magnitude of the dependent nature of China’s economy with respect to the core of world capitalism, by looking at the appropriation of value produced by Chinese labourers through foreign trade with the United States. The fourth section, ‘Towards a political economy of Chinese delinking’, investigates how the strategic use of exchange rate policy and the maintenance of extensive state ownership in national assets by China’s authorities is paving the foundations for the development of an autocentric economic system that is disconnected from the exclusive needs of the centre. This is followed by conclusions.
The roots of unequal exchange in Samir Amin’s theory
The unequal international economic relations through which the countries of the capitalist centre benefit from the low wages of the Chinese working class can be surmised through the prism of the concept of ‘unequal exchange in the strict sense’ as posed by Emmanuel (1972, 60–64) and further elaborated by Amin (1974, 53–59). Trade relations are considered unequal when a given amount of goods produced by exporters in high-income countries is exchanged for an equal amount of goods from low-income countries, even though the latter contain a greater amount of labour embodied within them. Since the exports of the latter group of countries are exchanged for goods that embody a smaller amount of labour, this implies a transfer of value to the capitalist centre. The asymmetry inherent in trade between countries characterised by different levels of development derives mainly from the fact that the difference between the labour costs of workers based in advanced and less advanced countries does not generally reflect any inequality in the productivity levels between the two groups of countries. As Amin (ibid., 148–149) has argued, ‘exchange is unequal whenever labor of the same productivity is rewarded at a lower rate in the periphery.’
On this basis, it can be argued that labour productivity in terms of use-values is uniform, as is the value produced by a given amount of labour. However, the output of the same quantity of labour is priced differently in peripheral countries vis-à-vis central ones because of the asymmetry in the international specialisation of production between peripheral and capitalist formations at the centre. This, in turn, determines a different remuneration of the productive factors in the two groups of countries. In particular, although the labour costs of the peripheral countries’ manufacturing sector are significantly lower than the labour costs of the central countries, the rates of profit tend to be relatively uniform. Under these conditions, the determination of international prices reflects the need to increase the remuneration of the factors of production in advanced capitalist countries vis-à-vis peripheral countries. This implies that international trade allows the economies of the capitalist centre to support the profit rates of their firms and remunerate their workers with higher wages.
According to Amin and Emmanuel, hence, there is a binding link between unequal exchange and wage inequalities. However, while the latter considers wage levels to be ‘the independent variable of the system’ (Emmanuel 1972, 71), for Amin wage inequalities mainly derive from an international division of labour that is radically dichotomised, where the core countries specialise in innovation-intensive productions, where there is a lower probability of facing intense price competition from international rivals (Amin 1974). To the extent that the acquisition of a dominant position in technology-intensive markets offers opportunities to earn technological rents (Reinert 1995; Amsden 2004), one might expect that export specialisation in technologically innovative commodities allows high-income countries to increase the labour compensation within their tradable sector’s firms without squeezing the latter’s profit margins. On the other hand, the productive structures of the periphery are distorted towards low-value-added branches of activity that are particularly exposed to low-cost competition. For this reason, firms in the periphery require an extremely low level of wages that allows them to survive the long-term challenge from foreign rivals. In this sense, the explanation given by Amin regarding the origin of wage inequality at a global level is coherent with the one provided by Bettelheim, who does not treat wages as an ‘independent variable’, but relates the low wages in the poor countries ‘to the low level of development of their productive forces’ (Bettelheim 1972, 288, original emphasis).
Amin holds that the maintenance of a downward pressure on wages in the peripheral countries’ export sector is guaranteed by the existence of a Lewis-like labour surplus trapped in the rural sector of the economy. The full absorption of such excess labour, however, is difficult to achieve because it is inconsistent with the maintenance of the country’s external balance in the long run. As Samir Amin notes (1976, 130), ‘any serious attempt at development made by a country of the periphery leads inevitably to difficulties in external payments’, insofar as the exhaustion of the reserve army of labour present in the traditional sector leads to an upward push in the wages of industrial workers. This, in turn, may compromise the ability of companies operating in the modern sector to compete with internationally established prices. In such conditions, the re-establishment of the external balance requires a contraction in investment in order to recreate an excess of labour and bring wages back to the level necessary to recover external competitiveness. In our analysis inspired by Amin, wages are therefore considered a dependent variable, while the formation of international prices is an independent variable: the higher the price that the world market assigns to a certain type of exported goods, the higher the salary that is compatible with the survival of the exporting companies and, therefore, with the country’s external balance.
