Globalisation in Asia and China: Assessing Costs and Benefits

Globalisation in Asia and China: Assessing Costs and Benefits
Walden Bello
Published in Linking Alternative Regionalism for Equitable & Sustainable Development TNI Briefing Series 5, September 2004

In this article, I would like to look at selected aspects of globalisation in Asia, discuss the economic and social implications globally for Asia and the world of the industrial development of China, and offer some suggestions on where to bring the ASEAN-China relationship.

The 1990's were hailed as the decade of globalisation. Yet the 1990's, it is now well established, were a period of economic stagnation and rising poverty for vast parts of the developing world. As noted by the UNDP's Human Development Report 2003, during the 1990's, the number of extremely poor people throughout the world increased by 28 million. More specifically, average per capita income growth was less than 3 per cent in 125 developing and transition economies, and in 54 of them average per capita income fell. Region-wise, the number of poor increased in Latin America and the Caribbean, Central and Eastern Europe, the Arab states, and Sub-Saharan Africa. Instead of becoming a great new frontier for exploitation, Central and Eastern Europe exacerbated the problem, with the number of people living in poverty tripling to 100 million in the 1990s.

In the North, stagnation and rising unemployment were the rule in Japan and Europe. In the US, the nine-year boom did not arrest worsening income distribution. Corporate profits stopped growing after 1997, and when the boom finally ended in the bust of 2001, rising unemployment and rising poverty became central features of the world's most globalised economy. But while the impact of globalisation may be dismal in other parts of the world, Asia seems to be the exception. Globalisation is associated with the rise of China, which is projected by some to be on the way of surpassing the US in terms of size by the middle of this century. But is Asia, indeed, the exception?

The Asian Financial Crisis

First of all, it must not be forgotten that the most dramatic economic crisis of the era of globalisation occurred in Asia. This was the Asian financial crisis of 1997. The Asian financial crisis was but one of about eight crises that had been brought about the by liberalization of financial flows since the 1970's. But it was the most drastic and far reaching, with its shock waves felt in Russia and Latin America.

What brought about the crisis is now undisputed. No longer do we hear the explanation that we often heard before-that it was created by corrupt crony capitalism in which a culture of non-transparency hid bad business decisions. Even Robert Rubin, the former Treasury Secretary of Bill Clinton who was one of the central players during the crisis, now admits that the problem in great part stemmed from the uncontrolled and unregulated movement of speculative capital that was unleashed by the partisans of capital account liberalization.

Attracted by high interest rates in economies that followed policies of capital account liberalization prescribed by the IMF and the US Treasury Department, a net inflow of $100 billion was experienced by the economies of East and Southeast Asia between 1994 and 1997. That money went mainly to speculation in real estate and the stock market. When the oversupply of funds in these sectors started to create dislocations in the rest of the economy, speculative capital began to exit, and the exit turned into a panic as foreign exchange speculators like hedge fund operators took advantage of the rush for the exits make a profit. Some $100 billion left these markets in a few short weeks in the summer of 1997, bringing down the economies with them.

1998-2000 were years of stagnation for most of these economies. In a few short weeks, over one million people in Thailand and some 22 million in Indonesia fell below the poverty line. Recovery took place, but most of the countries lost their dynamism, and recovery was more sustained in those countries, such as Malaysia and Thailand, that undertook programs disapproved by the IMF, such as capital controls and expansionary fiscal policies. But for the most part, the so-called "Asian miracle" over in those countries with which it was most associated: Korea, Indonesia, Malaysia, and Thailand.

Victims of their own Strategy

Capital account liberalization and financial speculation felled these economies. But they were already in trouble even before events of 1997. The main driver of their growth had been export-oriented manufacturing, or industrialization pursued via the manufacture of commodities using cheap labor. In Southeast Asia, the process had been driven by Japanese capital, which exported some $15 billion to the region in the period 1985-1991 as the appreciation of the yen forced on Japan by Washington made manufacturing in Japan less competitive, forcing the keiretsu or Japanese conglomerates shifted their manufacturing operations to Indonesia, Thailand, Malaysia, and China.

But the massive inflow of investment started to taper off by the mid-1990's. Even as capital-account liberalization was undermining these economies by making them prey to the volatile movements of speculative capital, the dependence of their industrial and manufacturing sectors on direct foreign investment became a source of weakness and crisis as the wage differentials between them and China became more and more pronounced in the mid-1990's. By the late nineties and early years of this century, direct foreign investment into these economies as a proportion of total foreign direct investment was greatly reduced, while China's share shot up. By 2002, China in fact was attracting $45 billion a year, a figure second only to that for the United States.

But not only were the Asian economies, in fact, losing out in terms of foreign investment. They were losing markets to China and, indeed, they were losing their own markets to extraordinarily cheap imports or smuggled goods from China. The pioneers of the strategy of foreign capital-driven, low-wage-based, export-oriented growth had become victims of their own strategy.

Considerations on China

So we come to China. When it comes to representing the success of globalisation, China and India are often trotted out. Owing to our greater familiarity with the Chinese case, the following remarks will be confined to China.

