Posts Tagged ‘capital’

The Separation of the ‘Economic’ and the ‘Political’ under Capitalism: ‘Capital-centric Marxism’ and the Capitalist State

‘The Iron Rolling Mill’ by Adolf Menzel

One of the central claims of Capital-centric Marxism is that capitalism is the first mode of production in human history whose social property relations are reproduced through market competition. Capitalism’s unique laws of motion/rules of reproduction—the law of value which compels producers to economize labor-time through productive specialization, labor-saving technical innovation and the accumulation of surplus-value—operates through the mechanism of price competition. Put simply, capitalism is reproduced through the “dull compulsion of the market place” rather than through varied forms of extra-economic coercion.

The capitalist state, from this perspective, is distinguished from all previous forms of political domination by its relative separation from the capitalist economy. The capitalist state constitutes what Heidi Gerstenberger has called a public sphere of “impersonal power;” while exploitation is privatized in individual units of production. In the words of Ellen Meiksins Wood in her seminal essay “The Separation of the ‘Economic’ and the ‘Political’ in Capitalism”:

To speak of the differentiation of the economic sphere…is not, of course, to suggest that the political dimension is somehow extraneous to capitalist relations of production. The political sphere in capitalism has a special character because the coercive power supporting capitalist exploitation is not wielded directly by the appropriator and is not based on the producer’s political or juridical subordination to an appropriating master. But a coercive power and a structure of domination remain essential… Absolute private property, the contractual relation that binds producer to appropriator, the process of commodity exchange—all these require legal forms, the coercive apparatus, the policing functions of the state.2

While the capitalist state provides the ‘general conditions of accumulation,’ it does not direct the distribution of labor-power and means of production within and between branches of production. Instead, it is the law of value operating through real market competition that insures the reproduction of this mode of production. The unique dynamism of capitalism—the constant development of the productive forces—and its crisis tendencies—falling profits as a result of the increasing mechanization of production—operate independently of the desires and goals of either individual capitalists or its “Executive Committee,” the capitalist state. Again, as Wood argued:

… the social functions of production and distribution, surplus extraction and appropriation, and the allocation of social labor are, so to speak, privatized and they are achieved by non-authoritative, non-political means. In other words, the social allocation of resources and labor does not, on the whole, take place by means of political direction, communal deliberation, heredity duty, custom, or religious obligation, but rather through the mechanisms of commodity exchange.3

Many critics of “Political Marxism” have labelled this approach a “Hayekian Marxism” that limits the “general conditions of production” to the provisions of certain infrastructure that individual capitalists cannot produce profitably. This perspective, it is argued, cannot account for the key features of the concrete history of capitalism. Specifically, Capital-centric Marxism cannot explain the role of the capitalist state in creating capitalist social property relations, the persistence of legally coerced labor under capitalism; or the growth of capitalist state economic intervention in the twentieth and twenty-first centuries. In this essay, we will attempt to sketch the barest outline of a Capital-centric account of the roots and limits of capitalist state policies that attempt to shape social relations and the course of accumulation. In this task, I draw not only on Marx’s Capital—the most important of Marx’s mature, scientific works—but on a variety of works in or close to the tradition of “Political Marxism.”

Michael Zmolek’s excellent new book, Rethinking the Industrial Revolution4, directly addresses, from an explicitly Capital-centric perspective, the role of the capitalist state in the creation and consolidation of capitalist social property relations in England. Brenner, Wood and others have been quite insistent that the operation of capitalist rules of reproduction—specialization, innovation and accumulation—cannot explain the origins of capitalist social property relations. Put simply, the process of ‘primitive accumulation’—the establishment of capitalist social relations of production—is not the result of the spread of markets or the development of the productive forces. Instead, it is the unintended consequences of attempts of pre-capitalist classes to reproduce themselves in periods of crisis that produce capitalism. In this process, the state plays a crucial role. Zmolek’s discussions of enclosures and the expropriation and sale of monastery lands in Tudor England give new historical depth and sophistication to Marx’s discussions in the section on “primitive accumulation” in Capital.

Zmolek’s discussion of the role of the post-1688 British capitalist state in the creation of an industrial working class is especially important. Marx was quite clear that the ‘dull compulsion’ of the market was not sufficient to discipline propertyless wage workers when capital had not yet conquered the labor-process. As long as capital’s subsumption of labor was formal and the actual labor-process was in the hands of skilled artisanal wage earners—legal-juridical forces was necessary to ensure the sale of labor-power and capital’s ability to command production. The majority of workers can be “dually free”—free from possession of objects and instruments of production; and free of non-market legal-juridical compulsion to labor—only when capital has achieved real subsumption of labor. Only when capitalists both face a mass of workers without non-market access to the means of production and are able to constantly reproduce a reserve army of labor through the mechanization of production, can capital effectively secure an adequate and reliable supply of labor power without legal and juridical restrictions on workers. Zmolek’s discussion of the central role of the British capitalist state in destroying artisanal wage workers’ resistance to the real subsumption of labor to capital again concretizes these insights.

Legally coerced wage labor also persists in capitalist agriculture, where the disjuncture between production and labor time5 makes non-market coercion necessary to secure adequate supplies of labor power during crucial periods like planting and harvesting. Legally coerced wage labor is also found in situations where capital has command of industrial labor-processes, but where workers are only partially separated from landed property. For example, in apartheid South Africa, workers were not “free” to enter or leave labor contracts at will.6 The specific forms of capitalist social property relations that emerged in the South African countryside and urban centers after the 1913 Natives’ Land Act—the partial separation of the African population from the means of production—necessitated this legal coercion. Africans were able to partially reproduce their labor-power outside of the wage-relation either in the “Reserve Areas” or on plots of land provided by capitalist farmers. This “partial proletarianization” required the “pass laws” that legally restricted geographic mobility of labor-power in order to ensure steady supplies of ‘cheap’ African labor power to capital.

Today, millions of non-market coerced wage workers—often mislabeled ‘slaves’—are compelled to sell their labor-power often for less than the cost of their reproduction, and are prevented from leaving employers to seek better wages and conditions. As David McNally and Susan Ferguson7 have argued, most of these workers are migratory workers who do not enjoy the legal rights/freedom of citizens. The extra-economic coercion they face is crucial to supplying inexpensive labor-power to labor-intensive sectors—sex-work, domestic servants, landscape workers, hotel cleaners, janitors, home construction, garment production, and certain branches of agriculture. Real capitalist accumulation and competition compels capitalists in labor-intensive industries to pay low wages—wages often below the costs of reproduction—in order to earn the average rate of profit.8 Legal coercion in the form of the denial of civil and political rights is often required to provide such “cheap” labor-power.

The reality of capitalist competition through the “artillery of fixed capital” also explain the role of the capitalist state historically in attempting to protect “infant” capitalist industries. Anwar Shaikh, in his seminal essay “Foreign Trade and the Law of Value,”9 has argued out those capitalist classes that entered the world market after the consolidation of industrial capitalism in Britain were faced with a dilemma. Whether in Germany, Italy, Japan or the US in the nineteenth century, or in the global South in the twenty and twenty-first centuries, “late industrializers” found they were unable to compete directly with the older, more capital-intensive producers. “Free trade” meant remaining exporters of agricultural goods, raw materials and low-end, labor-intensive manufactured goods. Only those ruling classes that succeeded in establishing protective tariffs and selective state subsidies for capital-intensive export industries succeeded in carving out a place for themselves in the capitalist world economy. As Vivek Chibber points out in Locked in Place: State-Building and Late Industrialization in India10, protective tariffs as part of “import substitution industrialization” programs were insufficient, allowing inefficient manufacturing in many parts of the global south to survive for decades. However, “export led industrialization” programs had a very different impact. When capitalist classes were ready and willing to compete globally, usually in social formations where the capitalist transformation of agriculture had created a competitive home market, forms of capitalist state intervention and protection were necessary preconditions for successful industrialization.

Finally, Joaquim Hirsch’s essay “The State Apparatus and Social Reproduction: Elements of a Theory of the Capitalist State”11 provides important insights into the roots and limits of capitalist state intervention in the advanced capitalist countries in the twentieth and twenty-first centuries. The state-derivation school, of which Hirsch was a prominent figure, shared with “Political Marxism” the goal of providing a Marxist analysis of the form of the capitalist state—of a “public power” separate from the private sphere of exploitation and accumulation. Like Wood, Hirsch rooted the separation of the political and economic in the specific social property relations and rules of reproduction of capitalism. The “state derivation” school also sought to counter various neo-Keynesian and neo-reformist arguments that capitalist state fiscal and monetary policy, combined with forms of ‘indicative planning’ and limited nationalizations, had finally created a crisis-free form of ‘managed’ or ‘state monopoly capital.’ Put another way, Hirsch’s arguments point to how the separation of the political and economic that characterizes capitalism essentially limits the capacity of capitalist state personnel to alter the rules of reproduction of capitalism through the construction of institutional frameworks—the Regulationists’ “regimes of accumulation”—to regulate the economy. Instead, it is the dynamics of accumulation, competition and profitability that place strict limits on the actions of capitalist state personnel, as we have seen time and again in the past forty years beginning with the Mitterand regime in France in the early 1980s through, most recently, the capitulation of Syrizia in Greece to the austerity agenda of the European Union.

Starting from an account of the separation of the political and economic that is essentially the same as that of Capital-centric Marxists, Hirsch concludes: 

… that the bourgeois state, by reason of its essential character [its formal separation from the economy—CP], cannot act as regulator of the social process of development, but must be understood in the determination of its concrete functions as a reaction to the fundamentally crisis-ridden course of the economic and social process of reproduction. The developing state interventionism represents a form in which the contradictions of capital can temporarily move; but the movement of capital remains historically determining… These can be condensed in terms of value theory in the law of the tendency of the rate of profit to fall, which also means that this law must be the conceptual point of departure for an analysis of state functions, to be developed out of the concrete course of capital accumulation and class conflict.12

Put simply, other than the extension of political rights to workers and the expansion of the welfare state which were temporary concessions to working class struggle that never undermined labor-market discipline, the logic of capitalist state economic policy is driven by attempts to mobilize the counter-tendencies to the falling rate of profit.13Whether the use of fiscal and monetary policy to stimulate demand, manipulate interest rates or provide tax subsidies to various capitals; incomes policies and restrictions on trade union rights; or the mechanisms of indicative planning and nationalization (usually of less productive capitals), capitalist state economic policies aim facilitate increasing the rate of surplus-value and destroying redundant capitals—without the collapse of accumulation that comes with crises.

The abandonment of Keynesian policies in the late 1970s and early 1980s reflected the limits of capitalist state policy and the necessity of periodic capitalist crises.14 Despite the massive expansion of ‘state intervention,’ capitalist state policies operated at a distance from accumulation and could not prevent a new crisis of profitability. The shift to neo-liberalism facilitated the revival of profitability and accumulation between 1982 and 2007 because it was effective in facilitating the increased exploitation of labor and the destruction of inefficient firms. However, neo-liberalism—like all other capitalist state policies—could not prevent a renewed crisis of profitability beginning in 2008. These crises are rooted in the operation capitalism’s most fundamental laws of motion/rules of reproduction—the operation of the law of value through specialization, innovation and accumulation under the whip of market competition—which are beyond the ability of capitalist state managers to effectively regulate.

Ultimately, the Capital-centric understanding of the place of the capitalist state in the ensemble of capitalist social property relations points to the need to radically disrupt the separation of the political and economic in order to transcend capitalism. Because capitalist state policies are ultimately limited by independent dynamics of profitability, the capitalist state institutions cannot be utilized in some instrumental fashion to abolish capitalism in some piece-meal manner, as strategies of “non-reformist reforms” argue. Instead, working people will have to confront the capitalist state and build their own organs of political and social power—which will abolish the separation of the political and economic—in order to build a new, democratic socialist order.


1 “The Bourgeois State Form Revisted,” in W. Bonefeld, et al. (eds.) Open Marxism, Volume I: Dialectics and History (London: Pluto Press, 1992); Impersonal Power: History and Theory of the Bourgeois State, (Chicago: Haymarket Books, 2009)

2 “The Separation of the ‘Economic’ and the ‘Political’ in Capitalism,” in Democracy Against Capitalism: Renewing Historical Materialism (New York: Cambridge University Press, 1995), pp. 29-30.

4Rethinking the Industrial Revolution: Five Centuries of Transition from Agrarian to Industrial Capitalism in England (Chicago: Haymarket Books, 2014).

5 Susan Archer Mann, Agrarian Capitalism in Theory and Practice (Chapel Hill, NC: University of North Carolina Press, 1990), Chapter Two.

6 This argument is detailed in Martin J. Murray and Charles Post, “The ‘Agrarian Question,’ Class Struggle and the Capitalist State in South Africa and the United States,” Insurgent Sociologist, Volume 11, Number 3 (Winter 1984).

7 “Precarious Migrants: Gender, Race and the Social Reproduction of a Global Working Class,” in L. Panitch and G. Albo (eds.), Socialist Register 2015: Transforming Classes (New York: Monthly Review Press, 2014).

8 Howard Botwinick, Persistent Inequalities: Wage Disparities under Capitalist Competition (Princeton, NJ: Princeton University Press, 1993.

10 (Princeton, NJ: Princeton University Press, 2003). See also “Development from Below,” Jacobin 19 (2015) []

11 In J. Holloway and S. Picciotto (eds.), State and Capital: A Marxist Debate (Austin, TX: University of Texas Press, 1978)

13 For a similar argument see G. McCormack and T. Workman, The Servant State: Overseeing Capital Accumulation in Canada (Blackwood, NS: Fernwood Press, 2015)

14 See David McNally, Global Slump: The Economics and Politics of Crisis and Resistance (Oakland, CA, PM Press, 2011) and Anwar Shaikh, “The First Great Depression of the 21st Century” in L. Panitch, G. Albo and V. Chibber (eds.), Socialist Register 2011: The Crisis This Time (New York: Monthly Review Press, 2010).



Capitalist Systems and Income Inequality

Similar levels of income inequality may coexist with completely different distributions of capital and labor incomes. This column introduces a new measure of compositional inequality, allowing the authors to distinguish between different capitalist societies. The analysis suggests that Latin America and India are rigid ‘class-based’ societies, whereas in most of Western European and North American economies (as well as in Japan and China), the split between capitalists and workers is less sharp and inequality is moderate or low. Nordic countries are ‘class-based’ yet fairly equal. Taiwan and Slovakia are closest to classless and low inequality societies. 

Similar levels of income inequality may be characterised by completely different distributions of capital and labour. People who belonged to the highest income decile in the US before WWII received mainly capital incomes, whereas in 2010 people in the highest decile earned both high labour and capital incomes (Piketty 2014). Yet the difference in their total income shares was small.   

Different distributions of capital and labour describe different economic systems. Two polar systems are particularly relevant. In classical capitalism – explicit in the writings of Ricardo (1994 [1817]) and Marx (1992 [1867], 1993 [1885]) ¬– a group of people receives incomes entirely from ownership of assets while another group’s income derives entirely from labour. The first group (capitalists) is generally small and rich; the latter (workers) is generally numerous and poor, or at best with middling income levels. The system is characterised by high income inequality. 

In today’s liberal capitalism, however, a significant percentage of people receive incomes from both capital and labour (Milanovic 2019). It is still true that the share of one’s income derived from capital increases as we move higher in the income distribution, but very often the rich have both high capital and high labour incomes. While inter-personal income inequality may still be high, inequality in composition of income is much less. 

The purpose of our study is to introduce a new way of looking at inequality that allows us to classify empirically different forms of capitalism. In addition to the usual inter-personal income inequality, we look at inequality in the factoral (capital or labour) composition of people’s incomes. The class analysis (where class is defined narrowly depending on the type of income one receives) is thus separated from the analysis of income inequality proper.    

Which countries around the world are closer to classical, and which to liberal capitalism? Does classical capitalism display higher inter-personal income inequality than liberal capitalism? Can we find what we term ‘homoploutic’ societies – where everyone has approximately the same shares of capital and labour income? Would such homoploutic societies display high or low levels of income inequality?   

To answer these questions, in Ranaldi and Milanovic (2020) we adopt a new statistic, recently developed by Ranaldi (2020), to estimate compositional inequality of incomes: the income-factor concentration (IFC) index. The income-factor concentration index is at the maximum when individuals at the top and at the bottom of the total income distribution earn two different types of income, and minimal when each individual has the same shares of capital and labour income. When the income-factor concentration index is close to one (maximal value), compositional inequality is high, and a society can be associated to classical capitalism. When the index is close to zero, compositional inequality is low and a society can be seen as homoploutic capitalism. Liberal capitalism would lie in-between. Negative values of the income-factor concentration index, which describe societies with poor capitalists and rich workers, are unlikely to be found in practice.