Is China delinking itself from the chain of imperialism?
In this section, we will first attempt to measure the dependent character of China’s economy with respect to US capitalism by using as a proxy the transfer of value from China to the US. We will use as a reference year 2014, the last one for which it was possible to process data since the 2018 release of the Organisation for Economic Co-operation and Development (OECD)–World Trade Organization (WTO) Trade in Value Added (TiVA) database. Second, we will focus on the evolution of transfer of value, for the purpose of tracking the dynamic of the unequal relations between China and the US during the 1995–2014 period. Our estimate of the transfer of value to the US economy specifically refers to manufacturing imports from China. The motivation for this choice is that we start from the hypothesis, widely accepted in Marxist debate (Amin 1974, 1976; Jaffe 2000; Palloix 1979), that most of the manufactured exports from less advanced countries such as China are produced in ultramodern sectors with the same techniques as in advanced countries. It therefore follows that, inasmuch as physical productivity levels are equal, but the remuneration levels of production factors are different, the pattern of bilateral exchange of manufactured goods between China and the US can be expected to be unequal.
In order to quantify the transfer of value from China to the US which arises from the exchange of modern industrial goods between the two countries, we draw inspiration from Amin’s methodology, as stated in Accumulation on a world scale and later reaffirmed in Unequal development. In these works, Samir Amin calculates the transfer of value from the periphery to the centre due to the mechanism of unequal exchange by measuring the difference between the price that manufacturing goods imported from the periphery would have if they were produced in the centre – that is, if the rewards of labour were equivalent to what they are at the centre, ‘with the same techniques, and so the same productivity’ – and their actual price (Amin 1974, 57–58; Amin 1976, 142–143). Using Amin’s approach as a point of departure, our computation of the value appropriated by US producers through unequal exchange proceeds in two steps. First, we estimated the hypothetical value of US manufacturing imports from China under the assumptions that:
the wage level of manufacturing workers in China is equal to the wage level of manufacturing workers in the US;
the profitability in China’s manufacturing sector is also equal to that of the US, since, slightly differently from Amin’s method and in accordance with Bettelheim (1972, 325), we do not presume any uniformity in the profit rates across countries.
Second, we deduced the actual price of Chinese manufactured exports to the US from their hypothetical value (see the Appendix). According to our estimate, the value-added content of Chinese manufactured exports to the US, if Chinese workers and companies were remunerated the same as in the US, would not be in the order of $389.9 billion (which is what it is), but 5 times as much – that is, $1931.7 billion in 2014 alone. This means that, if imports from China were manufactured in the US (or in countries with similar wages and profit rates), the US economy would have incurred additional expenses of $1541.8 billion. This cost saving hugely benefits the US economy to the extent that, assuming an unchanged distribution of income, it contributed to an increase in the average rate of profit of the US economy from 11.2% to 14.1%.
From a static point of view, it would thus appear that until now China has taken the development path typical of the models of peripheral integration, insofar as the compression of domestic income has favoured the leading country of global capitalism. From a dynamic point of view, however, this is simply the immediately visible manifestation of a much more complex phenomenon. First, it should be noted that the wages of workers in the Chinese manufacturing sector have experienced unparalleled growth on a global scale over the last 25 years, leading to a considerable reduction in the wage gap between Chinese and US manufacturing workers: if, in 1995, the average wage in the US manufacturing sector was about 58 times the average in China, in 2015, this ratio dropped to 8.2.
The dynamic of the remuneration of China’s production factors in terms of US production factors can be analysed through the concept of China’s labour’s terms of trade (LTOT) vis-à-vis those of the US. This is defined as the ratio of the prices actually assigned by international markets to the Chinese factors involved in the production of China’s goods exported to the US, to the hypothetical price that would be assigned to those factors of production if the same amount of goods were produced in the US or in countries with a similar remuneration of factors (see Equation 2 in the Appendix). In order to fully understand the meaning of such a definition, it is useful to recall that:
the remuneration of production factors in Chinese and US export sectors is, by construction, the price assigned by international markets to their respective output (net of capital depreciation);
goods actually exported from China and the same amount of goods which are hypothetically produced in the US can be produced with the same production techniques. Hence, the same quantity of living labour is expended in the production of actual and hypothetical exports;
the value of goods exported is equal to the quantity of new living labour which is embodied in them.1
From the three conditions stated above, it follows that the ratio of the remuneration of factors of production of the Chinese and US export sectors must be equal to the ratio of the price assigned by international markets to the same quantity of new living labour which is embodied in Chinese and US exports, respectively. The latter ratio can therefore be thought of as a labour’s terms of trade, i.e. the purchasing power of China’s labour exercised over labour materialised in the goods hypothetically produced by the US.
