Can the Chinese model of state neoliberalism be considered “development”？

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8 The Transition from Neoliberalism to State Neoliberalism in China at the Turn of the Twenty-First Century Alvin Y. So and Yin-wah Chu

1 Introduction

Neoliberalism emerged in the late 1970s as a new policy framework to guide the development orientation in not only the South but also the North and the East. In the 1990s neoliberalism found expression in the so-called Washington Consensus as a way of articulating the economic orthodoxy that prevailed in the U.S. Treasury Department, the World Bank, and the IMF. Beeson and Islam (2005, 4) point out that neoliberalism and the Washington Consensus are meant to favour the unfettered operation of the market and to roll back the reach of the state. The states, in both rich and poor nations, have been urged to embrace “macroeconomic prudence” (a euphemism for control of inflation and for maintaining tight budgets), deregulation, privatisation, trade and financial liberalisation, lower taxes, and small government.

However, much assessment of the impact of neoliberalism on develop- ment over the past three decades has been negative. William Tabb (2003, 25), for instance, claims that neoliberalism has failed in term of its own goals. “It has not brought more rapid economic growth, reduced poverty, or made economies more stable. In fact, over the years of neoliberal hegemony, growth has slowed, poverty has increased, and economic and financial crises have been epidemic.”

Talking about specific regions, Beeson and Islam (2005, 6) also endorse the viewpoint that neoliberalism has failed to promote development in Latin America and East European countries:

Latin America represents a case of “reforms without results”. Despite ● decades of reforms, there is more poverty in Latin America in 2005 than in 1980, real wages are barely equal to those of 1980, and inequality remains persistent and conspicuously high.

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State Neoliberalism in China 167

The attempt at “big bang” privatisation and the fast-tracking of capitalism ● in the transition economies of eastern Europe and the former Soviet Union has been a tragic failure. The “transition recessions” have been longer and deeper than the Great Depression. GDP in 2000 was still below the 1990 level (by as much as 40 per cent) for many of these economies. Poverty and inequality have gone up sharply.

Others talk about the “lost decades” of neoliberalism during the 1980s and 1990s. Martin Hart-Landsberg (2006), for instance, contends that the post- 1980 neoliberal era has been marked by slower growth, greater trade imbal- ances, and deteriorating social conditions. The UN Conference on Trade and Development (UNCTAD) reports that “for developing countries as a whole, the average trade deficit in the 1990s is higher than in the 1970s by almost 3 percentage points of GDP, while the average growth rate is lower by 2 per cent per annum” (UNCTAD 1999, vi).

Like other states in the developing world, China faithfully (albeit gradu- ally) carried out the policies of neoliberalism when it re-entered the capi- talist world economy in the late 1970s. The Chinese state set up institutional frameworks to guarantee private property rights and promoted free markets and free trade, in the hope that an invigorated Chinese economy could compete successfully in the world market.

However, unlike other developing countries, China did not lose out during the lost decades of neoliberalism. Instead, it underwent rapid and sustained economic development in the last three decades of the twentieth century. China’s development has been remarkable for a number of reasons. In the first place, its gross domestic product increased close to 10 per cent a year from 1978, and the country managed to reduce the share of popula- tion living on less than US$1 per day from 64 per cent (1981) to 16 per cent (2006); effectively 400 million people were lifted out of absolute poverty (UNDP 2006). China’s rapid growth rate was matched nowhere in the world except in the so-called Asian miracle economies of South Korea, Taiwan, Singapore, and Hong Kong.

In the second place, although China’s economy has had its share of problems, such as tremendous regional disparity and growing social inequality, it has also succeeded in upgrading its technological capability. Over the years not only has China become the global factory for inex- pensive consumer goods, it has also enticed BP, General Motors, Intel, Microsoft, Oracle, and other corporations to locate part of their R&D facilities there. Furthermore, despite the importance of foreign investors as both producers aiming at the global market and retailers targeting the domestic one, foreign capital remains largely a junior partner in China’s development project.

In the third place, despite the downfall of the former Soviet Union and eastern Europe, China’s Communist Party has continued to provide

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168 Alvin Y. So and Yin-wah Chu

leadership for the country. China thus avoided the regime change and polit- ical chaos that befell its socialist cousins.

As a result, by the first decade of the twenty-first century, researchers began to characterise China as a “rising, new economic superpower” and reported that “China surged past the United States to become the world’s largest automobile market” (Holz 2006; Wines 2010); the world press began to speak of the G-2 – the United States and China – as in effect sharing world power (Wallerstein 2010). Some researchers even welcome China’s regional and global emergence as a counterweight to U.S.-driven neoliberal and mili- tarised capitalism (Silver and Arrighi 2000).