By applying this methodology to 47 countries with micro data provided by Luxembourg Income Study from Europe, North America, Oceania, Asia, and Latin America in the last 25 years and covering approximately the 80% of world output, three main empirical findings emerge.   

First, classical capitalism tends to be associated with higher income inequality than liberal capitalism (see Figure 1). Although this relationship was implicit in the minds of classical authors like Ricardo and Marx, as well as in recent studies of pre-WWI inequality in countries that are thought to have had strong class divisions (Bartels et al. 2020, Gómes Léon and de Jong 2018), it was never tested empirically.

Note: The graph shows on the horizontal axis compositional inequality and on the vertical axis the standard measure of inter-personal income inequality (Gini coefficient). Nordic countries (Finland, Sweden, Norway and Denmark) are marked in red.

Second, three major clusters emerge at the global scale. The first cluster is the one of advanced economies, which includes Western Europe, North America, and Oceania. Relatively low to moderate levels of both income and compositional inequality characterize this cluster. The US and Israel stand somewhat apart from the core countries since they display higher inequality in both dimensions. 

Latin American countries represent the second cluster, and are, on average, characterised by high levels in both inequality dimensions. 

The third cluster is composed of Nordic countries and is exceptional insofar as it combines low levels of income inequality with high compositional inequality. This is not entirely surprising: Nordic countries are known to combine wage compressions with ‘socially acceptable’ high returns to capital (Moene and Wallerstein 2003, Moene 2016). Such compromise between capital and labour (reached in the early 1930s) has put a cap on earning inequality within the region (Fochesato and Bowles 2015) but has left wealth inequality untouched (Davies et al. 2012). By drastically reducing the progressivity of capital income taxation (Iacono and Palagi 2020), income tax reforms during the 1990s have worked in the same direction.

Several other results are found. Many Eastern European countries are close to the Nordic cluster. Some (Lithuania and Romania) have very high compositional inequality, likely the product of concentrated privatisation of state assets. India is very similar to the Latin American cluster, displaying a class-based structure with high levels of income inequality.

Taiwan and Slovakia are, instead, the most ‘classless’ societies of all. They combine very low levels of income and compositional inequality. This makes them ‘inequality-resistant’ to the increase in the capital share of income. In other words, if capital share continues to rise due to further automation and robotics (Baldwin 2019, Marin 2014), it will not push inter-personal inequality up:  everybody’s income would increase by the same percentage. The link between the functional and personal income distribution in such societies is weak – the topic of a previous VoxEU column by Milanovic (2017b). It is also interesting that Taiwan is both more ‘classless’ and less unequal than China.

The third, and perhaps most striking result that emerges from our analysis is that no one country in our sample occupies the north-west part of the diagram. We find no evidence of countries combining low levels of compositional inequality (like those of Taiwan and Slovakia) with extremely high levels of income inequality (like in Latin America). 

To conclude, we propose a novel taxonomy of varieties of capitalism on the basis of the two inequality dimensions (Table 1). We believe such taxonomy brings a strong empirical and distributional focus into the literature on the varieties of capitalism, as well as a larger geographical coverage.

Table 1. Nomenclature of capitalism


Baldwin, R (2019), The Globotics Upheaval: Globalization, Robotics and the Future of Work, Princeton University Press.

Bartels, C, F Kersting and N Wolf (2020), “Testing Marx: Inequality, Concentration and Political Polarization in late 19th Century Germany”, German Institute for Economic Research.

Davies, J, R Lluberas and A Shorrocks (2012), Credit Suisse Global Wealth Report 2012.

Fochesato, M and S Bowles (2015), “Nordic exceptionalism? Social democratic egalitarianism in world-historic perspective”, Journal of Public Economics 127: 30-44.

Gómes Léon, M and H J de Jong (2018), “Inequality in turbulent times: income distribution in Germany and Britain, 1900–50”, Economic History Review. 

Iacono, R and E Palagi (2020), “Still the Lands of Equality? On the Heterogeneity of Individual Factor Income Shares in the Nordics”, LIS working papers series 791.

Marin, D (2014), “Globalization and the Rise of the Robots”,, 15 November.

Marx, K (1992 [1867]), Capital: A Critique of Political Economy 1, translated by B Fowkes, London: Penguin Classics. 

Marx, K (1993 [1885]), Capital: A Critique of Political Economy 3, translated by D Fernbach, London: Penguin Classics.

Milanovic, B (2017a), “Increasing Capital Income Share and its Effect on Personal Income Inequality”, in H Boushey, J Bradford DeLong and M Steinbaum (eds) After Piketty. The Agenda for Economics and Inequality. Cambridge, MA: Harvard University Press. 

Milanovic, B (2017b), “Rising Capital Share and Transmission Into Higher Interpersonal Inequality”,, 16 May. 

Milanovic, B (2019), Capitalism, Alone, Cambridge MA: Harvard University Press.

Moene, K O and M Wallerstein (2003), “Social democracy as a development strategy”, Department of Economics, University of Oslo 35/2003.

Moene, K O (2016), “The Social Upper Class under Social Democracy”, Nordic Economic Policy Review 2: 245–261.

Ricardo, D (2004 [1817]), The Principles of Political Economy and Taxation, London: Dover publications.  

Ranaldi, M (2020), “Income Composition Inequality”, Stone Center Working Paper Series 7.

Ranaldi, M and B Milanovic (2020), “Capitalist Systems and Income Inequality”, Stone Center Working Paper Series 25.

Piketty, T (2014), Capital in the Twenty-First Century, translate by A Goldhammer, Cambridge, MA: Harvard University Press.


How Financial Inclusion is Driving Fairer Growth in Emerging Markets?

Rising global inequality is one of the biggest social and economic challenges of the 21st Century—a problem further exacerbated by the COVID-19 pandemic. While inequality is a global issue, it is often more pointedly felt in emerging countries, as they tend to have a large informal sector, greater regional divides, wider gaps in access to education, and more significant barriers to employment for women. Financial inclusion is often seen as an important factor in bridging these divides, while also supporting better economic and social outcomes.

This article discusses how financial inclusion supports fairer development in emerging countries, highlights some leading examples, and outlines how the investment landscape may evolve over time. Financial inclusion is becoming a key priority for governments, and will therefore likely increasingly matter to businesses and investors. The integration of finance with technology is helping accelerate financial inclusion, creating compelling investment opportunities within fast-growing economies.

Financial Inclusion at a Glance

Financial inclusion is the process of providing suitable financial services to the “unbanked” (individuals or businesses) in an affordable, sustainable, and ethical way. This can involve access to traditional credit through banking and insurance products, but also saving mechanisms for healthcare or education and even investment products, allowing citizens to benefit further from the rapid growth of their economies.

It has been shown that increasing financial inclusion can drive economic development, possibly increase GDP by up to 14% in EM and a staggering 30%1 in frontier economies. According to World Bank studies, globally around 1.7 billion people, or 31% of the adult population, lack access to financial services.2 Half of this unbanked population live in Asia, 25% in Africa, and 10% in Latin America. A significant portion of these unbanked groups are women. Therefore, improved financial inclusion can also lead to greater gender equality.

Financial inclusion is a key enabler of the UN Sustainable Development Goals (SDGs), which will be a key driver of reducing poverty and enhancing shared global economic prosperity. This is important to investors as economic growth is a fundamental long-term driver of corporate revenues and earnings, which supports asset prices. Financial inclusion’s importance is illustrated by being a target in no less than seven of the 17 goals (Exhibit 1).

Exhibit 1: Financial Inclusion is Closely Linked to Several UN SDGs

For example, through better access to financial services such as bank accounts and insurance products, citizens in emerging countries can come out of poverty (enabling SDG 1). Access to funds and insurance also helps people working agriculture to better manage their finances, achieve higher yields, and thereby increase food security (SDG 2 and SDG 3). Financial inclusion means people can invest in their children’s education (SDG 4) and improved female empowerment can address gender equality (SDG 5). These five SDGs feed into the wider socio-economic goals such as shared economic growth (SDG 8) and innovation and sustainable industrialisation (SDG 9).

Regulators are also prioritizing financial inclusion, given the link to economic growth. Over 60 countries have made commitments to financial inclusion, and more than 50 have launched or developed a national financial inclusion strategy. digitization and electronic transactions have helped fuel an increase in financial inclusion rates. Some of the leading examples of rapid financial inclusion have been within India and Kenya, where access to accounts has grown rapidly in last decade (Exhibit 2). However, there still remains a wide disparity between countries (Exhibit 3).

Exhibit 2: The Growth of Financial Inclusion in Emerging Markets
Exhibit 3: The Proportion of “Unbanked” Citizens Remains High in Some Developing Countries

How Tech and Digitization Is Driving Financial Inclusion

The growing importance of financial inclusion provides a structural opportunity for financial institutions and businesses, with some already capitalising on this shift. Small and mid-sized enterprises (SMEs) play a central role in financial inclusion as they represent about 90% of business and more than 50% of employment worldwide.3 Formal SMEs, which tend to be more structured businesses with contracted employees, salaries and other employment benefits, contribute up to 40% of GDP in EM, and this figure is even larger when more informal businesses are included. However, nearly half of the SMEs in developing countries face challenges in obtaining finance, representing a $5.2 trillion unmet annual financing need.4 This compares to a favourable 15% of SMEs in high-income countries. The low EM penetration rate highlights how providing financial services to segments that lack financing can be a huge structural growth opportunity for businesses.

Traditional banking rarely allows money to reach lower market segments (such as micro credit and SME) for cost and/or efficiency reasons, necessitating the need for new business models. The rapid evolution of fintech, digital, and mobile banking is accelerating the rate of financial inclusion by raising efficiency, lowering transaction costs, and expanding outreach to new clients and markets. This digital evolution, which has sharply increased during the pandemic, is disrupting high cost of customer acquisition/interactions, credit assessment, and credit underwriting. It is also enhancing cross selling of products and accelerating growth.

Leading Country Case Studies

India – Powerful Public and Private Partnerships

One of the fastest-growing markets for financial inclusion is India, driven by government initiatives as well as public-private partnerships. Examples include the PM Jan Dhan Yojana scheme (PMJDY), priority sector lending directives to all financial institutions, as well as the government’s Unified Payments Interface (UPI) platform.

Under the JD scheme, Indians were given the facility to open a Jan Dhan bank account using the Adhar biometric ID system. This, together with a fast-growing mobile usage, has accelerated digital adoption. As a result, 424 million Indian citizens have been served by PMJDY as of May 2021, including 234 million female customers. The scheme has also increased the number of banking outlets in rural Indian villages from 67,694 in March 2010 to nearly 13 million by the end of 2020.5 The establishment of the UPI, an instant real-time payment system, has also increased usage of cashless payments, with major telecom players helping drive adoption.

Kenya – Pioneering Mobile Banking Success

Kenya stands out as a success story for financial inclusion due to its early adoption of mobile banking and the fintech revolution. This has led to a very high percentage of the population having access to a bank account relative to peer countries. Much of this achievement is due to the mobile banking M-Pesa system, started by Safaricom and Vodafone. Leveraging the network of telecom subscribers, it allows mobile payments, and provides banking access to the rural population where bank branches would be too expensive to operate.

Mobile money transactions are now well established in Kenya, accounting for a staggering 44% of GDP in 2019.6 Financial institutions such as Equity Bank have successfully used the mobile and agency banking model to expand access to banking services much more quickly and efficiently than through traditional banks. The socioeconomic impact of mobile banking has been significant in Kenya. It is estimated that M-Pesa alone has lifted 2% of the Kenyan household out of poverty.7

China – Accelerating Digital Payments and E-commerce

The SARS epidemic in 2003 changed consumer behaviour towards e-commerce and accelerated the launch of e-commerce and digital payments in China. Alibaba launched Taobao that year, its first e-commerce website, and soon after created Alipay to help online payments acceleration. also started selling products online in 2003.8 This shift, supported by a robust identification system and internet infrastructure, has resulted in lasting online payments adoption, with China now the leader in digital wallets and digital payments. The COVID-19 pandemic has further accelerated the rise in digital payments transactions in China and globally. This trend will likely be supported further by the adoption of digital currencies.

Brazil – Frontline in Fintech Innovation

Brazil is becoming a hub for fintech and digital innovation which should accelerate financial inclusion, especially as the fintech disrupters are focusing on mass market and SME lending targeting the approximately 55 million of Brazil’s 213 million population which remains unbanked. Although Brazil has one of the highest numbers of fintech start-ups, the companies with payment offerings as well as credit track record tools are fast becoming the more successful financial inclusion businesses. Some traditional banking groups are also embracing digitisation, helping to drive further financial inclusion. Liberal banking regulations and the launch of PIX, an instant payment platform offered by the Central Bank of Brazil, have also increased digital adoption. This should make the market more competitive and services more affordable for customers.

Mexico – Bridging the Gender Finance Gap

Mexico has some of the lowest financial penetration rates in GDP per capita and HDI (Human Development Index) terms, especially with respect to women. At its level of development, financial inclusion for women should be much higher than the current 33% level.9

One company really driving financial inclusion in Mexico is Gentera, which is the country’s largest microfinance institution (MFI), serving clients at the bottom of the socioeconomic pyramid. Focusing on group lending for women through its Crédito Mujer service, the company has built a client base which is 89% female and accounts for 16% of all female borrowing in Mexico. A key driver of its success has been the group-lending model and ability to maintain low default rates, despite income variability and the lack of credit history, using group/community guarantees. Gentera also contributed to social impact during the challenges created by COVID-19 by providing services to clients while simultaneously suspending interest payments.

How We See the Investment Landscape Evolving

Financial inclusion is not just a sustainability trend, it is also structural growth opportunity for businesses and investors. Traditional financial inclusion models have largely focused on micro-lending of cash loans to either support working capital needs or bridge consumption needs. However, limited micro credit models are increasingly being challenged.

A significant amount of evidence suggests that low income households need access to much wider range of financial services to generate income, build assets, smooth consumption, and manage risks. These include products such as savings, insurance and healthcare, transfer payments, and pension etc, not just access to credit. The businesses carving out large market presences in these areas, while adopting digitisation, are likely to enjoy higher growth, and for longer, as developing economies benefit from global technological advances.

We believe fintech has begun to take over where traditional banks have not managed to service significant segments of the population or SMEs, and this is where we are seeing exciting opportunities. Financial inclusion opportunities are greatest in markets that embrace and support technological innovations and effectively regulate the segment, as illustrated in in Kenya, Brazil, and India.

Overall, we see financial inclusion being a key priority for the UN SDGs and governments, which in turn should drive business agenda and investor interest. With COVID-19 exposing and worsening social inequalities between nations and within societies, the importance of supporting financial inclusion has never been more of a priority for building a stronger and more inclusive global economy.


1 Source: EY (2018). Retrieved from
2 Source: World Bank (2017). Retrieved from
3 Source: UN (2020). Retrieved from
4 Source: World Bank. Retrieved from
5 Source: Reserve Bank of India (2020)
6 Source: Central Bank of Kenya (2019)
7 Source: MIT News (2016). Retrieved from
8 Source: World Economic Forum (2020). Retrieved from
9 Source: GIWPS (2019). Retrieved from


A Sudden Topicality

February 28, 2022 Leave a comment
A sudden topicality Marx, Nietzsche and the politics of crisis

Karl Marx was a thinker of crisis. But in what sense was he a theorist of crisis? In what sense did he propound something that might legitimately be called a ‘crisis theory’?*The question may seem an odd one. After all, although there is no one text by Marx specifically dedicated to the topic, it is generally held to be pervasive throughout his economic and political writings from the late 1840s onwards; indeed, to constitute their very rationale – the energizing demonstration of the necessity of social change, via the demonstration of the tendency to crisis inherent in the capitalist mode of production itself. Marxists have long debated the meaning and significance of the ‘crisis theory’ contained in Marx’s passages on this topic – in particular, the question of whether or not it constitutes a theory of breakdown or collapse (Zusammenbruch). This question was at the heart of the revisionist controversies around the time of the First War World, for example, in which both Rosa Luxemburg (The Accumulation of Capital, 1913) and, later, Henryk Grossman (The Law of Accumulation and Breakdown of the Capitalist System, 1929) upheld the theory of breakdown against what were held to be ‘revisionist’ positions.