We can conceptualise the improvement of China’s labour terms of trade vis-à-vis the US between 1995 and 2014 (Figure 1) as follows: consider two baskets of manufactured goods. The red basket is produced in China, and the blue basket in the US. Since the level of (physical) productivities is similar between the two countries, these baskets contain exactly the same value (in terms of labour time), say 100 hours of labour. With this in mind, the upper part of Figure 1 shows that, in 1995, all the goods contained in China’s basket were exchanged with only 4.7% of goods contained in the US basket. In other words, 95.3% of the working time spent by Chinese workers contained in exports to the US was transferred without obtaining anything in exchange. Less than 20 years later, however, the goods contained in the Chinese basket were exchanged for as much as 17.5% of goods produced and contained in the US basket, as shown in the lower part of the figure.
China’s labour terms of trade vis-à-vis the US in 1995 and 2014. Source: Authors’ elaboration from the OECD–WTO Trade in Value Added (TiVA) database, World Input–Output Database (WIOD), and the Conference Board TED database (2020).
The rapid enhancement in China’s labour’s terms of trade vis-à-vis those of the US has progressively decreased the amount of China’s labour value per unit of goods exported that is appropriated by the US through unequal trade relations. In Figures 2 and 3, it can be noted that the value expropriated through unequal exchange (blue lines) increased almost fourfold, from 395.9 billion to 1541.8 billion US dollars from 1995 to 2014. Such an increase, however, is uniquely a consequence of the expansion in the volume of US imports of Chinese manufactured goods, which surged by 18 times (Figure 2). The fact that the transfer of value increased less, in proportion, than the value added contained in the goods imported by the US is due to a significant improvement in the Chinese labour’s terms of trade (Figure 3).
Towards a political economy of Chinese delinking
The reduction in the relative amount of value transferred from China to the US has been accompanied by a continuous growth of the current account surplus, from 2001 until the outbreak of the 2008 crisis. This seems to indicate that, for almost a decade, the wage increases in the Chinese manufacturing sector were compatible with the preservation of external competitiveness. However, the failure of many South American countries to achieve the transition to the status of high-income countries points to the need for caution about making forecasts based on past trends. In fact, the experience of these countries shows that the reduction in the per capita income gap vis-à-vis advanced countries often comes to a halt once the status of middle-income country is reached (Palma 2003, 127). This outcome derives from the exhaustion of the reserve army of labour in the countryside, followed by an increase in wages and a loss of competitiveness in the labour-intensive sectors (Agénor, Canuto, and Jelenic 2012, 2).
In light of the above, the acceleration of the internal absorption of manufacturing output could therefore signal the danger of a middle-income trap in China. Indeed, observation seemingly indicates that China’s attempt to close the gap with high-income countries is inevitably clashing with the objective of maintaining external stability in the long run: after having peaked at 10.1% in 2007, the ratio of China’s current account to its gross domestic product (GDP) dropped significantly after the 2008 global financial crisis, hovering at around a meagre 2% of GDP between 2012 and 2018. The decline of China’s current account surplus might therefore indicate that the country is nearing the maximum level of income per capita compatible with its external equilibrium rather than signalling an increase in potential income. This would be consonant with Amin’s idea that, given the existing international division of labour, the development of the periphery is incompatible with the expansion of an internal market focused on increasing the incomes of the working masses without compromising the external balance. As Amin says (1976, 253): ‘adjustment … takes place through a permanent tendency to external deficit on the part of the underdeveloped countries … . [In turn] the tendency to deficit is constantly being overcome by the slowing down of potential growth.’