There are a number of considerations that nuance the commonly accepted picture of China benefiting from globalisation.

First of all, if benefiting from globalisation is identified with the adoption of free-market policies, then contrary to the impression painted by neoliberal economists, China did not follow the kind of anti-state policies that were prescribed to and created such disasters in many developing countries. Latin America went the free market route beginning in the 1980's and ended up in crisis and stagnation by the 1990's. East Asian and Southeast Asian countries liberalized their capital account in the early nineties, and this led to the end of the Asian miracle in 1997. In contrast, China kept itself immune from the damaging gyrations of speculative capital by maintaining strong capital controls. The state is the leading force in the economy, not only as a policymaker but also as a productive unit owning or managing multitudes of enterprises. China's market has been one huge protected market, and only recently, with China's entry into the WTO, is it opening up, cautiously. The point is that if free market policies are said to be the key to economic success in the era of globalisation, then certainly China is no exemplar of such policies.

Secondly, China's growth has been impressive but it has created tremendous internal contradictions and pressures. Growth has been concentrated in the coastal regions, with the Western and Northwestern provinces being left behind. Despite the fact that 123 million people have been lifted out of poverty by China's growth, inequality has shot up. As one analyst notes,
China is already troubled by problems arising from perceived inequities between the new classes of "haves" and "have nots." These problems exist at macro (regional) and micro (neighborhood) levels. Efforts to meet WTO requirements could worsen geographic and urban/rural frictions, widen an already growing gulf between rich and poor, and generally make China more ungovernable. WTO-mandated reforms will almost certainly worsen existing problems with massive unemployment, increases in uncontrolled migrant populations, major public safety and public health issues, and rapid degradation of social welfare infrastructure.

Moreover, as China has become more and more central to global growth, so have the implications of its economic and social contradictions become more global in their implications.

Third, the accepted picture is that of China's growth stimulating growth in other economies. But there is also another side to this: China's growth also threatens to add pressures for global stagnation and deflation, which have emerged as the main trends in the global economy. Let us digress for the time being and focus on the crisis of overcapacity at the global level before returning to China.

Global Overcapacity and China

The context of developments in China is tremendous global industrial capacity all around. By the 1990's, the indicators were stark. The US computer industry's capacity was rising at 40 per cent annually, far above projected increases in demand. The world auto industry was selling just 74 per cent of the 70.1 million cars it builds each year. So much investment took place in global telecommunications infrastructure that traffic carried over fiber-optic networks was reported to be only 2.5 per cent of capacity. In steel, excess capacity was estimated nears 20 per cent. Former General Electric Chairman Jack Welch claimed that "there was excess capacity in almost every industry." Indeed, by the end of the 1990's, the gap between capacity and sales was, according to the Economist, was the largest since the Great Depression.

In the US economy, as noted above, profits stopped growing after 1997, and this was one of the factors leading firms to a wave of mergers, the main purpose of which was the elimination of competition. The most prominent of these were the Daimler Benz-Chrysler-Mitsubishi union, the Renault takeover of Nissan, the Mobil-Exxon merger, the BP-Amoco-Arco deal, and the blockbuster "Star Alliance" in the airline industry. In 2000, global merger and alliance deals, James Crotty points out, were worth $3.5 trillion, about six times their value in 1994. The $1.1 trillion worth of cross-border mergers in 2000 was thirteen times the figure for 1991, signifying a "merger and alliance wave of historic proportions."

A major reason for the continuing overcapacity stemmed from the dynamics of the neoliberal policies that were generalized in the 1980s and 1990s. The process was, however, one fraught with crisis, both in the North and the South, for liberating capital from the constraints of states that had imposed a compromise between labor and capital, and between global capital and national elites, meant, in the context of international competition, bringing down wages-which meant, in turn, choking off the engine of effective demand that capital needed to reproduce itself.

As even as structural adjustment limited global demand, the neoliberal policies of opening up national markets and removing restrictions on the movement of investment and capital meant intensified competition for this limited global market. The so-called "core industries," such as automobile and steel, that had massive investments sunk in plant, machinery, and infrastructure were already burdened with excess capacity in the late eighties, yet they were forced to invest even more in global plant to take advantage of the so-called "economies of scale" to reduce their unit costs and thus cut back on their losses. The important thing became holding on or expanding market share in a stagnant global market.

Let us at this point return to China. Tremendous new capacity is being added in China, but it is not mean to fill expanded domestic purchasing power but to serve an already weakly growing global market where there is already tremendous overcapacity. The problem is that China's strategy of growth seems to be based less on increasing domestic demand than on dominating world markets. Moreover, US, European, and Japanese TNCs move to China, less to exploit a domestic market but to make it a global manufacturing base.