The revival of Marxist theory in Western Europe in the 1960s and 1970s brought a corresponding revival of interest in crisis theory. Numerous new books and articles were published on the topic, with titles like (from the anglophone literature) ‘The Marxian Theory of Crises, Capital and the State’ (David Yaffe, 1972), Capitalism and Crisis (Walton and Gamble, 1976), United States Capitalism in Crisis (Union of Radical Political Economists, 1978) and Economic Crisis and Crisis Theory (Paul Mattick, 1981), leading up to Simon Clarke’s synthetic Marx’s Theory of Crisis (1993).1 In the last two years the genre has been revived once again. In the UK, the 2007 Isaac and Tamara Deutscher Memorial Prize (the only significant English-language book prize for a work of historical materialism) went to Rick Kuhn’s Henryk Grossman and the Recovery of Marxism. The most recent book by the 2004 winner of the prize, Michael Lebowitz, returns to his work on crisis theory from over twenty years ago. And the journal at the centre of the revival of Marxist Studies in the anglophone academy, Historical Materialism (founded in 1992), has carried various articles and a symposium theorizing the current global financial crisis in terms of Marx’s theory of crisis. [2] To each crisis, we might say, its own revival of Marx’s ‘theory of crisis’.

This alone should give us pause for thought. (I still recall the manner in which, at the Socialist Movement conference in Chesterfield in the north of England on Monday 19 October 1987, the day of what is still the largest one-day stock market crash in history – the Dow dropped over 22 per cent, in a crash unconnected to a general crisis – by the early afternoon, the Trotskyist economists associated with the then recently abolished Greater London Council publicly announced the arrival of the long-awaited collapse of the capitalist system.) Just as Marx saw periodic crises as ‘bringing to the surface’ the underlying ‘barrier’ (Schranke) to the development of the productive forces inherent within the capitalist mode of production, [3] so economic crises also bring to the surface a desire to displace the politics of social transformation onto economic events. In this respect, one might say: periodic economic crises are windows onto the permanent crisis of Marxist political thought.

In counter-position to this recurring dependence of a politics of fundamental social transformation upon periodic economic crises, Antonio Negri has argued that the problem with the Marxian analytic of subsumed labour is that it ‘exclude[s] social labour* This is the text of a talk to ‘Los Pensadores de la Crisis Contemporanea: Marx, Weber, Keynes, Schmit ’, Universidad Internacional Menéndez Pelayo, Valencia, 2–4 December 2009, organized by José Luis Vil acañas Berlanga, Alberto Moreiras and Étienne Balibar.power as the potentiality for crisis’, neglecting ‘the antagonism that the plural substantial times of subjects oppose to the analytic of command’. [4] Negri thereby posits the possibility of a purely political kind of capitalist crisis. Yet such a purely political antagonism has shown no signs of generating a crisis for the capitalist order. (The ontologization of politics appears here as a symptom of the crisis of political thought, rather than its solution.) Negri’s accompanying declaration that, ‘synonymous with real subsumption’, crisis is now ‘simultaneous and stable’, indeed ‘consubstantial with the current phase of capitalist development’, redefines out of existence the politically crucial aspect of the traditional idea of crisis: namely, the conception of crisis as a decisive turning point in a process, a point at which a decision must be made. (But by whom or what?) Marx himself famously insisted, against Adam Smith: ‘Permanent crises do not exist.’ [5] It is the tendency towards and potentiality for crisis that is permanent, not the crisis itself.

Crises of Accumulation, Crisis of Capitalism?

The doubt as to whether Marx should be thought of a crisis theorist – as opposed to a ‘thinker’ of crisis in some more general, yet-to-be-determined sense – stems from the disjunction between the all pervasive, general-historical character of the concept of crisis in its modern form (including the historicopolitical notion of a crisis of the capitalist system as a whole, as a condition of a transition to a new mode of production – a notion which clearly motivated Marx), on the one hand, and the restrictedly conjunctural character and relatively narrow political-economic basis of Marx’s so-called ‘theory of crisis’, as a theory of periodic crises or cycles within capitalism, on the other. For Marx, economic crises within capitalism are normal stages in the conjunctural cycle or spiral of expanded reproduction. Textually, what is thought of as the theory of such crises is primarily to be found in Part 3 of Volume 3 of Capital – put together by Engels from Marx’s notes and published in 1894 as ‘The Law of the Tendency of the Rate of Profit to Fall’ (especially chapter 15, ‘Exposition of the Internal Contradictions of the Law’) – along with some passages in the Grundrisse (in ‘The Chapter on Capital’) and Theories of Surplus Value (especially chapter 17), which describe ‘overproduction’ as ‘the fundamental contradiction of developed capital’ and ‘the basic phenomenon in crises’, respectively. [6] In so far as there is a general theory of capitalist crisis here, it is threefold. 1. Crises are modes of appearance of structural contradictions within the process of capitalist production – they bring contradictions ‘to the surface’, as Marx says. 2. Crises are means for the temporary solution, and hence new forms of mediation, of such contradictions, which restore the conditions for accumulation. 3. The restoration of conditions for accumulation is at the same time the renewal of the terms of the contradictions within the system that gave rise to the crisis in the first place.

Hence the ‘periodic’ or ‘cyclical’ character of such crises, taking the developmental form of a spiral. As Marx put it in Capital:From time to time [periodisch] the conflict of antagonistic agencies finds vent in crises. The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions that for a time [den Augenblick] restore the disturbed equilibrium. [7] The mechanism of the capitalist production process itself removes the very obstacles it temporarily creates. [8] Capitalist production seeks continual y to overcome these immanent barriers, but overcomes them only by means which again place these barriers in its way and on a more formidable scale. [9]

Debate has focused on whether crisis tendencies can always, in principle, be countered by what Marx called ‘counteracting tendencies’ (widerstrebende Tendenzen[10] and, we must add, crucially, their political management (the Keynesian moment – a crucial aspect of the process that is no longer part of ‘the capitalist production process itself’) or whether the barriers to the development of productive forces that are involved represent some kind of cumulative ultimate limit to capital accumulation, since, in Marx’s famous words in Chapter 15 of CapitalVolume 3: ‘The true barrier [Die wahre Schranke] to capitalist production is capital itself.’ [11] As David Harvey has recently pointed out: ‘How to understand crisis formation remains … by far the most contentious issue in Marxian political economy.’ [12] There are a number of theoretical difficulties here.

First, Marx’s recurring discussions of the ‘immanent barriers’ to capital accumulation determine limits purely formally, in comparison with hypothetically ‘unfettered’ production at the same level of development of the productive forces. There is no sense that a subsequent mode of production might impose its own, different kind of limits to production. ‘Limit’ here is thus the negative or reverse side of a productivist utopianism (to be distinguished from its use by Marx in the sense of those ‘limits of variation’ that define the field of operation of his concept of law). [13] Second, although Marx often uses the terms synonymously, [14] a ‘barrier’ (Schranke) is not quite the same thing as a ‘limit’ (Grenze), in that a barrier (unlike a certain conception of limit) can always in principle be overcome.

Furthermore, the existence of certain inherent limits (relative to formal possibility) is not in itself a barrier to infinite expansion. There is no contradiction in the idea of an infinite expansion within limits. Taken in the context of the multiplicity of tendencies counteracting breakdown or collapse, there are thus scant purely theoretical grounds for believing in its necessity. As Marx put it: ‘[The] process would soon entail the breakdown of capitalist production, if counteracting tendencies were not constantly at work.’ [15] However, whatever position one takes in this debate, the literature on Marx on crisis, from Maksakovsky’s 1928 The Capitalist Cycle to Lebowitz’s 2008 Following Marx[16] is agreed on one thing: in so far as Marx has a ‘theory’ of crisis, it is a critical political economic theory of crises in capitalist production. In so far as ‘crisis’ has a political meaning for Marx, though, it is in its relation to the broader historical process of a transition to a new, non-capitalist mode of production (‘social revolution’). In this respect, ‘crisis theory’ is necessarily inadequate to the thinking of crisis required, even if one were to believe that it establishes the inevitability of ‘breakdown’ (which I do not; which is not to say that such a breakdown might not come about – in which case, socialism remains far less likely an outcome than barbarism). Analysis of the historical process demands not merely an account of fundamental contradictions and their expression in conflicts and crises, but an account of crisis as a condition of possibility of the new, in this case the qualitatively historically new: new forms of social production, new relations of production and forms of organization. Crisis ‘theory’ is thus in principle inadequate to thinking the historico-political meaning of crises – and this includes Marx’s own account (or ‘theory’) of capitalist crises, however central to such a thinking it might be.

Hence my reluctance to think of Marx as a crisis ‘theorist’, with respect to the politics of crises, which was his ultimate concern.

It is a failure to adhere to the disjunction between forms of analysis here (historical development of the mode of production beyond its own limits, on the one hand, and political economy of capital, on the other) that generates the quasi-theological notion of a ‘final’ crisis of the capitalist system, as a whole, as some kind of event, rather than a process with a duration of many decades, if not centuries, appropriate to the idea of a ‘social’ rather than a merely ‘political’ revolution. And it is this notion that lies behind the substitution of a theory of breakdown for a (generational) politics of transformation. Nonetheless, the political significance of the concept of crisis motivating Marxist debates depends upon some projected articulation of these two levels, some conjunctural political effectivity at the level of the mode of production, in response to ‘periodic’ crisisIt is the assumption of such an articulation that has led, historically, to charges of ‘economism’ and ‘determinism’ being laid against Marx’s work, despite the fact that the projected mechanism of articulation is, precisely, not economic but political – namely ‘struggles’ directed towards the reappropriation of the collective powers of social labour. This is a ‘mechanism’, if one may continue to call it that – a mechanism for the transformation of conjunctural crisis into structural change – which falls outside the ‘theory’ of crisis as such. Rather, as Balibar argued back in the 1960s: ‘The analysis of the transformation of the limits … requires [minimally, we might add – PO] a theory of the different times of the economic structure and of the class struggle, and of their articulation in the social structure.’ [17] It is the current near-total absence of the social conditions for such a politics of reappropriation, of course, that has reduced the politics of crisis to that of the state’s management of the interests of ‘capital in general’, in antagonism with those of particular capitals (currently, mainly banking capital) – making crisis almost exclusively an intra-capitalist affair. Hence the current debates regarding the extent to which certain financial instruments, such as credit derivatives, threaten the ongoing expanded reproduction of the system, in a structural manner, and the extent to which what we are seeing is simply another periodic crisis in the spiral of expanded reproduction, in which capital has run up against a barrier of its own making, and thereby set itself the task of overcoming it, as the condition of a new cycle of accumulation. There is no reason, in principle, to believe that it cannot achieve this task, with the coordinated help of the major capitalist states; albeit at considerable cost to the lives of working populations.

At the outset, then, we can discern basic temporal distinctions between the way the concept of crisis functions at three levels: (1) the longue durée of history (transition between modes of production), (2) the theory of crisis as part of the political economy of capitalism (the theory of ‘the cycle’), and (3) actual, concrete conjunctures, such as the current ‘global financial crisis’, as it is called. In fact, this crisis is arguably more of a crisis of the money-form of capital (of the radical diversification and speculative intensification of forms of ‘money’) set off, in part, by the unforeseen consequences of various technical alternatives to the perceived unreliability of the US dollar as a store of value. [18] Any account of crisis adequate to Marx’s political desire – which was constituted at the level of history – would involve, minimally, the articulation of these three temporalities. [19]

However, maintaining these distinctions between levels and hence objects of analysis, and further investigating the concept of crisis in its fundamental political meaning at the level of its greatest historical generality, was not the way the literature on ‘crisis theory’ responded to the supposed economism of the traditional Marxist version. Rather, especially since the 1970s, the response has been what one might call a Weberian methodological turn in crisis theory toward a pluralization of types of crisis, not just within political economy (most notably, James O’Connor’s 1973 The Fiscal Crisis of the State20), but societally.

Jürgen Habermas’s Legitimation Crisis (also 1973) was an important text in this regard, with its multiple classifications of types of crisis, setting out from the distinction between system and lifeworld, and moving on to distinguish economic crisis, rationality crisis, legitimation crisis and motivation crisis. [21] In his 1987 survey, The Meaning of Crisis (a book that singularly fails to discuss, precisely, the question of meaning), O’Connor synthesizes such approaches via further generic distinctions between economic crisis, social crisis, political crisis and personality crisis. [22] This kind of typologizing particularization takes the meaning of crisis for granted and simply seeks instances of it, empirically, in a largely descriptive manner.

But what of the generality and fundamentally historical character of the concept of crisis? At this point, it is useful to take a brief digression via Koselleck’s historical semantics, in order to remind ourselves of the kind of concept that crisis is. I shall draw on three texts here: Koselleck’s 1959 Critique and Crisis: Enlightenment and the Pathogenesis of Modern Society, his 1982 entry for ‘Crisis’ in the 8-volume Geschichtliche Grundbegriffe/Basic Concepts in History, and the more recent essay ‘Some Questions Regarding the Conceptual History of “Crisis”’, into which the results of the latter are condensed. [23]

Historical-Semantic Digression: Koselleck

It is the virtue of Koselleck’s semantic history to have shown how in its contemporary, all-pervasive lifeworld sense, the concept of crisis dates specifically from Europe in the eighteenth century, as one of a set of categories constitutive of the emerging discourse of the philosophy of history – including, crucially, both progress and revolution, in its modern historicalpolitical meaning. On Koselleck’s account in Critique and Crisis, the Enlightenment concept of critique, which developed within the terms of the absolutist state, transformed ‘history’ into a utopian philosophical concept, by virtue of the dislocation of the subjects of critique (the Illuminati) from any possible political action, within the constraints of absolutism. For Koselleck, all philosophy of history is thus constitutively Utopian. [24] The critical process of enlightenment is thereby seen to have ‘conjured up’ a historical concept of crisis by virtue of the alienation of criticism from history. History presents itself as crisis because it demands a decision or an intervention that the critical subjects in question (the Illuminati) lacked the means to undertake. In this respect, the inherited etymological meaning of crisis as something that ‘presses for a decision’, and an intervention, becomes transferred onto – and is made in the name of – the philosophical concept of history itself. Or to put it another way (which Koselleck himself does not): crisis is constituted as a historical category according to a structure of thought within which it is speculatively political (that is, it has a political meaning) but is nonetheless, in any particular instance, political y irresolvable (that is, is not amenable to political action). The historical concept of crisis thus registers an aporia in the historical concept of politics. In other words, what I earlier called ‘the crisis of Marxist political thought’ runs far deeper than Marx’s work, down to the bedrock of all philosophic historical concepts of political practice.

In the eighteenth century, the concepts of ‘progress’ and ‘revolution’ offered alternative resolutions to this sense of history as crisis, within the terms of Enlightenment philosophy of history. It is the historical and philosophical failure of these two alternatives that now turns ‘crisis’ back onto the philosophical concept of history and the aporia of politics out of which it emerged; albeit only for so long as any particular crisis lasts. As Koselleck put it:

It is in the nature of crises that problems crying out for solution go unresolved. And it is also in the nature of crises that the solution, that which the future holds in store, is not predictable. The uncertainty of a critical situation contains one certainty only – its end. The only unknown quantity is when and how.

The eventual solution is uncertain, but the end of the crisis, a change in the existing situation – threatening, feared and eagerly anticipated – is not. [25]

In being extended to history, the concept of crisis is thus objectivized in a manner that goes beyond both knowledge of it and any possible practice. This perhaps explains why, as Koselleck notes, the terms ‘criticism’ and ‘crisis’ appear to be mutually exclusive in polemical use. [26]

Historically, in the course of the seventeenth and eighteenth centuries, what was originally a single Greek concept fractured into the separate ‘subjective’ and ‘objective’ components of ‘criticism’ and ‘crisis’, respectively. The indeterminacy associated with the notion of ‘crisis’ is the result of the projection of the etymological core of the term (from the Greek krinõ, meaning to cut, to select, to decide, to judge – a root it shares with the term ‘criticism’) beyond its original jurisprudential context of a situation calling for a decision (in which a decision could, indeed had to, be made), into a situation in which a decision cannot be made, because (at least on Koselleck’s account of the politics of the Enlightenment) there is no possible appropriate subject. This is an account that projects the political consequences of the underdevelopment of Prussia in the eighteenth century into the heart of the concept of Enlightenment itself.

It was the restriction of the term ‘crisis’ to a medical use in medieval Latin (based on the ancient usage in Hippocrates and Galen) – whereby it denoted the crucial, or ‘critical’, life-or-death stage in the development of a disease, at which point a decision had to be made – that introduced a distinctive existential tension into the term; while it was the apocalyptic element of its theological usage – which extended the legal context to judgement before God – that prepared the ground for its extension to history as a whole. [27] Political thought thereby became, via the concept of crisis, the diagnosis of history. Yet, for Koselleck at least, there is no doctor to intervene:

the question of the historical future is inherent in the concept of crisis only as a problem, or horizon, never as a solution.