However, a careful analysis of the evolution of the economy over the last 20 years allows us to hypothesise that, despite the waning of China’s trade surplus, the growth of labour income will not prejudice the maintenance of external sustainability in the long run. This is due to the fact that the increase in Chinese purchasing power of international output was preceded by a progressive change in the country’s productive structure towards higher-value-added sectors and activities. Such a productive shift has required the accumulation of technological capabilities (Amsden 2001, 2–3) typical of advanced countries, which is needed to increase the capacity to raise the technological complexity of the goods that are being made and exported by Chinese firms. In turn, the specialisation in non-traditional branches of activities has been offering Chinese producers the opportunity to retain a portion of the technological rents that nowadays are fully transferred to the centre. To the extent that in these sectors the output price determined by international markets is high in relation to the amount of labour and capital expenditure that is required to produce that output, one might expect that export specialisation in technologically innovative commodities will allow China to support the simultaneous increase of workers’ wage and firms’ profit margins without generating structural deficits in the balance of trade.
The development strategy referred to above is in line with the delinking strategy recommended by Samir Amin, in that the decisive element which helps reduce unequal exchange is the implementation of policies which create the conditions for stimulating the ‘gray matter’ of working people in the periphery. For the development of superior technological capabilities can be interpreted as an element conducive to the structural changes necessary to insulate the economic system of peripheral countries from intense international low-cost competition, and hence to resist the downward movement of prices and, therefore, wages (Amin 1974, 89).2
In the following section, we will examine the critical role played by the Chinese state in laying the foundations for a progressive delinking of China’s economy from the chain of imperialism, whose effectiveness must be assessed by its ability to guarantee the compatibility of rising wages (or decreasing international exploitation) and external balance in the long run. We differentiate between two stages in the dynamics of the state-led structural shift of China’s industrial specialisation towards higher-value-added production: an initial, preparatory phase (from the mid 1990s to approximately the financial crisis of 2008), aimed at paving the way for a rapid growth of the industrial base while increasing the exports of manufacturing industries; and a second phase (from the late 2000s until today) characterised by a rapid acceleration of technological upgrading of the manufacturing base.
Phase I: building the indispensable foundations for delinking
The key element in the first phase of China’s delinking was the maintenance of a competitive real exchange rate of the renminbi by the Chinese authorities, which ‘played a fundamental role in fostering a large and diversified industrial base’ (Rodrik 2007, 22). This is consistent with what was predicted by a number of authors (Dollar 1992; Polterovich and Popov 2003; Rodrik 2008; Bhalla 2012; Frenkel and Rapetti 2015), according to whom a depreciated exchange rate has a positive impact, at least in the early stages of development, insofar as it encourages the development of a light export-oriented manufacturing sector. This leads to a greater division of labour, which, in turn, in addition to generating immediate increases in the efficiency of companies that expand production, stimulates the acquisition of skills and technological development that benefit the entire economy (Kaldor 1978, 106; Verdoorn 1956, 434).
To the extent that it regulates the proportion of domestic savings that flows into domestic investment and, therefore, modulates the absorption rate of the reserve army, the government’s real exchange-rate policy plays a very important role in governing the development process. On the one hand, an excessively high rate of absorption would tighten the labour market and render wage growth excessive compared to the development of the workforce’s productive capabilities and to the technological capabilities of firms. A rapid expansion of formal employment, eventually resulting in labour shortages, could then favour a shift in production factors towards the non-tradable sector. This tends to generate external imbalances and a premature de-industrialisation characteristic of many developing countries (Rodrik 2017). One the other hand, an excessively slow rate of absorption means that a substantial surplus of labour power would stay trapped in sectors traditionally associated with low productivity. The price is paid in the form of forgone opportunities for extracting productivity gains resulting from the shift of employment towards sectors with higher productivity levels and growth rates.
Along these lines, an exchange rate policy that is oriented towards shifting the economic output towards the tradable sector must be able to balance the growth of urban employment with the growth of the economy’s productive capabilities. If one assumes that:
in agreement with the Marxian theory of the reserve army of labour, the growth of real wages primarily depends on the bargaining power of workers, which, in turn, is positively related to the growth of urban employment;
in accordance with Kaldorian industry growth theory, the development of productive capabilities, i.e. the growth rate of productivity, depends on the growth of cumulated manufacturing output;
in turn, the growth of cumulated manufacturing output is an increasing function of the past labour-time which has already been expended in the production process;
then, from (b) and (c), it follows that the longer the time period during which urban employment growth occurs, the greater the amount of labour-time expended in the production process by each worker, and therefore the growth of productivity. However, since the growth of real wages is only a function of urban employment growth, but not a function of the cumulated manufacturing output growth, it follows that a deceleration in the pace of absorption of surplus labour might contribute to the acceleration of productivity growth with respect to real wage growth. We conclude from all this that the economic success of the exchange rate policy in emerging markets depends on its capacity to regulate the tempo of absorption of surplus labour: the conversion of domestic savings into domestic investment must be slow enough for surplus labour to be absorbed by urban sectors capable of generating foreign currency and favouring further productivity gains, and fast enough to exploit the productivity gains deriving from the shift of labour towards the urban economy. Under these circumstances, exchange rate policy is likely to contribute to a greater efficiency of the productive resources employed, and to the gradual transformation of the industrial structure (Lin 2012, 202–203), while at the same time avoiding the onset of crises deriving from foreign imbalances.