The aim of this chapter is to understand why China was able to avoid the pitfalls of neoliberalism and become one of the economic powerhouses of the twenty-first century. Our argument is that China has pursued a unique mode of neoliberalism – what we call state neoliberalism – which differs from the mainstream neoliberalism promoted in the Washington Consensus model. The following sections first delineate the distinctive features of state neoliberalism and then examine how the neoliberalism project historically emerged in China in the 1980s, deepened in the 1990s, and then was trans- formed to state neoliberalism at the turn of the twenty-first century. Finally, the trajectory and theoretical implications of state neoliberalism will be discussed.

To begin with, let us explain our conception of state neoliberalism and how it differs from the neoliberalism project in the Washington Consensus.

2 Neoliberalism and state neoliberalism

Before the late 1970s, capitalism in the North took the form of what John Ruggie (1982, 2005) called “embedded liberalism”. In order to solve the acute economic and social problems created by the unfettered market during the 1930s’ Depression, the advanced capitalist state had to take a more active role in managing the economy to provide full employment and avoid wide upswings and downswings of the market. In embedded liber- alism, the state takes on more and more roles – providing welfare and social services, strengthening workers’ trade unions, imposing more regulations on the market, imposing higher taxes on the capitalist class, and so on. Thus, capital, induced to compromise and have a new social contract with the working class, is embedded in a web of social and political constraints and in a new regulatory regime that serve to constrain its “greedy” profit- making behaviour. After World War II, a variety of liberal, social demo- cratic, and dirigiste welfare states exemplifying this embedded liberalism trend emerged in western Europe and the United States.

According to Harvey (2005), neoliberalism is a new class project through which the capitalist class fights back against the high taxes and strict regu- lations of the state as well as the “rigidities” imposed by the state and the

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State Neoliberalism in China 169

trade union on production relations. On one hand, neoliberal reforms aim to liberalise markets so that members of the capitalist class have more freedom to hire and fire workers and expand their trading and investment within and beyond national boundaries. From the late 1970s onwards, neoliberal reforms have entailed deregulation, privatisation, and the marketisation of social services. It is also widely agreed that neoliberalism as a philosophy or ideology seeks to downsize or confine the role of the state to that of establishing and expanding markets. Thus Harvey (2005, 7) uses the term “neoliberal state” to refer to “a state apparatus whose fundamental mission was to facilitate conditions for profitable capital accumulation on the part of both domestic and foreign capital”.

In the North, neoliberalism emerged in advanced capitalist societies where the state and the capitalist class were the two most powerful players. Neoliberalism was a new project prompted by members of the capitalist class who wanted to revamp the unfettered market when confronted by a crisis of capital accumulation in the 1970s. As “neoliberalism” replaces “embedded liberalism,” state-market relations shift from a situation of state domination to one of market domination.

The historical context from which neoliberalism emerged in China, however, was totally different from that in the North. China is a state socialist country where property is predominantly owned by the state and the collective. In addition, China in the early 1970s had just gone through its devastating Cultural Revolution, the primary aim of which was to suppress the capitalist market and destroy the capitalist class. Thus, at the onset of the reform the private sector was almost non-existent, and the capitalist class was very weak. The market institution, therefore, had to be constructed from almost nothing. In this scenario, which agent had the capacity to re-create the market institution in 1970s China in the aftermath of the Cultural Revolution, where anti-capitalist sentiment was still very strong?

Whereas the capitalist class has been the dominant agency for neolib- eralism in the North, the communist party-state had to take the driving seat to propel neoliberalism forward in China. During the initial stage of the reforms in the 1980s, the party-state did carry out neoliberal policy progressively. However, when Chinese society responded to neoliberal poli- cies with waves of social resistance and class conflict at the turn of twenty- first century, the party-state had second thoughts and adopted what we call state neoliberalism in order to attain a more harmonious society.

The term state neoliberalism seeks to highlight the contrast between China’s experience of neoliberalism and that of the North. Obviously state neoliberalism is a highly contradictory term. Since the party-state still claims to be communist and to stand on the side of workers and peas- ants, it could not possibly carry out all sorts of neoliberal policies to assault workers and peasants and undermine their interests. When the negative

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170 Alvin Y. So and Yin-wah Chu

impacts of neoliberalism led to waves of protests among urban workers and countryside peasants and threatened the survival of the party-state, the party-state sought to institute state neoliberalism – more taxes and more regulations, more redistribution of resources to the countryside – to restrain the excess of neoliberalism. How the contradiction of neoliberal reforms in a post-socialist state has led to an oscillation between market-led and state-led development in China and how the party-state has handled this contradiction over the past three decades – leading to both the surprising continuation of the Chinese communist party-state and the rise of China as a contending power in the capitalist world economy – is discussed in the following pages.