As one account notes, though China's population is 1.3 billion, 700 million-or over half-live in the countryside, earning an average of only $285 a year. These "minuscule wages have slowed China's transition to a consumption-driven economy along the lines of that of the US." Not surprisingly, as one analysis puts it, "China is producing so fast that it may be impossible for the population to absorb it all. Already there are price wars in industries like autos, mobile phone, and auto parts. Excess capacity first. Price wars next. Then a drop in investments. China's growth could slow sharply next year, damaging the mainland itself and neighboring countries increasingly dependent on China. And it could hurt manufacturers worldwide if those excess goods get exported." In cars, for instance, local and foreign manufacturers now have the capacity to produce 2.7 million cars, one million more than Chinese consumers are projected to absorb. And excess capacity could grow to 2.3 million cars by 2005.

Globalisation in Asia. A Balance Sheet

So far, we have advanced the following points regarding the process of globalisation in Asia.

First of all, it is not true that the impact of globalisation on Asia has been largely beneficial. Certainly, the experience of Korea, Indonesia, Thailand, Malaysia, and the Philippines, all of whom went through the cauldron of the Asian financial crisis and all of whom are now victims of the foreign-capital-intensive, low-wage, export-oriented strategy that they pioneered, suggests a more ambiguous outcome.

Second, the picture about China being a beneficiary of globalisation is too simple. Tremendous inequalities, among regions, among classes, between countryside and city, are driving forward the process of Chinese high-speed growth in directions that may result in greater, rather than less, instability, with all sorts of consequences for the rest of Asia and the world.
Third, we must also nuance the picture of China's growth serving as a stimulus to the global economy. In fact, since China's strategy and that of the TNC's is not to hitch investment and growth to significantly expanding local demand but to serve as the low-wage manufacturing base for the global market, massive investment in China is significantly adding to the global problem of overcapacity, stagnation, falling prices, and falling profits. China in my view is in fact less of a savior and more of a problem for the global economy.

Beyond Corporate-driven Globalisation

The picture we have drawn so far sees China as benefiting from corporate-driven globalisation only if it maintains its low-wage advantage. The same TNCs that once invested in Southeast Asia have moved to China and are prepared to move once more if China loses its competitive edge in labor costs. This may be difficult to imagine at this point, but it cannot be warded off indefinitely if one continues to be dependent on a low-wage, export-oriented, foreign-capital dependent strategy of development.

For Southeast Asia and China, the challenge is to adopt development strategies that do not make them hostages to the calculations of transnational firms. What could be the elements of such development strategies?

First of all, a key element is to base growth on the expansion of domestic demand rather than export markets. Instead of depressing wages, this would mean raising wages and moving towards greater equality in income distribution. This means both Southeast Asia and China must cease to be low-wage manufacturing bases but expanding markets stimulating domestic industry.

Second, neither Southeast Asia nor China can continue on the path of high-speed growth without continuing to incur the tremendous ecological devastation that has accompanied this strategy. Growth rates need to be significantly moderated, and this is only possible if there are policies that promote the equitable sharing of a more moderate expansion of the economy. A strategy of sustainable development would also put agriculture back into the center of the development process, which would mean moving away from the policies of liberalization and benign neglect that are currently dominant.

Third, if China has any key lesson for Southeast Asia, it is the importance of strong state leadership of the development process. 10 years of deregulation and privatization need to be reversed throughout the region. A state capable of disciplining foreign capital and using it to achieve national priorities is more essential than ever.

Fourth, for Southeast Asia, in light of the competition posed by China, the EU, and the United States at a global level, it is important to be serious about regional integration. To expect to survive as national economies without becoming part of a larger economic bloc coordinating policies in trade, finance, technology, investment, and development is becoming increasingly unrealistic in a world where big economic blocs become the key players. The Association of Southeast Asian Nations (ASEAN), in short, must become a reality, and this can only be done through a combination of political will and a democratization of the process of regional integration.

Fifth, moving towards domestic-market oriented sustainable development strategies will necessitate a more congenial system of world economic governance. The domination of institutions like the International Monetary Fund, World Bank, and World Trade Organization has been one of the major blocks to the adoption of alternative development strategies. Indeed, the IMF and the World Bank have been the strongest promoters of export-oriented manufacturing as strategy for development, while the World Trade Organization protects the north's technological monopoly and subsidized agriculture. A more pluralistic system of world economic governance-where the power the current central institutions is reduced and that of other actors, like the International Labor Organization (ILO) and the United Nations Conference on Trade and Development (UNCTAD), is increased-is necessary to create the space for developing countries or developing country blocs to adopt strategies of their choice.

Finally, it must be noted that South-South cooperation would be a tremendous step forward in the adoption and generalization of alternative development strategies. The recent formation of the Group of 20, the mainstays of which are Brazil, China, India, and South Africa, is, from this point of view, a very positive development. The G20 has broken up the EU-US monopoly on trade negotiations. But it has the potential to do much more in terms of transforming the system of global relations of economic power. With shared trade and investment strategies within a paradigm that focuses on the inclusion instead of exclusion of the vast millions of the developing world into the development process, the G20, working with the other developing countries, can play a key role in reversing the immiserizing effects of globalisation on most of the world's population.