The Chinese experience seems to confirm these assumptions: from the second half of the 1990s until the mid 2000s, through a large-scale use of foreign exchange intervention policies, China has financed a substantial accumulation of foreign exchange reserves, which exerted a downward pressure on wages and the real exchange rate of the renminbi. This strategy has clearly implied losses to the national economy, insofar as the accumulation of reserves represents, in fact, a funnelling of savings towards foreign countries, amounting in effect to an intentional crowding out of internal investment (Adams and Park 2009, 17; Frenkel and Rapetti 2015, 82; Reinhart, Reinhart, and Tashiro 2016). In China, this translated into a slowdown of the absorption of surplus labour and wage growth – the latter remaining well below productivity gains between 1995 and 2008 (Figure 4), meaning that, despite a powerful increase in industrial production at the turn of the 1990s and 2000s, the wage share in value added in the manufacturing sector experienced a downward trend during the period under review. A strategy aimed at accumulating foreign reserves through the compression of internal consumption may sound like a drag on development, to the exclusive benefit of the centre of the capitalist world economy. Indeed, in recent decades, the Chinese central bank has continued to invest in US treasury bills which yield very low returns, thus funnelling Chinese savings towards the US economy, which has thus been able to maximise growth, consumption and investment (Dooley, Folkerts-Landau, and Garber 2004, 310).
However, this represents only one side of the coin. The other side is a dynamic one and it works in a completely opposite direction. If invested internally, in fact, these savings would probably have squandered too rapidly the reserve army necessary to contain wages, prices and, therefore, the real exchange rate. On the contrary, after the entry of China into the WTO, the accumulation of foreign exchange reserves has created a downward pressure on the renminbi. The general objective of this policy has been to favour the growth of the tradable sector and, in particular, of those sectors consistent with a factor endowment characterised by a relative scarcity of physical capital and productive capabilities. As noted by Jeon (2006, 19), at this stage one of the major factors that played a key role in the overall growth of China’s GDP was ‘the expansion of the secondary industry which is turned out as the industry having high increasing returns of scale’. In other words, the growth in manufacturing employment gave the Chinese economy a powerful impetus for cumulatively promoting the growth of technological capabilities as well as supporting the upgrading of the domestic factor endowment structure, without resorting to foreign loans.
Indeed, in the course of the Chinese development process, the strengthening of the manufacturing sector alongside the maintenance of a balance-of-payments equilibrium signals not only that wage growth has proceeded hand in hand with the upgrading of the production structure, but also that the growth of exports was rapid enough to obtain sufficient export earnings to cover the rise in import costs brought about by the growth in domestic income. As underlined by Felipe and Lanzafame (2018, 5), the development of China’s export capabilities is the key element that has enabled the People's Republic of China (PRC) to run significant current account surpluses in a context of sustained economic growth, to the extent that it was the decisive condition for the growth of labour productivity in manufacturing.
The policy of exchange rate moderation accompanied China until the mid 2000s and proved to be decisive for reaching the Communist Party of China's (CPC's) long-term development goal of elevating the country to the status of a middle-income country. In this regard, it must be noted that the loss of capacity to prevent the exchange rate from appreciating after the debt crisis of the 1990s led to low or stagnant growth rates in most developing countries, particularly the Latin American and African countries, until recent years (Bresser-Pereira 2010, 125–147; Elbadawi, Kaltani, and Soto 2012, 696). On the other hand, the ability to pursue a competitive exchange rate policy enabled China to escape the poverty trap and, potentially, initiate the structural changes necessary to progressively overcome an international specialisation based on wage moderation. In this sense, what from a static point of view could be interpreted as an adaptation on China’s behalf to its peripheral condition in the international division of labour, from a dynamic point of view can, on the contrary, be interpreted as a first step towards overcoming this subordination.