3 Neoliberal capitalism in China in the late 1970s and the 1980s

In China as in other countries northern, southern, and eastern, the impulse to carry out neoliberal reforms was irresistible when the state faced a capital accumulation crisis in the 1970s and the 1980s. Thus, the Chinese commu- nist party-state started the reforms to reinvent and liberate the market from the state as well as re-integrate China into the capitalist world economy in order to speed up capital accumulation. With this mindset the Chinese state leaders carried out the following policies during that period:

● Decollectivisation . In the countryside, agricultural communes were dismantled in favour of an individualised “household responsibility system”. Peasant families were given plots of land to cultivate, and they were responsible for their own gains and losses. They were also encour- aged to sell their products to rural markets, engage in rural industries, and seek work in nearby township enterprises. Township and village enter- prises were created out of the former commune assets, and these became centres of entrepreneurialism, flexible labour practices, and open market competition. ● Proletarianisation of peasants . The loss of collective social rights in the countryside meant the peasants had to face burdensome user charges for schools, medical care, and the like. At the same time, forced to seek work elsewhere after the end of collectivism, rural migrants flooded – illegally and without the right of residency – into the cities to form an immense labour reserve (a “floating population” of indeterminate legal status). China is now in the midst of the largest mass migration the world has ever seen (Chan 2003). This rural floating population, vulnerable to exploita- tion on a grand scale, puts downward pressure on the wages of urban workers (Pun 1999). ● Marketisation policy to restore and expand the market. A new labour market was introduced to the Chinese economy in the late 1980s, creating

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State Neoliberalism in China 171

a flexible labour force responsive to the market’s ups and downs. After a labour market was set up, the state enterprises were no longer required to provide lifelong employment and job security to their workers and were given the autonomy to hire and fire workers in the name of enhancing productivity and efficiency, as called upon by neoliberalism. ● Fiscal decentralisation and the weakening of the central state . In the mid- 1980s provincial, municipal, county, and township governments became subject to a bottom-up revenue-sharing system that required localities to submit only a portion of revenues to the upper level; they were then allowed to retain all or at least most of the remainder. This fiscal decen- tralisation policy made local states independent fiscal entities with the unprecedented right to use the revenue they retained. As a result, the central state’s extractive capacity was considerably weakened. The Chinese state was unable to control the extrabudgetary funds of the local govern- ments, and its relative share of tax revenues decreased to the extent that the central state lost effective control over China’s economic life (Wang and Hu 2001; Oi 1992). ● Opening up and spatial differentiation . There was an open-door policy toward foreign investments. It began with the establishment of four special economic zones (SEZs) in 1979, the opening of 14 coastal cities and Hainan Island in 1984, and the extension to three delta areas (the Pearl, Yangtze, and Yellow river deltas) in 1985. The combination of decentralisation and the opening up led to a very uneven pattern of spatial development in China, with rapid economic growth taking place mostly along the eastern coastal subregions. These subregions were characterised by an “extrovert” economy – that is, their economies were driven by foreign direct invest- ment and export-led industrialisation, and their economic growth relied upon their integration with global commodity chains (Chen 2005).

Through the above processes of decollectivisation and proletarianisation, marketisation, fiscal decentralisation, opening up, and spatial differentia- tion, China was clearly moving toward the neoliberal capitalist model. On the one hand, the state was being downsized, and state capacity was being weakened. On the other hand, the private sector and the various markets (labour, capital, and finance) were expanding rapidly. The Chinese economy reintegrated with the capitalist world economy.

Like other neoliberal states, China suffered a considerable cost during her initial march toward neoliberal capitalism in the 1980s. A decade of market “reforms” had already led to many serious economic problems: infla- tion, unemployment, corruption, and tax evasion. Inflation was over 30 per cent in 1988 and 1989, when the state tried to decontrol commodity prices. Unemployment became a problem when bankrupt enterprises discharged workers. Workers showed signs of discontent as reforms began to exert tighter control over the work schedule and raise work quotas. A government

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source estimated that 70 per cent of enterprises became rich through profit- eering and speculation; another source revealed that the private sector had evaded from 70 to 80 per cent of its taxes (So and Hua 1992).

In the late 1980s these economic problems and social grievances triggered a democracy movement that led to a confrontation between the protesters and the party-state in the Tiananmen Square. The Tiananmen incident was the first major challenge to the Chinese communist party-state during the post-Mao era. It led to bloody suppression of the protesters and serious polit- ical division within the party-state between the so-called reformist faction (which was pro-neoliberal reform) and the conservative faction (which was sceptical of such reform). What happened after the Tiananmen incident?