Marx’s innovation in the discourse of crisis was to posit a solution immanent to the conditions of the crisis itself – for him, initially, the world-historical role of the proletariat, and, subsequently, the collective worker. It is not possible here to address the notorious, ongoing question of the ‘blocked’ historical role of such political subjects in fundamental social – that is, historical – change, except in the briefest and broadest of ways.

Its parameters have changed significantly since Marx’s and Koselleck’s days, both empirically and theoretically (especially with regard to the concept ‘subject’).

In the first place, in line with Marx’s own historical projection, the post-1989, tendentially global, extension of the field of operation of capital accumulation has brought about a convergence of the concept of history with that of historical capitalism: an ongoing reduction of history to historical capitalism. However, despite this, in many ways stunning, empirical confirmation of Marx’s long-term historical vision, the problematic of the collective worker as historico-political agency on a global scale, which has consequently been posed anew, on new spatial grounds, nonetheless remains primarily theoretical, formal, speculative or purely potential, for all the hopes raised by such place-holders as ‘the multitude’, ‘multitudes’, ‘movements of movements’ and the like. For there is an aporia here: the more effectively global the collective worker becomes, the less politically actual it is.

The standard explanation for this phenomenon, modelled on the effect of imperialism on the European working classes at the time of the First World War – namely, the ability of nation-states to articulate workers’ interests primarily in national rather than class terms – retains its relevance. Indeed, this relevance is heightened by the broadening geopolitical distribution of the elements of the labour process.

However, this is not the sole or even perhaps the primary problem; and the spatial dynamics of political identification with regard to states are also being transformed in myriad and complex ways. Equally, and in the long term probably more, important is the role in the formation of social subjects in capitalist societies played by abstract social and economic forms.

Capitalistic sociality (the grounding of social relations in exchange relations) is essentially abstract: primarily, a matter of form rather than collectivity. Collectivity is produced by the interconnectedness of practices, but the broadest forms of interconnectedness and dependencies that are produced exhibit the structure of a subject (the unity of an activity) only objectively – that is, in separation from both individual subjects and particular collectivities of labour – at the level of states and beyond. Not only does the subject-structure of capital no longer correspond to (although it must still articulate itself across) the territorially discrete entities of nation-states, but the dominant forms of economic subjectivation (of individuals as constituents of variable capital and consumers of commodities) are now accompanied by forms of financial subjectivation (of individuals as subjects of loans, credit-card debt, pensions, benefits, etc.) that further subsume labour to capital in the sphere of its circulation. As Harvey has put it, in another context: ‘There is a sense … in which we have all become neoliberals.’ [28] In other words, there are ‘counteracting tendencies’ not just to crises of accumulation but to the formation of collective social subjects through capitalist production as well. What are the socio-political tendencies counteracting financial subjectivation? With regard to the temporality of crisis, the cyclical character of crises of accumulation tends to instil less a sense of possibility than of repetition. This serves to reinforce the main form of temporal abstraction associated with the experience of commodities in capitalist societies: ‘the new’. The periodic character of crisis and the commodity-form each produce modes of experience of temporal abstraction that undermine or erode the historical experience of crises and, thereby, function to repress the political possibilities they contain.

It is these structures and experiences that underlie the ontological generalization of crisis in Nietzsche’s concept of eternal return. Eternal return, we can say, following Benjamin, is an allegory of the experience of capitalism. Capitalism appears here in Benjamin’s work in the figure of ‘the torments of hell … “pains eternal and always new”’. [29]

crisis, repetition, the new

‘Permanent crises do not exist.’ [30] It is the tendency towards and potentiality for crisis that is permanent, not the crisis itself. The crisis is but a regular ‘phase’ in the process of capital accumulation (der Krisenphase), alternating with ‘prosperity’ [31] – a phase that renews the conditions of accumulation. In the concept of modernity we find both a normalization and a valorization of crisis as a means of production of the new, at the level of pure temporal form, in which what appears to capital wholly quantitatively (a return to the production of surplus value) is experienced qualitatively, as newness itself. Modernity became the central category of the philosophy of history, after Hegel, via the extraction of the formal structure of temporal negation from the totalizing narrative of necessary development in Hegel’s philosophy of history. Modernity/Neuzeit (literally, new time) is a consciousness of time that is consequently simultaneously and paradoxically constitutive of history as development and de-historicizing, in its abstraction of the temporal form of the present as the time of the production of the new (negation). [32]

This valorization of the formal structure of temporal negation is the cultural correlate and psychic deposit of the real abstraction of labour-time as a measure of value.

Marx famously celebrated this experience of capitalism as modernity in The Communist Manifesto both analytically (as a ‘constant revolutionizing of production’) and performatively, in what was more or less his invention of the manifesto as a cultural political form. [33] However, this was prior to his analysis of the fetishism of the commodity form and the historical process of the commodification of novelty as the means for the capitalistic appropriation of desire.

Under these conditions, the production of the new appears not only as a central part of the progressive historical function of capitalism – the development of human powers – but also a means for its eternalization. This is what Benjamin called ‘the new as the ever-selfsame’, and about which Adorno wrote that it ‘represses duration’. [34] In repressing duration, the new negates a condition of possibility of crisis generating actual y qualititatively historical new social and political forms.

The fetishism inherent in the commodity-form represses the social labour of production. Crises seem, at first, to restore the historical temporality of capitalism – and the social temporality of labour – to experience; but, in their seriality and constancy, their subjection to the abstract temporality of the modern, crises threaten to negate it once again, at a higher level, through a normalizing repetition. It is this repetitive element in the temporality of crisis that is absolutized and thereby ontologized in the later Nietzsche: history is reduced to a new ‘affirmative’ sense of pure becoming, the constant becoming of the new. In Nietzsche, every moment is a moment of decision. This is the philosophical basis of Negri’s self-undermining politicism. For in rejecting negation as the dialectical–logical means of giving determinacy to the new, each decision merely reproduces the transcendental structure of the new as the same: the nihilism that lurks within all modernisms – a negative nihilism of the new without significant differences, as opposed to the reactive nihilism of conceptual difference of the Hegelian dialectic, against which Nietzsche was reacting.

Nietzsche’s solution was to embrace – and thereby transvalue – the condition, in the doctrine of eternal return: the imperative that, when you will something, you will to do it an infinite number of times. Such a return is acknowledged to be ‘the most extreme form of nihilism’, but, in ‘completing’ nihilism, it is understood to break its connection to reactive forces, negating their function of conservation (‘the same’) and converting them into forces of active self-destruction. In this respect, Nietzsche is the prophet of a Schumpeterian ‘creatively destructive’ capitalism. In the eternal return, nihilism is, he writes, ‘vanquished by itself’. [35] To will the eternal return was for Nietzsche to become active.

The consequence, however, is that while ‘the new’ may no longer be ‘the same’, it is also no longer new, in the sense of being qualitatively historical y new. In the eternal return, the new consumes itself, and with it time itself.

Both Hegel and Nietzsche, in their very different ways, absolutized the temporality of the new to the point of the dissolution of historical time, and with it the very notion of qualitative historical novelty upon which it depends. Yet the new itself, qua new, is abstract: ‘it gives no satisfaction’, as Marx put it. The notion of the ‘qualitatively historically new’ harbours a structural contradiction between the production of the qualitative heterogeneities to which it refers and the sameness of its own conceptual form. Yet it is in its very abstraction that the new is the emblem of the promise of a future, a future beyond the abstractly new, in which, on Marx’s imagining, wealth will have becomethe absolute working out of creative potentialities… the development of al human powers as such [as] the end in itself … [w]here humanity … [s]trives not to remain something it has become, but is in the absolute movement of becoming. [36]

This is the Nietzschean aspect of Marx’s own image of a post-capitalist condition: the new freed from the historical conditions of its emergence in capitalism’s ‘constant revolutionizing’ of the instruments of production ‘and thereby the relations of production, and with them the whole relations of society’. [37] In this respect, the modern is a capitalist cultural form, even – perhaps especially – as it points beyond its current capitalistic conditions of existence.

The new, we might say, is the capitalistic form of the post-capitalist future. Benjamin recognized this in the 1930s when he interpreted Nietzsche’s idea of eternal recurrence as the transformation of the historical event into ‘a mass-produced article’ on the model of fashion as ‘the eternal recurrence of the new’. He attributed the ‘sudden topicality’ of the idea of eternal return in the 1930s to the accelerated succession of capitalist crises, whereby ‘it was no longer possible, in all circumstances, to expect a recurrence of conditions across any interval of time shorter than that provided by eternity’, leading to ‘the obscure presentiment that henceforth one must rest content with cosmic constellations’. [38]

For Benjamin, the political secret of Nietzsche’s eternal return was thus to be found in the anticipation of it by Blanqui in Eternity via the Stars (1872) – his last book, written in prison, which, Benjamin writes, ‘presents the idea of eternal return ten years before Nietzsche’s Zarathustra – in a manner scarcely less moving than that of Nietzsche, and with an extreme hallucinatory power’, but in which ‘the terrible indictment that [Blanqui] pronounces against society takes the form of an unqualified submission to its results.’ This is the ‘novelty as hell’ of the ‘Conclusion’ to the 1939 Exposé of Paris, Capital of the Nineteenth Century[39] We remain exposed to this ‘unqualified submission’ to the capitalistic terms of the crisis – restoration of accumulation through depreciation and the destruction of capital and the further disciplining of labour and everyday life – today.


1. ^ David Yaffe, ‘The Marxian Theory of Crises, Capital and the State’, Bul etin of the Conference of Socialist Economists, Winter 1972, pp. 5–58; Andrew Gamble and Paul Walton, Capitalism and Crisis, Macmillan,

London, 1976; Union of Radical Political Economists, United States Capitalism in Crisis, Monthly Review Press, New York, 1978; Paul Mattick, Economic Crisis and Crisis Theory, Merlin, London, 1981; Simon Clarke, Marx’s Theory of Crisis, Macmillan, London, 1993.

2. ^ Rick Kuhn, Henryk Grossman and the Recovery of Marxism, University of Illinois Press, Champaign, 2007; ‘Economic Crisis, Henryk Grossman and the Responsibility of Socialists’ (his Memorial Prize Lecture), Historical Materialism, vol. 17, no. 2, 2009, pp. 3–34; Michael Lebowitz, Fol owing Marx: Method, Critique and Crisis, Brill, Leiden and Boston, 2008, Part 3; Samantha Ashman et al., ‘Symposium on the Global Financial Crisis’, Historical Materialism, vol. 17, no. 2 (2009), pp. 103–213.

3. ^ Karl Marx, Theories of Surplus Value, Part 2, Lawrence & Wishart, London, 1969, p. 528.

4. ^ Antonio Negri, ‘The Constitution of Time’ (1981), in Time for Revolution, trans. Mat eo Mandarini, Continuum, London and New York, 2001, pp. 54–5.

5. ^ Theories of Surplus Value, Part 2, p. 497.

6. ^ Karl Marx, Grundrisse: Foundations of the Critique of Political Economy (Rough Draft), trans. Martin Nicolaus, Penguin/New Left Books, Harmondsworth, 1973, p. 415; Theories of Surplus Value, Part 2, p. 528.

7. ^ Karl Marx, Capital: A Critique of Political Economy, Volume 3, Book 3, ‘The Process of Capitalist Production as a Whole’, Lawrence & Wishart, London, 1959, p. 249; Das Kapital: Kritik der politischen Ökonomie, Drit er Band, Karl Dietz Verlag, Berlin, 1964, p. 259.

In this instance, the Lawrence & Wishart (L&W) translation is preferable to the later, usual y more reliable,

Penguin edition. Cf. Karl Marx, Capital: A Critique of Political Economy, Volume 3, trans. David Fernbach,

Penguin/New Left Review, London, 1981, p. 357.

8. ^ Karl Marx, CapitalA Critique of Political Economy, Volume 1, Book 1, ‘The Process of Production of Capital’, trans. Ben Fowkes, Penguin/New Left Review, Harmondsworth, 1976, p. 770, translation amended; Das Kapital: Kritik der politischen Ökonomie, Erster Band, Karl Dietz Verlag, Berlin, 1962, p. 648. Fowkes neglects to translate the ‘itself’ [selbst], which (as Étienne Balibar has pointed out to me) Roy’s 1875 French translation strengthened to ‘spontanément’.

9. ^ Marx, Capital, Volume 3, L&W, p. 250; Karl Dietz Verlag, p. 260; cf. Penguin, p. 358.

10. ^ Marx, Capital, Volume 3, L&W, p. 246; Karl Dietz Verlag, p. 256; cf. Penguin, p. 355.

11. ^ Marx, Capital, Volume 3, Penguin, p. 358; Karl Dietz Verlag, p. 260; cf. L&W, p. 246.

12. ^ David Harvey, ‘Introduction to the 2006 Verso Edition’, in The Limits to Capital (1982), Verso, London and New York, 2006, p. xxi .

13. ^ Cf. Étienne Balibar, ‘Elements for a Theory of Transition’, in Louis Althusser and Étienne Balibar, Reading Capital (1968), trans. Ben Brewster, Verso, London and New York, 1979, p. 291n.

14. ^ See for example, Grundrisse, p. 416.

15. ^ Marx, Capital, Volume 3, Penguin, p. 355, translation amended; Karl Dietz Verlag, p. 256. For an at empt to enrich and update Marx’s account of crises and the counteracting tendencies through which they are resolved, with respect to, first, the post-World War II development of finance capital, and second, its geographical aspects, see Harvey, The Limits to Capital, ch. 10, section X, and ch. 13, sections V and VI, respectively.

16. ^ Pavel V. Maksakovsky, The Capitalist Cycle: An Essay on the Marxist Theory of the Cycle (1928), trans. Richard B. Day, Bril , Leiden and Boston, 2004; Lebowitz, Fol owing Marx.

17. ^ Balibar, ‘Elements for a Theory of Transition’, p. 293.

18. ^ As argued, for example, by Dick Bryan in his contribution to the panel ‘Derivatives’ at the Historical Materialism conference, London, 29 November 2009.

19. ^ It is in the transition from the analysis of ‘Tendency and Contradiction in the Mode of Production’ to ‘History’ that Balibar’s ‘Elements for a Theory of Transition’ runs up against the internal limits of the Althusserian problematic, for which ‘history’ is not itself considered a concept of the theory of history, but rather only of its epistemology. Reading Capital, p. 302.

20. ^ James O’Connor, The Fiscal Crisis of the State, Palgrave Macmil an, New York, 1973. See also his Accumulation Crisis, Blackwel , Oxford, 1984.

21. ^ Jürgen Habermas, Legitimation Crisis, trans. Thomas McCarthy, Heinemann, London, 1976.

22. ^ James O’Connor, The Meaning of Crisis: A Theoretical Introduction, Blackwel , Oxford, 1987.

23. ^ Reinhart Kosel eck, Critique and Crisis: Enlightenment and the Pathogenesis of Modern Society, Berg, Oxford/New York/Hamburg, 1988; ‘Crisis’, trans. Michaela W.

Richter, Journal of the History of Ideas, vol. 67, no. 2, April 2006, pp. 357–400; ‘Some Questions Regarding the Conceptual History of “Crisis”’, in Reinhart Koselleck, The Practice of Conceptual History: Timing History, Spacing Concepts, Stanford University Press, 2000, ch. 14, pp. 236–47.

24. ^ Critique and Crisis, pp. 11–12, 185.

25. ^ Ibid., p. 127.

26. ^ Ibid., p. 168.

27. ^ Koselleck, ‘Crisis’, pp. 358–61; ‘Some Questions Regarding the Conceptual History of “Crisis”’, pp. 237–40.

28. ^ Harvey, Limits to Capital, p. xiii. Harvey is writing about the ‘widespread acceptance of the benefits to be had from the individualism and freedoms that a free market supposedly confers’, but his account neglects issues of subjectivation.

29. ^ Walter Benjamin, ‘Paris, Capital of the 19th Century:

Exposé of 1939’, in The Arcades Project, trans. Howard Eiland and Kevin McLaughlin, Harvard University Press, Cambridge MA and London, 1999, p. 26.

30. ^ See note 5.

31. ^ Marx, Capital, Volume 1, pp. 770–71; Karl Dietz Verlag, p. 648.

32. ^ See Peter Osborne, ‘Modernism and Philosophy’, in Peter Brooker et al, eds, The Oxford Handbook on Modernism, Oxford University Press, Oxford, forthcoming 2010, ch. 20.

33. ^ See Peter Osborne, ‘Remember the Future?: The Communist Manifesto as Cultural-Historical Form’, in Philosophy in Cultural Theory, Routledge, London and New York, 2000, pp. 63–77.