Phase II: breaking through the middle-income trap
The arrival of the Lewis turning point in China in 2003 manifested itself as an upward drift of urban wages beginning the following year (Zhang, Yang, and Wang 2011). Along with the decrease in exports due to the contraction of the global economy in 2008, this caused a decisive turnaround with regard to the wage dynamics vis-à-vis labour productivity. As a result, from the late 2000s in China, we have witnessed a significant reduction in the profitability of companies operating in the manufacturing sector (Figure 5).
Real wage and labour productivity growth, and rate of profit in manufacturing in China. Source: Data on wages and productivity come from TED. Profitability is measured as the ratio of total profits to the original value of fixed assets of manufacturing enterprises. Data for these variables are collected from the National Bureau of Statistics of China (NBSC n.d.).
If we start from the assumption that, in the tradable sector, profitability is predominantly determined by a specialisation coherent with the factor endowment (Lin 2012, 202), one could argue that the fall in profitability might be a signal that China has entered a phase of ‘comparative advantage vacuum’ (Cai 2012, 58): on the one hand, the country has lost its comparative advantage in labour-intensive sectors as a result of a substantial acceleration of wages. On the other hand, China has yet to gain a comparative advantage in technology-based and capital-intensive sectors (Gill and Kharas 2007, 5). It would appear, therefore, that the rise of incomes in the Chinese manufacturing sector has hit a bottleneck due to the inability of the Chinese economy to transit to newer production technologies.
The halting of the process of technological upgrading which generally follows a reduction in the profitability of those countries that fell into the middle-income trap suggests that pure market mechanisms are inappropriate tools for bolstering the incentive to change the patterns of comparative advantage. Indeed, in these countries the loss of competitiveness in the manufacturing sector generally led to a reduction in the rate of investment, such as to recreate the reserve army necessary to counter wage pressures. In other cases, the erosion of profitability in manufacturing was followed by a shift in resources from the production of tradable goods to the productions of non-tradable goods, leading to a premature de-industrialisation (Rodrik 2017) and the rise of external imbalances (Rowthorn and Wells 1987). In short, experience shows that the implementation of structural shifts in the international specialisation of peripheral countries towards technology-intensive sectors requires the adoption of policies that cannot be based exclusively on criteria of profitability.
First, the preservation of high wage levels even in the context of falling profitability, though penalising for firms in the short term, can increase the firms’ incentive to shift productive specialisation away from labour-intensive products towards more capital-and technology-intensive industries, with higher proportions of qualified labour (Foley and Michl 1999, 288–291; Storm and Naastepad 2013, 105).
Second, just as for wage increases, an appreciation in the domestic currency encourages the reallocation of resources towards more innovation-intensive activities, to the extent it ‘enables firms to upgrade their exported product quality by buying higher quality intermediates’ (Hu, Parsley, and Tan 2018, 29) which they could not have afforded before.
Third, the pursuit of the maximisation of profitability at the individual firm level can lead to sub-optimal levels of investments from the standpoint of society as a whole, which, in turn, might obstruct the activation of the process of structural change. The reason is that productivity gains associated with the expansion of production, especially of innovative projects, might not be entirely reaped by the firm which is responsible for the expansion of the scale of production in the form of internal economies of scale (Kaldor 1978, 106; McCombie 2002, 89; Rodrik 2008, 105). Therefore, the process of technological upgrading requires a strong public sector that supports the maximisation of output and makes purposeful investments, irrespective of their immediate profitability.
What the above discussion suggests is that the generation of structural changes to compete in technologically advanced sectors implies the implementation of policies that are incompatible with the standard criteria of capitalist efficiency and profitability – or, in the words of Samir Amin, policies that have ‘the nerve to challenge the criteria of economic rationality observed by conventional economics’ (Amin 1990, 58). The increased reliance on high-technology manufacturing industries as a source of real GDP and aggregate labour productivity growth in the post-2008 crisis period (Zhao and Tang 2015) is the intended consequence of the implementation of an economy policy by the PRC which is effectively centred around alternative criteria of economic rationality.