4 Rebuilding the state and the deepening of neoliberal capitalism in the 1990s

The Chinese state, in contrast to its image in much of the neoliberal liter- ature as weakened, considerably strengthened its managerial and fiscal capacity in the aftermath of the Tiananmen incident. In the early 1990s, to strengthen its control over the evaluation and monitoring of local leaders, the central party-state instituted a new “cadre responsibility system”. County party secretaries and township heads have to sign performance contracts and pledge to attain certain targets laid down by higher levels; they are held personally responsible for attaining those targets. There are different contracts for different fields, such as industrial development, agri- cultural development, tax collection, family planning, and social order. The Chinese party-state has the capacity to be selective – that is, to implement its priority policies, control the appointment of key local leaders, and target strategically important areas. Thus, Maria Edin (2003, 36) argues that “state capacity, defined here as the capacity to control and monitor lower-level agents, has increased in China, and that the Chinese Communist Party is capable of greater institutional adaptability than it is usually given credit for” (see also Zhu 2003).

The state also strengthened its fiscal capacity. The central party-state introduced a tax sharing scheme (TSS) in 1994 to redress the centre-local imbalance in fiscal matters (Yep 2007). The TSS is aimed at improving the centre’s control over the economy by increasing two ratios – the share of budgetary revenue in GDP and the central share in total budgetary revenue. It seems that the TSS has succeeded in raising both (Loo and Chow 2006), thus helping to arrest the decline of the centre’s fiscal foundation and increase the central party-state’s extractive capacity. Zheng (2004, 118–9) argues that the TSS has shifted fiscal power from the provinces to the centre and so “now, it is the provinces that rely on the central government for revenue”.

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State Neoliberalism in China 173

In addition, in contrast with the neoliberal doctrine’s call for less inter- vention, the Chinese state intervenes more in the economy. It has engaged in debt-financed investments in huge projects to transform physical infra- structure. Astonishing rates of urbanisation (no fewer than 42 cities have expanded beyond the one million population mark since 1992) have required huge investments of fixed capital. New subway systems and highways are being built in major cities, and 8500 miles of new railroad are proposed to link the interior to the economically dynamic coastal zones. China is also trying to build an interstate highway system more extensive than America’s in just 15 years, and practically every large city is building or has completed a big new airport. These megaprojects have the potential to absorb surpluses of capital and labour for several years to come (Harvey 2005, 132). It is these massive debt-financed infrastructural and fixed-capital-formation projects that make the Chinese state depart from the neoliberal orthodoxy and act like a Keynesian state.

After the party-state strengthened its capacity and played a more active role in upgrading the economy, it also pushed for a deepening of neoliberal capitalism. In the first wave of neoliberal reforms in the 1980s, reform poli- cies sought mostly to expand the private sector, while leaving the public sector largely intact. Thus, the reformers in the 1980s used the expression “socialist market economy” to stress that China was still socialist because it had a dominant public sector and because the party-state was still in control of the strategic sector (the commanding height) of the Chinese economy.

However, the party-state turned to the public sector and pushed forward the following policies in the late 1990s:

● Privatisation and corporatisation policy to cut the size of the state sector and increase the size of the private sector. In the 1990s, with state-owned enterprises (SOEs) undergoing corporatisation, they were no longer dependent on the state for funding and had to operate independently in the market. After corporatisation, the SOEs were asked to run like an independent, private, profit-making enterprise; they could go bankrupt if they lost money (So 2005). The SOEs were given the green light to lay off workers, increase work intensity and productivity, and cut workers’ benefits if they found it necessary to remain competitive in the market. In the late 1990s one could observe the layoff of millions of state-sector workers and the cutting back of their benefits. ● Commodification of human social services . Whereas the Maoist state provided social services (housing, health care, welfare, education, pension, etc.) based on need and free of charge to all citizens, the reform-era state treated them as commodities to be distributed to people in accord with market principles. Housing, for example, is no longer provided to state workers free. Instead, workers are now asked to find their own housing

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in the newly emerged private housing markets. Likewise, workers are now asked to pay a part of the cost for most welfare and social insurance services, including pension, medical care, the newly created unemploy- ment insurance, higher education, and many personal services (Guan 2000). ● Deepening of liberalisation . Petras (2006) points out that China’s member- ship in the World Trade Organization (WTO) will likely lead to further dismantling of the state sector, dismantling of trade barriers and removal of subsidies, the near-unquestioning orientation toward an export-market strategy, and consolidation of foreign production as the leading force in the Chinese economy (see also Hart-Landsberg and Burkett 2004).