34. ^ Walter Benjamin, ‘Central Park’, in Selected Writings, Volume 4: 1938–1940, Harvard University Press, Cambridge MA and London, 2003, p. 175; T.W. Adorno, Aesthetic Theory (1970), trans. Hul ot-Kentor, Minnesota University Press, Minneapolis, 1997, p. 27.

35. ^ Friedrich Nietzsche, The Wil to Power, trans. Walter Kaufmann and R.G. Hol ingdale, Random House, New York, 1968, pp. 1053, 1056, 58,

28. ^

36. ^ Marx, Grundrisse, p. 488, translation amended. Cf. Peter Osborne, ‘Marx and the Philosophy of Time’, Radical Philosophy 147 (January/February 2008), pp. 15–22, p. 17. Marx’s modernism was historico-philosophical, or part of an historical ontology of the human, rather than ontological as such.

37. ^ Karl Marx and Frederick Engels, The Communist Manifesto (1848), in Karl Marx and Frederick Engels, Collected Works, Volume 6, Lawrence & Wishart, 1976, pp. 477–512.

38. ^ Benjamin, ‘Central Park’, pp. 166–7, 178.

39. ^ Benjamin, ‘Paris, Capital of the 19th Century: Exposé of 1939’, The Arcades Project, pp. 25–6.


Rebalancing the Economy, Refurbishing the State: The Political Economic Logic of Sino-Capitalism in Contemporary China

February 26, 2022 Leave a comment

China represents a highly significant case that can inform debates on the nature and logic of capitalism, especially those expressed in the wider Comparative Capitalisms (CC) literature. This is not just because of China’s sheer size and international economic influence, but also because China’s form of capitalism – Sino-capitalism – opens up new avenues for theoretical inquiry in CC. Specifically, Sino-capitalism’s constitution demonstrates the importance of Régulation Theory’s more open and evolutionary approach to understanding CC.

Sino-capitalism conceives China’s political economy as driven by the dialectic of top-down state-centric modes of governance interacting with bottom-up networked modes of entrepreneurship based on market competition. This contrasts with the more static comparative approaches in most of the CC literature. In particular, this conception highlights how compensatory institutional complementarities are central to understanding CC. To illustrate Sino-capitalism’s dynamic of reproduction, the article looks at recent policy initiatives that aim to rebalance China’s development model. Even though rebalancing incorporates more forceful economic liberalization, retaining and strengthening state control over crucial areas of socio-economic governance is central. China is therefore pursuing a policy package that seeks to strengthen state governance capacity and market forces in tandem, illuminating the chronic re-composition and rebalancing of institutional spheres via top-down/bottom-up dialectics shaping Sino-capitalism.


China’s stunning economic transformation over the past 35 years still poses a puzzle for social scientific analyses. How could China’s obviously state-dominated development model produce such economic dynamism? Indeed, how has sustained market liberalization been combined with concerted efforts at strengthening state control over crucial areas of economy and society? And how has China undertaken far-reaching internationalization of its economy without sacrificing key elements of domestic policy autonomy?

In this article, I argue that the puzzle of China’s political economy can serve to inform salient debates on the nature and logic of capitalism highlighted in the Comparative Capitalisms (CC) literature (Deeg and Jackson, 2007; Jackson and Deeg, 2006; 2008). So far, conceptualizations of the crucial case of China remain at odds with each other and have found little resonance in the CC literature. For sure, most analyses of China in comparative political economy and economic sociology agree that China is, in fact, developing a form of capitalism. However, how to incorporate China’s form of capitalism both comparatively and theoretically in the CC literature remains a major challenge (Fligstein and Zhang, 2011; Peck and Zhang, 2013).

This challenge is also reflected in how CC literatures have so far faced difficulties in conceptually integrating emerging market economies. The narrow binary conception of Varieties of Capitalism (VoC) (Hall and Soskice, 2001) into Liberal Market Economies (LMEs) and Coordinated Market Economies (CMEs) never aimed to comprehensively cover emerging markets. Recent efforts within the CC literature have started to fill this conceptual gap. Much of the work has concentrated on Eastern Europe and, to a lesser extent, Latin America and East Asia (Bohle and Greskovits, 2012; Boyer et al., 2012; Hancké et al., 2007; Noelke and Vliegenthart, 2009; Noelke et al., 2014; Schneider, 2013).

All of these works go beyond the highly seductive parsimony of a binary distribution into LMEs and CMEs espoused by mainstream CC literature. Similarly, my analysis sees China as generating a novel form of capitalism – Sino-capitalism (McNally, 2007; 2012; 2015). Sino-capitalism’s analytical framework employs an open (Becker, 2009; 2014) inductive qualitative approach that conceives of “variegated” capitalisms globally (Jessop, 2012; Peck and Theodore, 2007; Streeck, 2010) and builds directly on insights in Régulation Theory (Aglietta, 1976; Lipietz, 1992; Boyer, 1990; 1997; 2005; Boyer et al., 2012). There is accordingly no “base” model of capitalism, but rather an assemblage of unique varieties of capitalism embedded in the global capitalist system.

I proceed by introducing the logic of Sino-capitalism, broadly conceived of as the macro-structural dynamics that define the mode of reproduction (cf. Boyer, 1990) and shape China’s contemporary political economic evolution. I then illustrate the dynamics driving Sino-capitalism’s institutional reproduction with recent policy initiatives that aim to rebalance China’s development model. Finally, the conclusion develops theoretical insights that can be generated from analyzing and conceptually extending the logic of Sino-capitalism.

My theoretical findings incorporate a call for more open and dynamic approaches that focus on the role of the state, the international embeddedness of national capitalisms, and the existence of contradictory/symbiotic politico-economic logics driving capitalist evolution. Quite pointedly, any conception of capitalist political economies must recognize the existence of different politico-economic spheres, each with its own logic or “Eigengesetzligkeit” (Weber, 1978; cf. Oakes 2003). Interactions among these spheres can generate a multiplicity of dynamics, ranging from symbiotic, reinforcing, counterbalancing, and compensatory, to contested and in discord.

Consequently, institutional complementarities under Sino-capitalism are not primarily conceived of as existing in a reinforcing state. Rather, compensating institutional complementarities have dominated and created dialectical dynamics of mutual adaptation and tension-ridden conditioning (cf. Evans, 1995). Sino-capitalism’s evolution thus represents an intriguing case of 35 years of extremely rapid and transformational institutional change that nevertheless exhibits a profound constant: a central dialectic of top-down state-guided capital accumulation existing side by side with bottom-up networks of entrepreneurs, market competition, and global economic integration.

1. The Logic of Sino-Capitalism

Most of these accounts stress one single aspect of China’s political economic evolution, but consequently miss the most central facet: the dialectical evolutionary dynamic of counterbalancing institutional complementarities driven by state guided forces top-down, by entrepreneurial networked forces bottom-up, and by global economic integration outside-in. In China’s emergent capitalism, state and private sector forces have mutually conditioned each other. The logic of Sino-capitalism attempts to capture these basic modalities of how China’s economic dynamism and political regime are replicated over time.

Analytically, the logic expresses the macro-structure shaping institutional and political reproduction, which, in turn, gives rise to China’s unique accumulation regime and modes of regulation. Insights from Régulation Theory (Aglietta, 1976; Lipietz, 1992; Boyer, 1990; 1997; 2005; Boyer et al., 2012) resonate directly in this conception. Paralleling other cases of capitalist evolution, China faced a critical juncture during the aftermath of the Cultural Revolution in the late 1970s as the Maoist regime’s legitimacy was questioned. A series of major political decisions to address this crisis created a new politico-economic compromise: private capital, both foreign and domestic, was gradually welcomed in China’s economy under the continued dominance of the Chinese Communist Party (CCP). This compromise, in turn, shaped the evolution and hybridization of specific sets of institutions defining Sino-capitalism.

In this context, the logic of Sino-capitalism can only be understood by conceptualizing China’s political economy as experiencing rapid international economic integration, especially intense participation in global value chains. Sino-capitalism forms by now an interdependent part of the neo-liberal global capitalist system. And finally, as Régulation Theory emphatically argues, capitalism does not tend towards stable equilibria, but rather is characterized by constant tensions and crises generated by its modes of reproduction. The dialectical logic of Sino-capitalism illustrates this volatile nature of capitalism strikingly.

The manner in which different institutional spheres interact means that Sino-capitalism differs from traditional conceptions of capitalist variety in important respects. Sino-capitalism is reproduced by a contradictory or dialectical quality: state-guided capitalism is tempered and at times challenged by dispersed private entrepreneurial forces that have created one of the world’s most dynamic and globalized private sectors. Sino-capitalism’s logic of reproduction thus derives from a specific institutionally-based notion of China’s emergent capitalism. Distinct institutional spheres are conceived of as interacting and mutually conditioning each other.

As a result, Sino-capitalism represents a distinctive institutional amalgam. Global integration, bottom-up networks of entrepreneurs, and top-down state guidance all coexist and balance each other’s dynamic elements, generating unique and diverse institutional complementarities. To illustrate, under Sino-capitalism’s eclectic policy outlook prices and market mechanisms are merely tools to an end: to develop China and make it wealthy and powerful. There is no a priori adherence to “free markets” as in a belief that fully liberalized market forces will generate the most efficient outcomes. Rather, controlled (often localized) policy experimentation is widely employed under long-term guiding principles. Most Chinese reforms have therefore constituted a work-around: they have employed measured market liberalization, though always under the condition that effective degrees of state control over the domestic economy remain intact.

The following develops further our understanding of Sino-capitalism’s logic by concentrating on three crucial sub-logics. Firstly, the central logic of reproducing a structurally rather stable dialectic of counterbalancing institutional spheres; secondly, and following from this sub-logic, a deliberately cautious pace of change that avoids radical departures from the past and tries to assure comprehensive state control over the reform process; and, finally, the interplay of state-centric development planning with local initiatives and policy trials bottom-up, a process that has generated much needed political space for economic experimentation and institutional innovation.

The propagation of a structurally rather stable dialectic which juxtaposes top-down state-guided capitalism with bottom-up networks of entrepreneurs, market competition, and global economic integration shapes Sino-capitalism’s logic most deeply. Although undergoing fundamental reform and massive growth, China’s political economy has continuously reproduced and recalibrated this dialectic. Chinese economic reform processes are accordingly not characterized by the dominant and stifling role of state-centric governance (Huang, 2008). Neither are they purely driven by entrepreneurial network-led accumulation from below (Nee and Opper, 2012). Counterbalancing institutional complementarities have actually conditioned, pressured, and mutually self-generated each other. These institutional spheres and their logics are sometimes in discord, but more often coexist and balance each other’s strengths and weaknesses (cf. Evans, 1995).

Critically, the logic of Sino-capitalism depends on the continuous adaptation of the CCP and Chinese state formations (Tsai, 2007; Dickson, 2008; Shambaugh, 2008). Chinese state firms, for example, began far-reaching reforms only after the development of private and quasi-private firms eroded their monopoly profits during the 1980s (Naughton, 1992). However, rather than attempting to smother private entrepreneurship, policy makers after 1992 concentrated on more fundamental restructurings of the state sector. State firms retreated from the most competitive and least profitable sectors in the Chinese economy, but kept a tight grip on industries populating the “commanding heights.”

The evolution of Sino-capitalism, therefore, does not represent a unilateral retreat of the state in favor of private entrepreneurial and market forces. Neither is it a story of initial liberalization followed by a full reassertion of statism (cf. Huang, 2008). The best way to understand Sino-capitalism’s dialectical logic is to focus on how private capital accumulation put pressures on the state to reform and adapt. State-initiated reforms and experimentation in turn enabled further private sector development, creating dynamic cycles of induced reforms, where each small step at restructuring created demands for further modifications (cf. Jefferson and Rawski, 1994; Naughton, 1995; Solinger, 1989).

In this view, top-down Leninist incentives focused on economic performance prodded local governments to compete vigorously for investment capital. This inter-jurisdictional competition led to the gradual liberalization of China’s economy and triggered substantial improvements in the investment climate facing both domestic private and foreign investors. In fact, state capitalist guidance and vibrant private entrepreneurship have tended to meet at the lower levels of the state apparatus, where local cadres have played a crucial role in accommodating and supporting individual capitalist accumulation.

The first phase of China’s reform and open door policy (1979-82) was marked by a major revolution top-down that changed incentives for CCP cadres to emphasize economic growth. The initial success of several experiments in both the state sector and the rural economy enabled a much more permissive regime for bottom-up entrepreneurship and experimentation in the 1980s. This first spurt of reform and opening, however, came to an end during 1989 as the party-state recentralized not only China’s politics, but also the economy. By 1992 reform impulses were once again unleashed by Deng Xiaoping’s “Southern Tour” (nanxun). Another phase of bottom-up capitalist accumulation then triggered by 1997 major reforms in the state sector and further privatization of local collectives, including the vast majority of Township and Village Enterprises (TVEs). By the 2000s the two process became more deeply intertwined, with both top-down (e.g., reforms triggered by China’s entry into the World Trade Organization after 2001) and bottom-up (e.g., massive inflows of foreign capital and the emergence of large Chinese private conglomerates) dynamics interacting simultaneously.

This dialectical logic is furthermore reflected in the unique policy mix employed to advance the reform process.This second sub-logic captures how most reform initiatives in China constitute a conscious work-around. For sure, reforms always aim to generate measured market liberalizations and economic efficiencies. However, they also intend to assure continued state control over the domestic economy and reform process. Full-scale economic liberalization, as in the “Big Bang” reforms of Eastern Europe and the successor republics to the Soviet Union, was consciously eschewed. In its place, the Chinese party elite favored innovative localized experimentation, institutional tinkering, and all kinds of work-around solutions that went beyond pure and simple economic liberalization. The results of this approach were stunning. Rather than experiencing the shocks generated by “Big Bang” reforms in Eastern Europe and Russia,the Chinese economy was able to relatively smoothly and gradually “grow out of the plan” to establish a market economy (Naughton, 1995). And in a similar fashion, China’s political economy evolved from an economic system characterized by complete state ownership to incorporate large swathes of private ownership and control (Oi and Walder, 1999).

One of the hallmarks of the policy process has been that most initiatives were cautious and gradualist. This does not mean that there were no spurts of reform, such as in 1992 after Deng Xiaoping’s “Southern Tour.” Similarly, contemporary reforms contained in the 60-point blueprint issued after the 18th Central Committee’s Third Plenum in November 2013 also hold the potential for reform breakthroughs. Top-down state coordination has consistently played a crucial role. Nonetheless, over the longer term key policy priorities have only shifted gradually in China. This has created an enduring and relatively constant policy environment, the “long-termism” of China’s “neo-etatist” planning (Heilmann, 2010).

The logic of Sino-capitalism is finally expressed in how central state coordination and localized policy trials have deeply interacted to create a rather novel experimental approach to economic and political-administrative reform (Florini et al., 2012). Every major policy change, such as the liberalization of foreign trade and investment, State-owned Enterprise (SOE) reforms, and the privatization of TVEs, was first tested with a variety of pilot projects, experimental regulations, as well as geographically defined special economic and industrial zones. Under these decentralized experiments bottom-up entrepreneurial and market pressures often created fertile ground for nominally illegal or unsanctioned behaviors. Over time, however, some formerly illegal behaviors were incorporated into local governance systems and accepted by central state formations, leading to continuous institutional adaptation (Florini et al., 2012; Tsai, 2002; 2007; Dickson, 2008). Equally significant, these trials and experiments left ample room for local ingenuity, learning, and ad hoc tinkering to work out problems in a gradual and, on the macro-level, controlled institutional environment.

China’s decentralized experimentalist approach to reform in a multi-layered state has created drawbacks and inefficiencies, most recently an “investment mania” in heavy industry that has generated large debt loads for industrial SOEs and local governments. Nevertheless, the dialectical interplay of state-centric development planning top-down and dispersed local initiatives bottom-up has created crucial space in an authoritarian system for institutional and policy innovation. Moreover, successful localized experiments are often scaled to provincial and national levels with strong central state guidance and efforts at standardization (Florini et al., 2012). This is “foresight maximum tinkering” – the “unusual combination of policy experimentation with long-term policy prioritization” (Heilmann, 2010: 109) that enables the pursuit of long-term priorities while leaving leeway to local ingenuity.

These three aspects of the logic of Sino-capitalism illustrate vividly how this emergent form of capitalism represents a complex new global capitalist force that falls outside dominant conceptualizations in CC. State-guided capitalism is balanced by entrepreneurially networked modes of capital accumulation that depend on the savvy of individual entrepreneurs exposed to market pressures. A cautious pace of change has avoided radical departures from the past and assured overall state control over the reform process. And the interplay of state-centric development planning with local initiatives and policy experiments opened up significant space for institutional innovation.