First, the growth of real wages was not only accepted but supported by policymakers. The gradual loss of competitive advantage of China’s labour-intensive growth model due to the country’s entry into a new era of labour shortage in the early 2000s was further accelerated by the Employment Contract Law, which entered into force in 2008. As noted by Lu and Gao (2011, 123), this legislation ‘has increased enterprises’ labor costs to varying degrees [and] put added pressure on China’s enterprises’. This encouraged a reorientation of China’s ‘development strategy toward labor practices that are more capital intensive and based on laborers’ skills’ (Zhang, Yang, and Wang 2011, 554), which, in turn, stimulated the industrial upgrading necessary to counter the rise in production costs (Wang et al. 2009, 497). This achievement is consistent with one of the major strategic goals set forth in the 12th five-year plan, for 2011–2015, which was drafted by the Chinese government in the aftermath of the global financial crisis of 2008–2009. The plan encouraged significant increase in the minimum wage standard with the explicit aims of accelerating the elimination of backward production capacity and encouraging ‘enterprises to enhance new product development capacity, increasing the technology level and added value of products, and accelerating the upgrading of products’ (State Council of the People’s Republic of China 2012, 12).
Second, between 2005, when the People’s Bank of China decided to adopt a managed floating exchange rate regime, and 2018, the value of the renminbi appreciated, in real terms, by 42.5%. This increase in the renminbi's purchasing power with regard to global goods has been followed by a marked expansion of Chinese imports of research-based and high-tech products over the last decade (Su 2018), including high-performance imported equipment. In turn, the import of innovative technologies originating mostly from the advanced Western countries has prompted the acquisition of the capabilities necessary for managing them on behalf of the local workforce.
Third, in order for the currency appreciation and wage growth to trigger the productive transformation pursued by policymakers, it was necessary to adopt instruments aimed at preventing the reduction of profitability in the tradable sector from translating into loss of employment or an outflow of productive resources from manufacturing into non-tradable sectors. The role of the Chinese state appears to have been decisive in the simultaneous attainment of employment and output composition objectives in the context of low profitability. The centrality of the public sector has emerged clearly since 2008, at a time of sharp contraction in global demand following the financial crisis. To continue on the path of modernisation in such circumstances, China’s authorities took ‘measures to shift the emphasis in its economic activity from foreign expansion to domestic development, mostly to creating new infrastructure’ (Rapoport and Gerts 2010, 60) and supporting the investment of manufacturing companies (Fardoust, Lin, and Luo 2012, 12).
The state-owned enterprises (SOEs) seem to have played a key role in the resumption of the steering role of the state. The reason for the newfound centrality of SOEs from the 2008 stimulus programme onwards is twofold: on the one hand, their ability to undertake investments guided by the socio-political objectives established by the government rather than the maximisation of shareholder value (He and Kyaw 2018; Ding, Knight, and Zhang 2019); on the other hand, their ability to operate on the market even in the presence of low profits or even at a loss (Yu 2014, 177). As can be seen in Figure 6, the average rate of profit in the ‘public’ industrial sector has been 6.5% between 2008 and 2017 – that is, a value much lower than that of the private industrial sector, which is 22.4%.
Despite the low rate of returns, the SOEs were able to translate a monetary policing easing into higher investments and expansion of output (Chen, Li, and Tillmann 2019), so much so that their weight on the overall industrial sector has steadily increased from 2009 to 2018 (Lardy 2019). At first glance, the fact that the state maintains scarcely remunerative productive resources in operation would appear to contradict the aim of securing an efficient allocation of productive factors. In actual fact, the strengthening of state-owned enterprises was deliberately pursued by the Chinese authorities, as blueprinted in the 12th and 13th five-year plans, which were directed towards the promotion of industrial upgrading. To this end, the government gave ‘play to the leading and supporting role of special major technology projects of the state’ (State Council of the People’s Republic of China 2012, 10), while remaining ‘firmly committed to ensuring that state-owned enterprises grow stronger, better, and bigger’, [and working] ‘to see that a number of such enterprises develop their capacity for innovation’ (State Council of the People’s Republic of China 2016, 34).
In the last decade, government authorities seem to have used SOEs to support high levels of industrial employment and wages, in a phase in which the decrease in manufacturing profitability would probably have led to one of the ‘adjustments’ typical of peripheral economies. In the current scenario, characterised by a downward pressure on profits, the existence of SOEs has allowed an employment of productive resources very different from the one that would have been possible in a pure market economy, while at the same time complying with the targets established by policymakers. Evidence of this is the fact that one of the main policy burdens that the state imposes on SOEs is the preservation of employment (Johansson et al. 2017; Shen and Chen 2017, 333).