This two-pronged strategy, state intervention and deepening of neoliber- alism, stems on the one hand from the ascendancy of the idea of “stability” in the aftermath of the turbulence associated with the Tiananmen protest and its suppression and, on the other, from the reformist faction’s convic- tion that they need not only the state but also domestic and multinational capital to restructure China’s society and market. In the words of Wang (2005, 70), “[t]his is the secret history of the tangled connection between ‘neo-authoritarianism’ and ‘neo-liberalism’ in China”.

5 Another wave of social resistance to the deepening of neoliberal capitalism in the 1990s

With the deepening of neoliberal policies, class inequalities and class conflict rapidly intensified along the two poles of capital and labour. On the one hand, a cadre-capitalist class was formed as a result of privatisa- tion and corporatisation of state assets. Since the old Chinese capitalist class was eliminated in the 1950s, a new class of capitalist entrepreneurs had to be created in order to promote market reforms. During the first decade of economic reforms (the 1980s), when a private sector was created, cadres (state officials) turned local state and collective enterprises into profitable town- ship and village enterprises (TVEs), developed joint ventures with foreign and overseas Chinese capitalists, quit their official positions to set up their own capitalist enterprises, and hired their kin and friends to run the new enterprises. Since cadres possessed political capital as well as the necessary networks to run their enterprises, they had an edge over other classes in taking advantage of nascent business opportunities in the reform era’s first decade. It was this cadre-capitalist class that advocated the deepening of neoliberal policies in the aftermath of the 1989 Tiananmen incident.

During the second stage of reform (the 1990s), when the state called for the privatisation of state enterprises (through shareholdings) with its “grasp the big, release the small” policy, the assets and profits of state enterprises were diverted on a massive scale into the private hands of the cadres in charge

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State Neoliberalism in China 175

of them. Ding’s (2000) studies show that state enterprises were stripped in three ways: through organisational proliferation, consortium building, and “one manager, two businesses”. In organisational proliferation, cadres removed the best-equipped or most profitable segments of an enterprise and established collectively owned companies. Consortium building refers to a partnership between economic entities in which a state-owned enterprise sets up a new firm in collaboration with a non-state-owned enterprise. “One manager, two businesses” happens when cadres establish their own private business by usurping assets from state industries in which they continue to hold executive positions. Francis (2001) points out that these practices are carried out by all sorts of state entities – “local and municipal governments, national ministries, the army, national and local public security bureaus, party organisations, universities, scientific institutes”. The coexistence and interpenetration of various forms of ownership between the state and the non-state domain have provided a golden opportunity for cadres to trans- form themselves into capitalist owners and managers of semi-state, collec- tive, and private properties.

As a result of the above practices, the emerging state-capitalist relation- ship is characterised by the fusion of the political capital of the cadres, the economic capital of the capitalists, and the social and network capital embedded in the local society. Many collective enterprises are owned and run by capitalists, while many private enterprises are spun-off state prop- erties owned and run by state managers or their kin. This fusion makes it very hard to distinguish what is owned by the state, by the collective, or by the capitalist in the private sector; the boundaries of property relations are often blurred. Fuzzy property boundaries and the mutation between state managers and capitalists have created an all-powerful hybrid that can be called a cadre-capitalist class (So 2003).

At the same time, the deepening of neoliberal policy also has produced the formation of the working class. In the 1990s the need to boost produc- tivity and bring profits into the state sector led to attempts to lay off redun- dant workers, hire rural migrants as temporary and contractual workers, cut wages, reduce workers’ benefits, charge workers for services, intensify workloads, and enforce strict work discipline in order to improve the state enterprises’ productivity and profitability. Workers in the state sector are now beginning to feel like proletarians in a capitalist enterprise.

In response to the above neoliberal policies, the Chinese working class has become restless. China Labour Bulletin (2002, 1) reports that “almost every week in Hong Kong and mainland China, newspapers bring reports of some kind of labour action: a demonstration demanding pensions; a railway line being blocked by angry, unpaid workers; or collective legal action against illegal employer behaviour such as body searches or forced over- time”. According to the official statistics, in 1998 there were 6767 collective actions (usually strikes or go-slows with a minimum of three people taking

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part) involving 251,268 people – an increase in collective actions of 900 per cent from the 1990s. In 2000, this figure further jumped to 8247 collective actions involving 259,445 workers ( China Labour Bulletin 2002, 2). Given such widespread labour protests, it is no wonder that the Chinese govern- ment has identified the labour problem as the biggest threat to social and political stability (So 2007).