The propagation of Sino-capitalism’s unique dialectic is ultimately based on continuous processes of institutional learning, adaptation, and hybridization. The intermingling of market-oriented rules-based, flexible network-driven, as well as more purely statist governing approaches are all part of this reproduction. As a result, rapid and transformational institutional change has occurred under a rather constant framework of gradualism, retention of state economic guiding capacities, and the interplay of top-down planning with innovative localized experiments.

2. Rebalancing China’s Political Economy

Over more than three decades China’s economic development relied on exploiting factors of production relatively abundant within the country. These included low wage labor, cheap land, and some mining resources. As capital accumulated, large savings in the state banking system were channeled into investment-driven growth during the 2000s, emphasizing large-scale investments in urban infrastructure, power generation, producer goods sectors such as steel, aluminum and cement, and export industries. This emphasis on investment- and export-driven development catapulted China to upper-middle income status, but by now is showing immense strains. Returns on investment are declining, while indebtedness is facing declining productivity and corporate profitability.

Consequentially, China’s investment- and export-driven development model was already around 2010 perceived to have reached the end of its sustainability (Naughton, 2010; Kroeber, 2009). In fact, both the 10th and 11th Five-Year Plans advocated a change to a more balanced and domestic consumption-driven development model. The 12th Five-Year Plan for 2011-2015 and the sweeping 60-point blueprint for economic, social, and legal reforms announced in late 2013 further amplify the policy foci outlined in these earlier pronouncements: the aim is to steer the Chinese political economy away from a concentration on growth above all else to balanced development.

Rebalancing China’s political economy implies a new growth model driven by consumption, innovation, and market forces with the overall aim of improving the Chinese people’s livelihood. The 60-point blueprint in particular outlines a host of reforms in the social, economic, and political-administrative spheres. However, interpretations of how exactly this shift will unfold are still prone to conceptual confusion. The 60-point blueprint has been looked at as far more ambitious and market-friendly than earlier reform efforts (Wharton School, 2013). It is seen as responding to various criticisms of China’s hitherto state-guided development model. These critiques stress that reforms should redefine the role of government, restructure state enterprises and banks, develop the private sector, promote competition, and deepen market reforms (World Bank and Development Research Center of the State Council, 2012: xv; cf. Kroeber, 2009).

In the view of liberally inclined Chinese economists, distorted resource allocations in China are mainly due to the continued dominance of SOEs in many crucial infrastructure and producer goods sectors. Since these sectors are often characterized by monopolistic or oligopolistic competitive environments, SOEs have become a major drag on efficiency. Assuring future economic growth must thus focus on the reorganization and privatization of large swaths of the Chinese state sector (Personal communication with researchers of the Development Research Center, October 2012).

Clearly, market liberalization and measured privatization enjoys potential support among segments of China’s economic policy-making community, including some top leaders.And strengthening market forces undoubtedly represents an important component of any rebalancing of the Chinese political economy. Nonetheless, envisioning that China will simply opt for full-out economic liberalization and privatization neglects a deeper understanding of the dynamics driving China’s political economy: the logic of Sino-capitalism. As before, the Chinese party-state is unlikely to pursue a full-blown policy of free-market reform. The emphasis continues to rest on avoiding economic liberalization’s potential dangers. The 60-point blueprint and more recent policy pronouncements make clear that there will be no radical departures from the past.

2.1 The 60-Point Blueprint of 2013

The sweeping blueprint announced in late 2013 covers a wide range of issues. Its 60 points or aspects include about 330 individual measures. Everything from changes in the one-child policy, car emissions standards, reforms to the hukou residency system, to interest rate liberalization is covered. The central objectives, though, reflect the dynamic qualities of Sino-capitalism. At first, substantial plans for economic and social liberalization stand out. According to the blueprint, the market should start to play the “decisive function in resource allocation” (Wharton School, 2013). Both academic and business analysts have thus seen it as ushering in significant market-oriented reforms. Avery Goldstein notes that the blueprint turned out to be “far more detailed, far more ambitious, far more unreservedly pro-market reform than many outsiders expected” (Wharton School, 2013; cf. Naughton, 2014).

One of the most prominent areas of liberalization that is highlighted in the blueprint concerns financial reform. Interest rates are to be fully liberalized but not before a deposit insurance system is set up. Similarly, capital account liberalization and with it the internationalization of the Chinese Yuan are to proceed, but again at first limited in scope, such as in the experiments being undertaken in China’s four newly established Free Trade Zones in Shanghai, Tianjin, Shenzhen, and Fujian Province.

Upon closer analysis, therefore, it becomes clear that the Chinese party-state is nowhere close to pursuing a pure free-market platform. The leadership under Xi Jinping, as its predecessors, is attempting to avoid the pitfalls that often accompany economic liberalization, especially the risks underlying financial liberalization. A deliberate, cautious pace of change is preferred that aims to avoid at all costs major mistakes that could destabilize society and threaten CCP rule. Moreover, many of the reform measures in urbanization, social welfare provision, and the environment will ultimately necessitate more effective state regulation and guidance, not just liberalization and deregulation.

The blueprint reflects this fine balancing act in its call for a new role for government and a new relationship between government and market. Reforms ultimately follow the essence of Sino-capitalism’s logic: a cautious pace of change that employs work-around solutions and avoids radical departures; the interplay of state-guided development planning with local initiatives and policy experiments; and the dialectic quality of Sino-capitalism that calibrates relations between top-down state-centric modes of governance and bottom-up global-, network-, and market-driven modes.

From the leadership’s points of view this approach is seen as politically necessary, since powerful political interests that could see new reforms as threats to their power and well-being will have to be contained, co-opted, or sidelined. These interests, many of which have benefited immensely from the old system, include the leaders of many large state and private firms, as well as various professional classes including the state technocratic elite itself. Conversely, socio-political interest groups who are likely to see benefits remain politically weak in China, in particular farmers and urban workers.

So the CCP moves gradually and cautiously to avoid the risk that economic reforms could get out of hand and create a political backlash. Economic and market liberalization measures are fine tuned with concerted efforts to sustain and strengthen state control over society and economy, including focused learning, adaptation, institution building, and social reform. I briefly highlight one policy arena that stands at the center of these dynamics: state sector reforms.

2.2 State Sector Reforms

China’s domestic imbalances are in part due to an overemphasis on the state sector, especially heavy industry. Although most state firms have been corporatized and listed on stock markets, they continue to act as quasi-monopolies or operate in managed oligopolies. Due to their strategic role in the economy, they receive enormous support from government agencies and the state-owned financial system.

The blueprint’s economic reform proposals clearly adopt a pro-market rhetoric and are supportive of private enterprise. Private firms should be given more room, equal property rights protection, and gain access to markets and sectors hitherto dominated by the state sector. However, the continued centrality of the state sector in the economy is reiterated as well: “adhere to the principal position of the public ownership system, give play to the dominant role of the public sector economy, and continually strengthen the vitality, control and influence of the public sector” (China Copyright and Media, 2013). The proposals, in broad brushstrokes, display efforts at encouraging private sector development and innovation, but focus equally on restructuring the state-owned economy.

Many of the SOE governance reforms suggested in the blueprint represent ongoing initiatives that have, in some cases, been in place for over a decade: price reforms should be continued in some basic infrastructure sectors, such as power and energy; more public disclosure of SOE finances be made available; the enterprise bankruptcy system improved; and long-standing attempts to fully separate government agencies from operational SOEs and their assets, especially in the remaining monopoly sectors, implemented.In this context, SOEs should complete their conversion into “modern enterprises” – joint-stock companies with up-to-date corporate governance. These conversions can include movements towards mixed-ownership systems, where in some exceptional cases private interests could take controlling stakes in existing SOEs. But overall the state should change the way it exercises its ownership, transitioning from “asset management” to “capital management.” New state-owned investment funds should be established, and some equity stakes in existing SOEs transferred to them, thus bringing specialized (state-owned) financial managers into the fold (Naughton, 2014).

Reforms thus include opportunities for private parties to gain ownership shares in some SOEs and enter into sectors so far controlled by SOEs. Several initiatives, for instance, attempt to separate infrastructure management from the actual operation of infrastructure services. The services can then be opened to private firms that can enter as service providers and create more competitive pressures. These reforms are similar in conception to reforms being implemented after breaking up the Railway Ministry in March 2013.

Perhaps one of the biggest changes on Chinese SOE performance could emanate from financial sector reforms.So far, SOEs have benefited substantially from financial repression in China’s domestic economy and the dominance of large state banks. Under these conditions most SOEs have access to plentiful and cheap credit, providing them with a competitive advantage both domestically and internationally. Building on the 60-point blueprint, financial reforms implemented in recent years encompass fully liberalizing interest rates and opening up the banking sector to more competition. This could subject borrowing by both SOEs and private entities to a more market-driven financing environment. Reform proposals also include permission for companies to launch initial public offerings without official approval, under a new “share issuance registration system.” However, much of these reform proposals remain a work in progress.

Another important reform initiative aims to increase the dividend payout ratio for SOEs from the current 5-15 percent to 30 percent by 2020. Already begun around 2007, this policy attempts to extract a larger share of state sector profits into the state treasury. It rests on the implementation of a “state capital management budget” (guoyou ziben jingying yusuan) that aims to steadily raise the dividend payout ratio of SOEs, thus lessening the leeway for SOEs to engage in overinvestment, a fact that has generated large industrial overcapacities (Naughton, 2006).

The blueprint’s objective of a roughly 30 percent dividend pay-out ratio from post-tax profits would put Chinese SOEs in line with common international norms. However, it is not clear at present if the Chinese government will be successful in exercising this aspect of its property rights. SOEs have shown a reticence to follow central guidelines and been characterized by various governance gaps. They are thus one of the main targets of Xi Jinping’s massive anti-corruption campaign. Undoubtedly, since Xi came to power in 2012 the hallmark of his leadership and greatest source of his popularity has been the relentless anti-corruption campaign. The campaign has deeply influenced SOE governance and targeted in particular SOEs in sectors that are seen as “fiefdoms” onto their own, not fully under the control of the CCP party-state.

The anti-corruption campaign demonstrates the prominence of party-state centralization in China’s dialectical reform dynamics. While some aspects of state sector reform are clearly aimed at introducing competitive market pressures, others aim to reassert state authority. Proposed pay-cuts to SOE executive salaries that the CCP Politburo approved in September 2014 represent one intriguing example. The new policy specifies that SOE executives who were appointed by the CCP Organization Department with a bureaucratic rank carrying substantial benefits and perks could face deep pay cuts of about 60 percent (Zhang, 2014). After implementation, such executive would again be treated as pure bureaucrats, since they have opportunities for career advancement in the party-state hierarchy. Conversely, those executives appointed competitively from outside the party-state hierarchy, who do not carry a bureaucratic rank, and who often have generous pay packets, would see no change.

The policy aims to make SOE executives choose between “working for the government” and working for “the enterprise” (Zhang, 2014). Interestingly, most SOE executives with bureaucratic rank are intent on keeping it and thus taking a pay-cut. They continue to see themselves and their SOEs as part of the larger CCP party-state hierarchy, and often have ambitions beyond any particular SOE to advance into the top levels of party- or state-administrative leadership (Personal communication with Kjeld Erik Brødsgaard, April 2016). This reform proposal marks a step away from market-based pay packages and hiring in the Chinese state sector, and, consequently, looks retrograde. However, it forms part of wider SOE reforms that aim to distinguish among state firms situated in monopoly industries and in public welfare, which are to be recentralized under closer scrutiny from the government, and those in competitive fields, which face further commercialization and exposure to market forces.

One good example that sums up China’s cautious and quiet reform approach regards the large oil and gas corporations: CNPC, CNOOC, and Sinopec. A series of experimental, incremental, and seemingly fragmented steps, including several pilot-based reforms aim to gradually transform the operating environment of these three giants. For example, oil import licenses have been granted to private firms, thus enabling them to compete with state-owned refiners. The Chinese government also has approved the first privately-led mega-refinery in Zhoushan, Zhejiang, which will compete head-to-head with Sinopec in that region. And a low-profile pilot-restructuring of Sinopec’s overseas exploration unit, SIPC, does not aim to privatize it, but rather to bring state-owned investment vehicles, such as Chengtong Holdings Group and China Reform Holdings, on board as strategic investors. These two state-owned investors will hold a combined shareholding of 70 percent of SIPC (Chen and Meng, 2016). This reform pilot reflects one of the central planks of contemporary SOE reform: state-owned investment corporations are being formed and tasked with employing their financial specialists to craft market-oriented strategies that can change management behaviors and capital structures.

In the end, the large oil and gas SOEs are seen as key economic stabilizers for the national economy. Following the logic of Sino-capitalism, the CCP party-state wants to maintain strong control over them and only implement moderate changes after conducting experiments and localized trials. This fundamental thrust of reforms is also apparent in China’s newest reform slogan: supply-side reforms.

2.3 Supply-Side Structural Reform

So far it is unclear what exactly this new reform initiative will encompass and what specific policies fall under the supply-side banner (Wong, 2016). Some argue for tax cuts for private businesses and reducing the government burden on investors. This clearly echoes the tax cut and deregulation policies advocated by conservative Western leaders in the 1980s. But the most important thrust seems to be efforts at diminishing overcapacity in industries such as steel, cement, aluminum, coal, and others. Mines and factories in sectors producing far more than the market demands should be shut down or merged.

As Xi Jinping put it when arguing for the importance of this reform for the long-term well-being of the Chinese economy, “The main direction (of the reform) is to reduce ineffective supply, increase effective supply, and make the supply structure more fitting to the demand structure” (Wang and Xin, 2016). However, closing down inefficient “zombie” corporations, many of them SOEs, will carry substantial economic, social, and political costs. More than three million people in the steel, coal, and similar industries could lose their jobs if proposed restructurings go through. On February 29, 2016 government sources announced a potential of 1.8 million steel and coal worker lay-offs, around 15 percent of the work force in those industries. However, no exact time frame was given for implementing this capacity reduction (Yao and Meng, 2016).

Certain provinces, like Shanxi and Hebei with large coal and steel industries, could face particular hardship. Shanxi, China’s largest coal mining province, has already been the focus of economic restructuring to reduce overcapacity. Annual GDP growth has declined by half since 2014, to reach a low of 3.1 percent in 2015. And the debt accumulated by the seven major state-owned coal firms in the province reached the size of the province’s entire GDP in 2015 (Ye and Marro, 2016). Nevertheless, Shanxi province plans to cut its coal production even further, by some 258 million tons by 2020. Similarly, Hebei province aims to contain its steel and cement capacities to 200 million tons each by that time. Evidently, the reforms will necessitate large fiscal transfers to cushion the concentrated burdens that fall on particular regions and industries.

Another major plank of supply-side reforms involves mega-mergers among large SOEs to gain international market share and competitive heft. The most prominent example so far has been the merger of China’s two state-owned train makers, China CNR Corp. and CSR Corp., in mid-2015. The Chinese government is also planning or implementing mergers of the country’s major metals companies, nuclear technology firms, and the two largest shipping lines (Yu, 2016).

This reflects once more the dialectical qualities of Sino-capitalism. Mega-mergers are intended to form national champions that can better compete abroad. However, they are also likely to reduce competition domestically and continue inefficiencies, especially if strong SOEs are forced to merge with weaker ones. Similarly, state sector reforms aim to give private investors bigger stakes in a wider range of SOEs, but they clearly rule out full privatization. And more generally, Xi Jinping has shown a distinct penchant for centralizing power, but simultaneously his government has put forward many reform proposals that aim to restrain the reach of the state.

In the final analysis, the sweeping 60-point blueprint and recent supply-side reform initiatives continue the search by China’s leadership for policy solutions that can effectively reform the economy while retaining crucial elements of central state control. They reflect the dialectical structure of Sino-capitalism: various state-centric endeavors and concerted efforts to augment state power are juxtaposed with circumscribed economic liberalization and the active encouragement of private entrepreneurship and technology innovation.

The rebalancing reforms proposed under Xi Jinping thus conform to the basic evolutionary logic of Sino-capitalism. Experimental, circumscribed, and cautious measures exemplify the intricate interplay of state-centric development planning with local initiatives and policy experiments. Over time, they are likely to reproduce the dialectic of Sino-capitalism while rebalancing China’s development model. In a recalibrated form top-down state-guided capitalism is likely to continue its dialectical relationship with capital accumulation based on private entrepreneurship and innovation, market competition, institutional learning, and global integration.