Together with substantial state-led investments in education, science, and research and development, the development strategy discussed above has played a decisive role in increasing the technological capabilities of the Chinese working class. On the one hand, the maintenance of employment levels has allowed wages to stabilise at relatively high levels, essential for the economy to upgrade. On the other hand, the state commitment to expand industrial investment, particularly in advanced segments (Qi and Kotz 2020, 9), has allowed the process of learning and acquisition of productive skills commenced in the previous decade to continue. In particular, the steady accumulation of knowledge due to the learning-by-doing externalities brought about by the cumulative growth of output has raised economic productivity, mainly in technologically advanced industries. In turn, the continuous improvement in the competitiveness of such industries has prevented resources from being diverted away from the tradable sector towards the non-tradable sector, despite rising industrial wages.
The set of technological capabilities that play a significant role in fostering competitive advantage through the specialisation towards knowledge-intensive sectors can be captured in the Economic Complexity Index (ECI) developed by Hidalgo and Hausmann (2009). Based on the authors’ assumptions, a nation’s overall complexity can be expected to reflect its ability to efficiently manage production processes that require a wide range of knowledge and skills. The ECI, which is proportional to the total complexity of the products exported by the country, is derived by analysing the ‘ubiquity’ of such products. It is therefore easy to see why the ECI is both a proxy for the mix of knowledge and skills that underpins the production structure of a country and a good predictor of the income of that country. Exporting non-ubiquitous goods means, in effect, exporting goods that require knowledge that is difficult to acquire and therefore less subject to international competition and whose price, therefore, tends to be high(er) compared to the labour value it contains. It follows that the higher a country’s level of economic complexity is, the higher that country’s income can be expected to be. From Figure 7 we can see that wages in manufacturing have increased in parallel with the growth of the complexity of exports. This confirms that the growth of Chinese wages mirrors the gradual upgrading of the productive structure of the economy.
The gradual specialisation in more complex commodities is allowing Chinese producers to tackle the extraordinarily difficult task of breaking into world markets dominated by the older industrial power (Li 2008, 109–110): from the early 1990s to 2017, the proportion of high-tech products in China’s total exports increased from 2% to 28.8%. During the same period, their share in global markets increased from negligible to more than 17%, meaning that Chinese producers have significantly increased their international competitiveness in technology-intensive manufacturing. The change in China’s specialisation towards higher-price exporting sectors is the crucial factor that contributes to progressively shrinking the remuneration gaps between Chinese and US producers, and, by extension, the decisive factor that will enable the Chinese to challenge the basis of unequal exchange.
Conclusions
In this article we argued that the entry into technologically advanced markets appears to be an effective strategy for China to challenge the reproduction of the appropriation of value through unequal exchange to the benefit of the centre. In order to secure a course of progressive structural change in the national economy, the Chinese authorities actively supported the increase of the technological capabilities of the national workforce through the implementation of set of policies that partially transcend the standard criteria of capitalist profitability. After having ‘sacrificed’ wages and purchasing power in order to promote the absorption of the labour surplus present in the countryside and an industrialisation compatible with external balance, from 2008 onwards the collectivist character of the Chinese economy seems to have played a key role in safeguarding the country from two typical pathologies affecting the peripheral capitalist countries in which the development of productive forces is subordinated to the pursuit of profitability: the halting of the growth in formal employment and wages, and the regression of the country’s productive structure towards the non-tradable sector.
In China, the mobilisation of resources by the visible hand of the CPC leadership has strengthened the industrial base and expedited the acquisition of technological capabilities in a context of falling returns in the manufacturing sector deriving from the growth of salaries and the appreciation of the currency. In fact, these same phenomena have been intentionally used by the national authorities as tools to stimulate the upgrading of the productive structure towards levels of sophistication typical of an advanced economy.
In light of the above, we posit that China’s development strategy can be thought of as a delinking strategy, to the extent that it is successfully breaking the barriers that peripheral countries usually encounter in their attempts to challenge the centre’s technological superiority. Through a regulated integration into the world market coupled with a systemic orientation of national productive resources, China has sped up its acquisition of superior technological capabilities. These have paved the way for building an independent modern economy that gives China’s producers the opportunity to penetrate highly technological markets, capture a slice of the technological rent hitherto reserved to the capitalist centre and definitively overcome its peripheral position in the global economy.