The peasants in the countryside, too, became restless because of increasing taxes and levies imposed by corrupt cadres in local government. Thornton (2004, 87) cites a Chinese government report confirming that over 1.5 million cases of protest occurred in 1993 alone, over 6000 of which were officially classified as “disturbances” ( naoshi ) by Chinese authori- ties. Of these cases 830 involved more than one township and more than 500 participants; 78 involved more than one county and over a thousand participants; and 21 were considered to be “extremely large-scale” events involving more than 5000 participants. A surprising number of confronta- tions turned violent; the disturbances caused 8200 casualties among town- ship and county officials, 560 county-level offices were ransacked, and 385 public security personnel were fatally injured (So 2008).

Aside from the workers and peasants, there was also resistance from middle- class intellectuals. The late 1990s saw the emergence in China of many kinds of social movements: environmental, consumer, homeowners’ resistance, women’s, and so on (Economy 2005; Cai 2005; Chen 2003). Mirsa (2003) points to the rise of a group of critical intellectuals – the so-called New Left ( xin zuopai ) – who were highly dissatisfied with the growing socio-economic class inequalities and the alarming decline of public morality. Showing a greater appreciation for the Chinese revolution, they wanted a reassess- ment of Western models of development (including modernisation theories and neoliberalism). Thus, when neoliberal reforms were deepened during the late 1990s and workers, peasants, and the middle class were increas- ingly restless, their criticisms of the problems of neoliberalism were more outspoken and blunt, and their protests and demonstrations became more widespread and violent. These societal forms of resistance were reflected in the party-state. In June 1998, 35 members of the Standing Committee of the National People’s Congress (NPC), presenting an emergency resolu- tion to the top leaders of the Chinese Communist Party (CCP), accused the government and the party of violating workers’ “right of existence” and “trampling the worker-peasant alliance” and alluded to widespread protest and opposition to China’s program of economic liberalisation (Liew 2001; Nonini 2008).

The challenges to the party-state outlined above happened at the right time because the party was undergoing an elite transition. In 2002 President Jiang Zemin, who served as China’s top leader for more than 13 years, retired. Jiang was the one who proposed “the Three Represents” policy to

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State Neoliberalism in China 177

recruit more politically progressive people from the “advanced productive” and “advance cultural” forces into the Communist Party. Jiang’s leadership team was replaced by Hu Jintao and Wen Jiabao. According to Joseph Cheng (2007), Hu and Wen’s ideal has been to return to the “good old days” of the 1950s when the Maoist party was in full control and the vast majority of party cadres were uncorrupt, dedicated, and selfless.

By the early 2000s, Hu and Wen began to institute a new mode of neolib- eral policy – what we call state neoliberalism – in response to the escalation of social resistance and class conflict in Chinese society.

6 The transition from neoliberalism to state neoliberalism at the turn of the twenty-first century

Contrary to neoliberal calls for the dismantling of the welfare state, in 2006 the Chinese party-state under Hu and Wen’s leadership presented a policy of “building a new socialist countryside” and “harmonious society” (Saich 2007). This policy has been hailed as significant because it could signal a change of ideological orientation in the Chinese state (Kahn 2006). Whereas the pre-2006 Chinese party-state adopted what can be loosely described as a neoliberal orientation – where market expansion is carefully controlled in some areas yet rapidly enabled in others – the goal became rebalancing the emphasis on economic growth with greater attention to social develop- ment. While market reforms would continue, the new policy indicated that the state would play a more active role in moderating the negative impacts of marketisation. The new policy required the state to include “the people and environment” in its developmental plan and not just focus narrowly on GNP indicators and economic growth.

Thus, the policy advocated a transfer of resources from the state to strengthen the fiscal foundation of the countryside. Not only was the agricultural tax abolished to help relieve the burden on farmers, but the state also increased its rural expenditure by 15 per cent (to $15 billion) to bankroll guaranteed minimum living allowances for farmers and hiked the health-care budget by 87 per cent, to $4 billion (Liu 2007). These policies indicated a massive infusion of funding from the state for the peasants and rural areas. In addition, there was a decommodification of human social services. Rural residents no longer would have to pay many miscellaneous charges levied by schools; fees at primary schools would be abolished as part of a nationwide campaign to eliminate them in the countryside for the first nine years of education. The state would also increase subsidies for rural health cooperatives, which would be available in 80 per cent of the rural counties. In the early 2000s, rural residents have to pay market rates at villages’ private clinics; since most of them do not have medical insurance, they spend staggering proportions of their cash on health care (Liu 2007).

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178 Alvin Y. So and Yin-wah Chu

The new policy was also aimed at reducing social inequality, especially the widening gap between countryside and city. Thus, pensions were to be made available to everyone, not just those enjoying privileged status as registered urban residents. In the mid 2000s, the state has also promoted the spread of minimum-living-standard assistance for the rural population. Potentially a highly significant development, this program might for the first time institute a social safety net covering the whole of the population, whether urban or rural ( Economist 2006 ; Hussain 2005).