3. Implications for The Study of Comparative Capitalisms

As the above illustrated, recent reform proposals in China do not indicate a full-blown turn towards a liberal market economy. Quite to the contrary, they seek to retain and strengthen state control over crucial areas of socio-economic governance. The Xi Jinping leadership is thus pursuing a policy package that seeks to strengthen the private sector, domestic consumption, and indigenous innovation all the while refurbishing the CCP party-state’s governing capacity.

Therefore, in the task of rebalancing China’s development model there is no indication of efforts to directly supersede the dialectical dynamics of Sino-capitalism. For sure, measured steps at economic liberalization are planned. But these form efforts to refurbish state-coordination and its interactions with other institutional spheres, not to fundamentally destabilize Sino-capitalism’s chronic re-composition and recalibration of institutional spheres via top-down/bottom-up dialectics.

The theoretical comparative implications of this mode of capitalist reproduction for the CC literature are substantial. The logic of Sino-capitalism underlines that our understanding of capitalist evolution must be opened up to incorporate the central role of the state, the international embeddedness of national capitalisms, and the existence of contradictory/symbiotic politico-economic logics. It ardently stresses insights from Régulation Theory and its related approaches (Becker, 2009; 2014; Jessop, 2012; Peck and Theodore, 2007; Aglietta, 1976; Lipietz, 1992; Boyer, 1990; 1997; 2005; Boyer et al., 2012).

The logic of Sino-capitalism peals away the veneer of capitalist stability and institutional coherence seemingly prevalent in the already developed political economies. Capitalism is at base unruly. For Régulation Theory capitalism does not tend towards equilibrium but rather towards crisis in the longer term (Boyer, 2005). It must perpetually reinvent itself, creating ultimately disruptive change. This is evidenced by the empirical literature, which shows that capitalisms are “institutionally fragmented, internally diverse, and display greater ‘plasticity’” (Deeg and Jackson, 2007: 157) than the parsimonious dichotomy of LMEs and CMEs implies.

The logic of Sino-capitalism further highlights how capitalist political economies are constituted by different politico-economic spheres, each with its own logic or “Eigengesetzligkeit” (Weber 1978; cf. Oakes 2003). A multiplicity of potential interactions is possible among these spheres, ranging from symbiotic, reinforcing, counterbalancing, and compensatory, to tension-ridden and contested. In such a perspective, the unruly, effervescent nature of how capitalism reproduces itself – the system’s need for perpetual expansion, disruption, and reinvention – stands front and center.

Among these spheres, that of the state looms large. Early CC approaches, especially the Variety of Capitalisms perspective (Hall and Soskice, 2001), granted little autonomy to the state. These analyses thus lost sight of the state’s inherent macro-structuring role. Boyer (1997; 2005) in his conception of capitalist diversity incorporates “statist capitalism” and “state-directed capitalism.” Greater attention is paid to the degree of stateness, a theme echoed by Vivien Schmidt (2012) when sheconceptualizes “state-influenced market economies” with reference to Italy, France, and Spain.

Recent literature on emerging capitalisms develops this theme further (Boyer et al., 2012; Bohle and Greskovits, 2012; Schneider, 2013). As with Sino-capitalism, the inherent diversity of these capitalisms is stressed, in particular the state’s different roles. Vivien Schmidt (2009; 2012) pointedly suggests that the state must be treated as an autonomous political-economic actor, deviating from many other CC approaches. Rather than disaggregating the state into its historical institutional components or the strategic actions of state elites, it must be viewed as architectonic, incorporating political struggles over ideas, policies, and power that fundamentally structure each variety of capitalism (cf. Amable, 2003; Streeck, 2009).

The Chinese state under Sino-capitalism crystallizes such an architectonic structuring role remarkably well. In practically every sphere of the economy the Chinese state remains a major force structuring national, local, and firm-level policies (Szelenyi, 2010). Sino-capitalism also exemplifies the importance of state adaptability, social accommodation, and a multitude of regulatory modes ranging from dirigiste to liberal laissez-faire, creating in turn several distinct regimes of production in the Chinese political economy (Luthje, 2013). One of the most interesting aspects relates to the Chinese state’s compensating role in reproducing the institutional and power relations sustaining Sino-capitalism.

The logic of Sino-capitalism relies, as other varieties of capitalism, on unique institutional complementarities. These create interlocking institutional isomorphisms sustaining competitive advantages and stabilities in the Chinese accumulation regime. They also imbue Sino-capitalism’s distinct dialectical structure and dynamics with a certain path-dependency. However, Sino-capitalism’s institutional complementarities differ from the mainstream conception of reinforcing complementarities (Hall and Soskice, 2001; cf. Amable, 2003).

Under Sino-capitalism, the balancing of institutional spheres relies on the amalgamation of state-led coordination top-down with flexible and entrepreneurial network capitalism bottom-up. This means that complementarities are characterized by constant tensions, power struggles, as well as adaptation and experimentation. As Deeg and Jackson (2007) note, many types of capitalism are characterized by tensions among different institutional spheres, since each sphere follows different logics. Indeed, Boyer (2005) and Crouch (2005) hold that true complementarity connotes institutions following different structural logics, “where components of a whole mutually compensate for each other’s deficiencies” (Crouch, 2005: 359).

Sino-capitalism is ultimately co-determined by unlike institutional logics that balance each other’s strengths and weaknesses. Actors have diverse options and capacities that facilitate cross-fertilization, creating openings for institutional learning, tinkering, experimentation, and transformation. Sino-capitalism’s tension-ridden dialectic complementarity should therefore be seen as contributing to, rather than undermining, the overall competitiveness and developmental sustainability of China’s political economy. Hybridization and messiness may hold distinct advantages.

Naturally, the hybrid, complex, and dialectical aspects of Sino-capitalism express fundamental contradictions that could someday come to the fore, destabilizing the system, and triggering a fundamental crisis of the political economy. All cases of capitalist evolution are historically indeterminate. Present political and economic dissonances in China already are an indication of increasing strains. Under the scenario of a major politico-economic crisis, Sino-capitalism could face a critical juncture at which point a new logic of capitalism supersedes it. It is therefore absolutely conceivable that Sino-capitalism could face a rupturing in coming years.

Nonetheless, the various policies announced to rebalance China’s political economy so far show that without major political upheaval the dialectical dynamics of Sino-capitalism are likely to be reproduced over time. Continuous gradual reforms in the realms of economic liberalization and institution-building, especially to establish a more effective regulatory state, do not imply a fundamental change. Sino-capitalism’s evolutionary logic could be replicated well into the future.

Regardless of the potential outlook for Sino-capitalism, explorations of its logic open up new avenues for theoretical inquiry in CC. The aspects of the logic analyzed in the foregoing expand our understanding of capitalist evolution to include state-capital dynamics and compensatory institutional complementarities. Perhaps most importantly, the dialectical evolutionary quality of Sino-capitalism contrasts with the more static comparative approaches in most of the CC literature, obliging us to recognize capitalism as in a perpetual state of disequilibrium and tension.

Christopher A. McNally


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Capitalism with Chinese Characteristics

February 24, 2022 Leave a comment

China’s experiment with socialism was chaotic and failed to produce the much-desired transition to development and prosperity. 

When the country broke with socialism and cautiously ventured into market-led development in the countryside in the late 1970s, China was one of most equal societies on earth. It was also quite poor, with over 30 percent of the population living under the poverty line, much like the Philippines then. 

Today, with its gini coefficient, a measure of inequality, at .50 or above, inequality in China matches that of the Philippines. However, the number of Chinese living in poverty are down to around 3 percent of the population, while over 20 percent of Filipinos are still poor. Inequality has increased, but in terms of lifting people out of poverty, China is regarded as an unqualified success story — probably the only one in the world.

An acquaintance with the key characteristics and vulnerabilities of China’s contemporary economy will enable us to get a sense of the dynamics and direction of China’s economic relationships with the Philippines and the rest of the Global South. 

For instance, it is easy to mistake the vaunted Belt and Road Initiative (BRI) as a grand plan for China’s global hegemony, as many have, if one does not take into consideration China’s massive industrial overcapacity problem, for which the BRI has been devised as a solution. And one cannot understand the overcapacity problem without referring, in turn, to one of the central features of China’s economy: the decentralization of economic decision-making, which has led to a great number of competing projects, much waste, and tremendous surplus capacity.

China’s economy is a capitalist economy, though one that is uniquely Chinese. It might be called “capitalism with Chinese characteristics,” to give a more accurate spin to Deng Xiaoping’s puzzling description of his project as “socialism with Chinese characteristics.” Deng, Mao’s pragmatic successor as the dominant personality in Chinese politics, led China’s integration into the global capitalist economy in the 1980s and 1990s.

China’s contemporary political economy has four key features: 

  1. It is largely liberalized or market driven.
  2. It is largely privatized but with state intervention in areas considered strategic.
  3. Its cutting edge is export-oriented production sustained by “financial repression.”
  4. And it is decentralized, with a great deal of autonomy for local decision-making while central authorities focus on broad national-level macroeconomic strategies and policies.


Liberalization, or the removal of state controls on production, distribution, and consumption, took place in three stages over the 1980s and 1990s. 

Market reform started with de-collectivization and restoration of a market-based peasant economy in the countryside in the early 1980s, followed by urban state-enterprise reform and price reform in the late 1980s. In the 1990s, reform of state-owned enterprises (SOEs) accelerated, with the aim being the transformation of these enterprises into profit-oriented capitalist corporations. 

Throughout these phases, the main thrust of the reform was, as Ho-Fung Hung, a leading authority on China’s economic transformation put it, “to decentralize the authority of economic planning and regulation and to open up the economy, first to Chinese diasporic capital [Overseas Chinese] in Asia and then to transnational capital from all over the world.”

Privatization with Strategic State Intervention

While market signals stemming from local consumer demand and global demand became the dominant determinant of resource allocation, the visible hand of the state did not disappear. It just became more discriminating. While departing from central planning, the Chinese state did not follow the so-called Northeast Asian developmental state model pioneered by Japan, South Korea, and Taiwan that restricted foreign investment and favored domestic enterprises across the board.

In contrast, in China, non-strategic sectors of the economy were opened up to competition among private enterprises, local and foreign, while those areas considered strategic from the point of view of national security, national interest, and overall “national competitiveness” were subject to significant state regulation, with much production controlled by state-owned enterprises (SOEs) that were, however, allowed a degree of competition with one another. 

In other words, the government permitted large-scale foreign direct investment to allow local businesses to access and diffuse foreign technology across a whole range of industries, while maintaining exclusive control and focusing state resources on those industries considered vital for the comprehensive development of the economy. 

Given the massive pullback of the state from large swathes of the economy, there is justification in describing China’s political economy as “neoliberal with Chinese characteristics,” as the Marxist economist David Harvey does. But perhaps, it is better characterized as a market economy with strategic islands of state-controlled production and with broad macroeconomic surveillance exercised by the central state. 

This is a far cry from the centralized micromanagement of the economy of the pre-1978 socialist state.

Export-Oriented Production with Financial Repression

While the greater part of domestic production was directed at the local market, the strategic thrust of the Chinese economy post-liberalization was rapid industrialization via production for export, a feature captured in the saying that China became “the manufacturer of the world.” 

Exports at their peak in the first decade of this century came to a whopping 35 percent of gross domestic product, a figure that was triple that of Japan. China became, as Hung puts it, the “hub for a global production network that begins with design studios in the United States and Europe; proceeds through producers of specialized components and raw materials in East and Southeast Asia; and ends up in China, where designs, materials, and components are brought together in finished products that are then sent all around the world.” (In this “Sino-centric” division of labor, the Philippines was integrated as a food producer, a source of raw materials, and a provider of industrial components like computer chips.)

Making export-oriented production the cutting edge of the economy meant restraining the growth of domestic consumption, a feature that was underlined by the policy of financial repression — that is, the interest rate on savings from consumers was deliberately kept low in order to keep the interest rate of loans to state-owned enterprises and private enterprises engaged in production for export low. From 2004 to 2013, the average real deposit rate was an extremely low 0.3 per cent. 

A third key ingredient of export oriented manufacturing was a policy of keeping the value of the renminbi low relative to the dollar. From 1979 to 1994, the renminbi steadily depreciated against the dollar, from 1.5 to 8.7, as China moved away from its old Mao-era import substitution model towards an export-oriented model that required an undervalued renminbi to make China’s exports competitive on global markets. Then, in 1994, the renminbi was devalued 33 percent relative to the dollar, followed by a peg of 8.3 renminbi to the dollar over the next nine years, greatly boosting the competitiveness of Chinese goods in global markets. 

In his trade war with China, U.S. President Donald Trump has called China a “currency manipulator,” allegedly deliberately keeping the value of the renminbi low to flood the U.S. with its exports. However, most economists say that China has let market forces largely determine the value of the renminbi since over a decade ago.

The fourth ingredient in the export-led model, its “indispensable fuel’” according to Hung, was the “protracted low-wage labor released from the countryside since the mid-1990s.” While there was a “demographic windfall” in the form of large rural surplus labor force that allowed China to take advantage of low-wage labor longer than other Asian economies, the latter was also a result of government policies that, in contrast to the 1980s, funneled resources from the rural areas to the urban areas and generated a continuous exodus of the rural population since the 1990s.

The combination of favorable financial policies for the export sector, an undervalued currency, and low wage labor was a formula that unleashed a flood of cheap Chinese goods on the world that proved to be deeply destabilizing not only for the industrial sectors of economies in the global North but also of those in the global South like Mexico and Brazil, which had higher wage levels. 

In these areas, China was not only as a source of competing imports but a cause of deindustrialization, as some corporations uprooted their labor-intensive industrial facilities and moved them to Southeastern China and others simply subcontracted the making of their products to cheap-labor Chinese firms. Not surprisingly, working class resentment built up in places like the so-called “rust belt” of the U.S. that Trump was able to harvest in 2016 with his anti-China rhetoric in his drive to the presidency.

Decentralized Authoritarianism

Contrary to the popular image of China’s development being the product of centralized direction, a decentralized character has, in fact, been one of its key features. 

Decentralization has been one of the key ingredients of China’s growth formula, dating to the 1990s. Decentralization was a spur to intense competition among localities since Beijing, according to one account, “started evaluating local officials by how quickly the economy grew under their watch” — and they, in turn, “competed with each other to woo firms, offering them cheap land, tax breaks, and low cost labor.” 

Described as essentially like turning the bureaucracy into a “large start up business,” decentralization sought to decisively break the command economy as well as force local authorities to “own” the reform process both by giving them the responsibility for coming up with the resources for investment and allowing them to reap the rewards of successful capital accumulation. 

Provincial and local authorities have thus had a great deal of power in interpreting and implementing general strategic directives from Beijing. The economic authority of the central government has been deliberately weakened, its role being transformed into that of an “indirect player“ focused on managing the macroeconomic backdrop such as interest rates, exchange rates, and preferential policy toward certain regions and sectors. Indeed, China has been described as the “most decentralized country on earth,” with the share of revenue of local government being more than twice that common in developed countries — and also much bigger than that typical of developing countries.

It is important to note, however, that strong local authority and command of resources in the capital accumulation and development process covered mainly the nonstrategic sectors of the economy. Important agents of central control across provinces were some key state owned enterprises (SOEs) in the designated strategic sectors, such as energy, heavy industries, railways, and telecommunications that were directly controlled by Beijing, though they themselves enjoyed a great deal of autonomy. Here it must be qualified, though, that the majority of the country’s 150,000 SOEs — and two thirds of all SOE assets — were controlled by provincial and local governments, not by Beijing. 

The relationship between the local and the center has oscillated between decentralization and recentralization over the years, with the latest phase of recentralization, though limited, taking place under the current leadership of Xi Jinping. 

In most other countries, the extent of decentralization would probably have led to a permanent weakening of the center. China, however, has an advantage over other countries that makes the system work and not fly apart — and that is the Communist Party structure that parallels the government structure at all levels and across all regions. While allowing factional conflicts to a significant degree, the party structure and its attendant discipline are what makes possible the paradox of “decentralized authoritarianism.”

Liberalization, privatization along with strategic intervention in key industries, export-led industrialization with currency management by the state, and decentralized authoritarianism — these were the ingredients of the so-called Chinese miracle. They were also responsible for generating the problems now faced by the economy, a topic to which we will turn in the next installment of this series.

This series is based on the recently published study by Focus on the Global South titled China: An Imperial Power in the Image of the West? on the occasion of the 70th anniversary of the founding of the People’s Republic of China this year.