Unlike neoliberal states in other parts of the world, China has a strong state machinery. Although a cadre-capitalist class emerged at the local level when state managers were asked to promote local development – a phenom- enon Oi (1992) describes as “local state corporatism”– it failed to capture the central party-state. Thus, the central party-state still held the moral high ground of state socialism, going after the capitalist for tax evasion and the breaking of environmental laws, standing on the side of the workers by strengthening labour laws, and standing on the side of peasants by cutting rural taxes and relocating more resources to the countryside. The party-state at the centre blames corrupt officials for causing social unrest at the local level. It is also highly autonomous, in the sense that it is not “captured” by vested economic interests at the local level. The old generation of capitalists was largely destroyed in the Communist Revolution and in the Cultural Revolution. The capitalist class born out of the market reforms of the 1980s and 1990s is still too weak and too dependent on the state to pose any chal- lenge (Dickson 2008). In addition, the Chinese state has the capacity to carry out its developmental plans. Since it owns the banks and controls the financial sector, it has at its disposal powerful policy tools to make the coop- eration of indigenous business more likely: access to cheap credit, protec- tion from external competition, and assisted access to export markets are all levers that the Chinese state can use to ensure business compliance with governmental goals. Since Chinese corporations have a high debt-to-equity ratio, even the threat of withdrawal of state loans would be serious.

Second, unlike the form of neoliberal state sometimes associated with the Washington Consensus, the Chinese state has actively and proactively intervened in the economy. It has become the engine powering capital accu- mulation. Besides controlling debt finance and infrastructure construction, the Chinese central state plans the development of strategic sectors, decrees prices, regulates the movement of capital, shares entrepreneurial risks, and underwrites research and development.

Third, unlike other neoliberally oriented states, the Chinese state has actively mobilised the ideology of nationalism; it defines itself as carrying out a national project to make China strong and powerful. In the post-reform era, China experienced an ideological vacuum, since the state could no longer be legitimised by Marxism or communism. Thus, nationalism became the dominant medium for the communist party-state to get the support of the

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Chinese people. The state seems to believe that the best course is to build a strong sense of national cohesiveness based on cultural heritage and tradi- tion rather than develop a nationalism based solely on hostility toward the outside world. Nationalism, however, can cut both ways. The state knows well that excessive nationalism might not only undercut the Communist Party’s ability to rule but also disrupt China’s paramount foreign policy objective: creating a long-term peaceful environment for its modernisation program. The Chinese state’s concern is reflected in its rejection of a more radical nationalism, such as that advocated by the authors of The China That Can Say No , as well as in its efforts to control anti-Japanese sentiment. Indeed, China’s response to the Japanese provocation involving the visit to the Yasukuni Shrine in the 1990s was far more restrained than Taiwan’s or Hong Kong’s. Concern that nationalism had to be controlled was also evident in Chinese efforts to restrain anti-Americanism in the aftermath of the NATO bombing of the Chinese embassy in Yugoslavia (Ogden 2003).

Fourth, unlike the embedded social democratic states in the North, which see themselves as a protector of citizenship rights, the Chinese state adopts authoritarian policies to discipline labour, suppress labour protests, and deactivate civil society in order to maintain a favourable environment to attract foreign investment and facilitate capital accumu- lation. Authoritarianism and export-led industrialisation go well together because labour subordination serves to keep labour cheap while making the working class docile. Otherwise, the exports of the East Asian develop- mental states would not be competitive in the world economy, and transna- tional corporations would not relocate their labour-intensive production to East Asia. It is ironic that the Chinese neoliberal state, with its tightly organised Leninist party-state machinery, has proven to be very effective in co-opting labour activists, dividing the working class, and silencing labour protests (Gallagher 2005).

In short, China’s neoliberalism is unique, different from that of both the neoliberal state in the Washington Consensus and the embedded liberal state in the North. Chinese state neoliberalism has a strong state machinery with a high degree of state autonomy and a strong capacity to carry out its goals. It vigorously intervenes in the economy through developmental plan- ning, deficit investment, export promotion, and strategic industrialisation. While highly nationalistic and authoritarian, it suppresses labour protests and limits popular struggles.

7 The historical emergence and future trajectory of state neoliberalism in perspective

David Harvey (2005, 1) points out that the period 1978–80 was a turning point in China’s social and economic history. In 1978 Deng Xiaoping, the leader of the Chinese Communist Party, took the momentous first step

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180 Alvin Y. So and Yin-wah Chu

towards liberalising a communist-ruled economy. The path that Deng defined was to transform China in two decades from a closed backwater to an open centre of neoliberal capitalism in the global economy. The first decade of neoliberal reforms, however, led to serious economic and social problems in Chinese society and triggered robust democracy protests in Tiananmen Square in 1989, protests that challenged the rule of the Chinese Communist Party.

In the aftermath of the Tiananmen incident, the party-state tried hard to restrengthen itself. It instituted a “cadre responsibility system” to improve local governance and a tax-sharing scheme to redress the centre-local imbalance in fiscal matters. In the mid-1990s, after political order and economic growth had been restored, the party-state determined to push for a deepening of neoliberal capitalism through privatisation, corporatisation, commodification of social services, and entry into WTO.

By the late 1990s, however, China began to feel the pains of a neolib- eral economy. First, there was widespread exploitation of labour power, particularly that of young female migrants from rural areas. Wage levels in China were extremely low, and the insufficiently regulated conditions of labour were despotic and exploitative. China had, moreover, become one of the world’s most unequal societies. Neoliberal market reforms, which had quickly created large disparities in income among different classes, social strata, and regions, led rapidly to social polarisation. Formal measures of social inequalities, such as the Gini coefficient, confirm that China had travelled the path from one of the most equalitarian societies to chronic inequality, all in the span of 20 years (Harvey 2005, 143). Furthermore, as usually happens in a country going through rapid capitalist industri- alisation, the failure to pay attention to the environment was disastrous. In China, “rivers are highly polluted, water supplies are full of dangerous cancer-inducing chemicals, public health provision is weak (as illustrated by the problems of SARS and the avian flu)” (Harvey 2005, 174). Edward Friedman (2007, 2) also points out that “China has a ruthless free market, no regulation, no safety standards, no FDA, no CDC, no NIH. It is also the world leader for people dying in industrial accidents, and about 400,000 each year die from drinking the water which is polluted.”

By the late 1990s, these contradictions had led to discontent and social conflict in society, as shown by the increasing call to regulate the market and the growing numbers of labour protests, peasant demonstrations, social movements, and other large-scale social disturbances.

In the light of the above contradictions and discontents, the Chinese communist party-state had second thoughts about its neoliberal policies. Besides, neoliberalism was increasingly coming under attack and losing its credibility in the global economy. In Eastern Europe and Russia, the “shock therapy” – which called for the dismantling of the centrally planned economy as soon as possible – not only did not work but also led to the

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downfall of the communist states. In the West the anti-globalisation move- ment was greatly empowered by its success in Seattle. In China the party- state began in the late 1990s to reverse some of its neoliberal policies and build up a developmental state. After the party-state strengthened its fiscal capacity, it made debt-financing investments in megaprojects to transform infrastructure and declared a new policy of “building a new socialist coun- tryside” to address the issues of rural poverty and inequality.

The situation in China was not desperate. The Chinese state was not under any threat of foreign invasion, had not incurred any large amount of foreign debt, and confronted no immediate threat of rebellion from below. As matters stood, the state still had the autonomy and capacity to propose and implement various developmental policies “from above”. For instance, the state could selectively introduce different types of developmental poli- cies, could vary the speed of the market reforms, could expand or limit market access for transnational capital, and most importantly, could still have the freedom of adjusting (or even reversing) its policies if they did not work.

The asymmetrical power relationship between the state and other classes has also given the state a free hand to try different developmental policies over the past few decades. The capitalist class was too small, too weak, and too dependent on the state to be the agent of historical transformation in China. The capitalist class is politically impotent to capture the state or to carry out the neoliberal path of development. Facing growing labour unrest and popular struggle against such abuses as child labour in the coal mines, discrimination against migrant workers, and environmental degradation, the capitalist class is powerless to affect state neoliberalism.

Nevertheless, the shift from neoliberalism to state neoliberalism took the form of a transition, not a rupture or a revolution. The transition took a fairly long time; it was a gradual, adaptive process without a clear blueprint. The reforms have proceeded by trial and error, with frequent midcourse corrections and reversal of policy. In other words, Chinese state develop- mental policies were, not a completed project settled in one bang, but an ongoing, pragmatic affair with many adjustments.

Situated in East Asia, China has long been attracted to the developmental state model that has brought remarkable post-war economic growth to South Korea, Taiwan, and Japan. Thus, as Chang Kyung-Sup (2007) points out, the East Asian states have embraced a conscious process of learning and trans- planting technologies, industrial organisation, and state policies. China is a leading practitioner of this process.

If the Chinese experience is characterised by trial and error, midcourse corrections, and reversals of policy, what is the future trajectory of state neoliberalism in China? There are several scenarios: a return to socialism, a return to neoliberalism, a move to imperialism, and consolidation of state neoliberalism.

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