Walden Bello


The Character of State Capitalism in China

February 23, 2022 Leave a comment

The social landscape of the contemporary Third World is defined by the existence of the following classes: a super-exploited urban proletariat; a large peasantry; a landlord group; a white-collar petty bourgeoisie occupying administrative positions; and comprador capitalists closely aligned with multinational interests. China has attempted to delink from this system of dependency, pursuing a path of sovereign development, partially free from the criteria of economic rationality that emerges from the global domination of capitalism. This complex process has demanded the creation of a national economy based on the development of sectors aimed toward mass consumption and capital goods, which further means consolidating society’s productive forces – knowledge, technology, and machinery – for which education is important. 

China’s steadfast construction of an independent project has come under criticism from bourgeois ideologists and sections of the Left. In both cases, “state capitalism” is used as a powerful tool in categorizing and hierarchizing the spaces of world politics, generating a simple narrative of competition between two easily identifiable protagonists – Western democratic free-market capitalism and its deviant “other”, Eastern authoritarian state capitalism. To dispel these misconceptions, we need to examine the specific character of this state capitalism to locate it within the multi-sided trajectory of socialism with Chinese characteristics. 

Mao Zedong once said: “Communists are Marxist internationalists, but Marxism must be realized through national forms. There is no such thing as abstract Marxism, there is only concrete Marxism. The so-called concrete Marxism is Marxism that has taken national form”. The nationalization of Marxism fundamentally involved the use of Vladimir Lenin’s ideas. Lenin recognized the impossibility of an immediate transformation from a backward, peripheral situation to full-blown socialism. Thus, he envisaged a series of phases, from petty-bourgeois capitalism and “War Communism”, through state capitalism, to socialism, during which elements of capitalism would remain. State capitalism was a transitional road to socialism, not an end in itself.

Lenin gave the examples of Germany after Bismarck’s reforms and Russia after the October Revolution to explain the historical specificity of state capitalism. In Germany, state capitalism was subordinated to “Junker-bourgeois imperialism”; in Russia, state capitalism was shaped by socialist imperatives. In April 1921, Lenin wrote: “Socialism is inconceivable without large-scale capitalist engineering based on the latest discoveries of modern science. It is inconceivable without planned state organisation which keeps tens of millions of people to the strictest observance of a unified standard in production and distribution…At the same time socialism is inconceivable unless the proletariat is the ruler of the state.” 

In the same month, he elaborated

“Of course, a free market means a growth of capitalism; there’s no getting away from the fact. And anyone who tries to do so will be deluding himself. Capitalism will emerge wherever there is small enterprise and free exchange. But are we to be afraid of it, if we have control of the factories, transport and foreign trade? Let me repeat what I said then: I believe it to be incontrovertible that we need have no fear of this capitalism…The Soviet government concludes an agreement with a capitalist. Under it, the latter is provided with certain things: raw materials, mines, oilfields, minerals…The socialist state gives the capitalist its means of production such as factories, mines and materials. The capitalist operates as a contractor leasing socialist means of production, making a profit on his capital and delivering a part of his output to the socialist state. Why is it that we badly need such an arrangement? Because it gives us, all at once, a greater volume of goods which we need but cannot produce ourselves. That is how we get state capitalism. Should it scare us? No, it should not, because it is up to us to determine the extent of the concessions.”

Hence, the nature of state capitalism is fundamentally influenced by the presence of a proletarian state. In an economic formation like this, there exists – in the words of Samary Catherine – “a fundamental distinction between the existence of ‘market categories’ (prices, wages, etc.) and the domination of the law of value, the first not being the ‘proof’ of the second.” The exercise of the domination of the proletariat in all areas – economic, political, and ideological – deeply affects the status of market relationships, money, and prices. Systematic supervision of market relations reduces commodity exchange to the mere fact of sale and purchase, creating a society in which goods are exchanged for money but do not have an independent life of their own; and in which persons do not exist for one another merely as representatives of commodities. 

The contradictions of capitalism are impacted in a particular way under a proletarian state heading a regime of state capitalism. Louis Althusser once noted: “the ‘contradiction’ is inseparable from the total structure of the social body in which it is found, inseparable from its formal conditions of existence, and even from the instances it governs; it is radically affected by them, determining, but also determined in one and the same movement, and determined by the various levels and instances of the social formation it animates; it might be called over-determined in its principle.” The overdetermination of state capitalism means that the various components of this social formation don’t merely exist as indices of an underlying essence (surplus extraction); they are actively re-structured by the political characteristics of the socialist state. 

In China, the establishment of the dictatorship of the proletariat – involving the crucial role of a strong planning system – has allowed the country to keep hold of a sizeable chunk of overall surplus value and to create partnerships with multinationals that enable it to acquire modern technology. This development of superior techno-industrial capabilities is conducive to the structural changes necessary to insulate the economic system from intense international, low-cost competition, and hence to resist the downward movement of wages. Between 1988 and 2008, China’s average per capita income grew by 229%, 10 times the global average of 24%. In 1994, a Chinese factory worker made $500 a year, only a quarter of the wage of her counterpart in Thailand. In 2020, the average annual income in China exceeded $10,000 – three times the figure for Thailand. All these dynamics are turning China more and more to its domestic market. As is evident, state capitalism in China is part of a wider project of autocentric expansion whose end goal is socialism. 

Yanis Iqbal


The Uneven and Combined Emergence of “Capitalism with Chinese Characteristics”

February 22, 2022 Leave a comment

The People’s Republic of China’s (henceforth named China) development over the past decades has been nothing short of extraordinary. While undergoing constant transformation and recording the world’s second highest GDP ($) in 2017[1], the socialist past appears a distant memory. Put bluntly, since the start of economic reform in 1978, China is booming with a “unique blend of planned economy and unbridled capitalism”.[2] Meisner even contends that the self-proclaimed Chinese Communist Party (CCP) has evolved to become the guardian of Chinese capitalism.[3] At a glance this may appear as a paradox, due to the apparent zero sum game between communism and capitalism that has been continuously perpetuated by the rhetoric of the Cold War.[4] Conversely, this essay will argue that the emergence of specific ‘Chinese characteristics’ within the country’s manifestation of capitalism, can be understood as an outcome of uneven and combined development (U&CD). Through applying Trotsky’s framework of U&CD to China’s development since 1978, the aim is to show that the Chinese economy is not paradoxical in itself, but rather possesses distinct features which materialized as an amalgamation of pre-existing internal socio-political structures and international influences of Western capitalism. The argument will be structured in the following manner. Firstly, an outline is provided of the advantages that are adherent to the theory of U&CD in explaining the particular elements of Chinese capitalism, followed by a section on the important impact of socialist policies on the peasantry under Mao. Next, the essay shifts focus to Trotsky’s theory of U&CD before applying it to the nexus of 1978. Finally, the argument will be sharpened through detailing some of the precise combinations in the context of labor relations and enterprise management that have resulted from the interaction of China with the global capitalist economy. In sum, this essay will show that conceptualizing China’s economic development through the lens of U&CD allows for a specific understanding of the peculiarities in China’s socio-economic spectrum and ultimately elucidates the allegedly paradoxical synthesis of a self-proclaimed communist party adopting a capitalist mode of production for economic gain.

Challenges in Conceptualizing China’s Development

The rather vague nature of the term ‘capitalism with Chinese characteristics’[5] illustrates the difficulty to conceptualize China’s economic development. The extensive reforms throughout previous decades were far from universal in their implementation and thus, some sectors such as Chinese industry were thoroughly reformed, while privatization of land is still largely impossible.[6] Here, we find both bold restructuring as well as rigid attachment to Maoist policy.[7] Huang uses the terminology ‘capitalism with Chinese characteristics’ to refer to a “factual observation of China’s economic and institutional processes”[8]. His work is a detailed analysis of the elements that constitute the special Chinese characteristics. But as Huang himself implies, his work is an analysis aimed at determining the extent to which China is capitalist.[9] While the insight he develops in his work is very valuable, this paper argues that it largely neglects the dynamics of interaction between domestic and international factors in the shaping of specific particularities within Chinese capitalism. Importantly however, an understanding of the international as a performative element and thus as constitutive of development itself, is essential to any notion of developmental processes.[10] Therefore, in order to investigate the origins of distinctive Chinese characteristics, a different approach is required, which factors in the influence of external forces in the developmental process. This endeavor will be undertaken in the last substantive part of this essay.

Maoist Origins of a Strong Peasantry

Before engaging with the capitalist transformation and the economic reforms after 1978, this section will take a closer look at Maoism and identify special features that laid the basis for later rapid capitalist reform. What was perhaps the most distinguishing trait of Maoism as opposed to Stalinist ideology in the Soviet Union, was Mao’s focus on the peasantry’s revolutionary agency.[11] With the absence of a revolutionary proletarian urban working class, following the effective deindustrialization of the coastal regions by the Japanese invasion, Mao famously declared that the Chinese socialist revolution would be “carried from country to town”[12]. In addition, the Chinese Civil War was fought before the revolution and thus, the latter appears as the conclusion of the former and the initial improvements for peasants could be framed as the success of the CCP.[13] Isaac Deutscher further details that during the 1950s, the state commenced an investment policy, aimed at improving the life-expectancy and literacy of the rural communes.[14] An example is the healthcare available to peasants that was offered under Mao, to counterweigh the rigid constraints on rural-urban migration that will be discussed later.[15] One of the resulting initiatives was the ‘barefoot doctors’ programme, which involved the training of health workers to meet the medical requirements of the peasants.[16] Despite challenging circumstances, the programme was widely considered successful in increasing the prompt availability of cheap healthcare and was acknowledged by the WTO for its positive impact on health levels in rural areas.[17] Overall, the improvements in literacy and healthcare under Mao were unquestionably significant and gave China a distinctive position among in comparison to other developing states.[18] What is important to note is that the high health standards posed a critical factor in the immediate availability of the peasants to take on low wage labour, which in turn was a primary reason for the pull that China exerted on foreign industry to invest so quickly, following the reforms of 1978.[19] In short, the origins of China’s ability to instantaneously sustain an ‘army’ of surplus labour can at least partly be traced back to the influence of socialist policies on the peasantry.[20]

The Framework of Uneven & Combined Development

As we have now arrived at the period within which this paper aims to apply the framework of a Trotskyist dynamic of development, a brief introduction to the theory of U&CD is paramount. Leon Trotsky was grappling with a crucial issue when he formulated the basic premises of his theory. Societal development in Russia was drastically diverging from the path that was predicted by Karl Marx and despite the absence of an established bourgeoisie; revolutionary currents in Russia were extremely powerful compared to England, where Marx had anticipated the initial proletarian revolution.[21] On the basis of this observation, Trotsky established two fundamental features of human development. The first of the two is unevenness, which he identifies as the “most general law of the historic process”.[22] Specifically, Trotsky argues that there is an inherent unevenness in development among the various social entities that constitute the world.[23] Secondly, the core dynamic of all human development is the interaction among these uneven formations, which produces particular dialectical developmental trajectories and is therefore a combined form of development and thus, the “key driver of historical development”[24]. Crucially though, combination is not mere repetition by one society of another societies development.[25] Rather, it is the result of an amalgamation of a society’s internal characteristics with external geopolitical pressures and social forces. Moreover, there are two key features that are integral to this procedure. Firstly, Trotsky identified the “privilege of historic backwardness”[26]. In this, he refers to the possibility for a society to skip specific developmental processes by adopting and further enhancing certain features from more ‘advanced’ societies through the aforementioned interaction, thereby accelerating their development.[27] The second factor refers to the social and geopolitical pressure that a more ‘advanced’ society exerts on others through their respective interaction. In turn, this compels a society to accelerate development under said pressure, hence Trotsky labelling this as the “whip of external necessity”[28].

The Conjuncture of 1978

Let us now locate the existing unevenness between China and the so-called advanced capitalist countries (ACCs) of the global economy at the conjuncture of 1978, out of which the powerful ‘whip of external necessity’ arose. Mao’s initial improvements for the rural peasantry that were discussed earlier, quickly faded and the burden of growing international isolation, a devastating famine and the atrocities committed during the totalitarian ‘Cultural Revolution’ became increasingly visible and took their gruesome toll on the Chinese people and the country’s socio-economic structure.[29] Despite the clear focus on heavy industry under Mao,[30] China’s workforce was comprised of about 70% agrarian labor.[31] However, total productivity stagnated and the agricultural output was relatively low, which further aggravated the concern for food security.[32] What added to the urgency of the Chinese situation was the rapid economic development by the so-called East Asian Tigers, all situated in direct proximity to China, thus generating geopolitical pressure as it became clear that China’s economic development was diverging from that of its industrializing neighbors.[33] This also prompted the leadership to acknowledge the necessity of economic reform, which was launched to overcome economic stagnation.[34] There was an explicit sense of importance attached to economic reform among China’s developmental planners, in the sense that “a big effort to catch up [was necessary to] move to the front ranks of the world”.[35] What fostered this visible unevenness and thus the ‘whip of external necessity’ between China and the capitalist countries of the global economy was the fact that at this very same point in time, global markets were at an unprecedented level of openness.[36] Consequentially, disregarding reform, especially in conjuncture with the ‘neoliberal turn’ of the global economy was equated with political and economic decay.[37] Having situated China in an international context, the following section will show how the ‘Chinese characteristics’ of capitalism originated in the process of combined development.

Identifying the Particularities of Chinese Capitalism through U&CD

Davidson argues that China started to experience U&CD most drastically after its incorporation into the global economy in 1978.[38] The analysis by Dunford and Weidong already applies the theory of U&CD to the historical development of China.[39] Yet, this is conducted in a different manner. Rather than searching for specific combinations within China’s economy, their study takes a broader approach and situates China in a wider context of international unevenness. In contrast, the subsequent analysis aims to provide a more specific account of how the internal and external currents formed distinct fusions in China’s economy. Subsequently, this part will examine some specific results of Chinese capitalist development, following the reforms that were initiated by Deng Xiaoping in 1978. Having previously established the existing unevenness between the largely agrarian Chinese economy and the so-called ACCs or the surrounding East Asian Tigers, now the aim is to illustrate the peculiarities within Chinese capitalism that emerged as a result of the interaction between internal factors particular to China and external influences of a westernised market; thereby merging into a combined form of development, aligning with the principles of unevenness and combination of U&CD.

Impact of Hukou and Danwei

The first analysis will focus on labour relations with a specific emphasis on the influence of hukou, (the household registration system), as well as the danwei, (traditional urban working units), on the structure of Chinese wage labour. Both the household registration system and the danwei were institutions that were developed as Maoist policy in the 1950s.[40] However, the following section will outline how both customs still remain an important factor in Chinese capitalism and therefore illustrate its combined nature.

The danwei was a publicly owned unit, integral to urban employment because it served as a lifetime employer, provided housing within the compound and was linked to the distribution of benefits, thus being labelled the “provider of iron rice bowls”[41]. Yet, these values are mostly incompatible with those of a market economy, which was introduced through China’s increased adoption of capitalist relations of production after 1978.[42] As a result, economic reform and the increasing influence of global capitalism have fundamentally altered the makeup of Chinese employment and have effectively ended customs such as lifetime employment or the comprehensive multitude of benefits that previously characterised the danwei.[43] Nevertheless, Xie et al. argue that the danwei continue to be influential.[44] This is apparent through their positive impact on workers’ wellbeing, especially in terms of equal earnings.[45] Given that some of China’s privately owned companies have adopted structures similar to those of the danwei,[46] it is plausible to argue that what remains of the danwei, following the marketization of social services, is still a powerful factor in the alignment of the class structure within China’s urban working class. Importantly however, the impact of the danwei is reliant on low labour mobility and thereby directly linked to the hukou system.[47]

Through the use of a hukou, the second unique trait within Chinese labour relations, the state effectively controls where people work or live and is thereby able to monitor and restrict rural-urban migration.[48] Set up under Mao for exactly this purpose, migration control still remains the central feature of today’s hukou system, despite having undergone liberalisation and restructuring during the period of reform.[49] The system encapsulates the administrative power of the state, as the firm restrictions on transferring permanent residence persist.[50] In addition, the results of market reform have led to the commodification of the urban ‘blue stamp’ hukou, which remains under state control but can now be purchased, thus essentially turning the right to move into a market good.[51] Although the possibility of a temporary residence was introduced by the aforementioned capitalist reforms, any commodified mobility within this system privileges workers with the appropriate financial means or desired qualifications.[52] In fact, the Chinese government is seen to favour temporary migration, as this has a lesser impact on the overall social makeup of cities and in addition reduces the necessary infrastructure requirements for workers.[53] What makes the hukou system such a distinct feature of Chinese capitalism is that it upholds a low wage labour force consisting of migrant workers, who are unable to go the route of formal migration and are compelled to take on jobs in precarious conditions.[54] The difficulty of the official transfer of residence and work rights, combined with diminishing prospects for agricultural employment has resulted in the “largest migration in world history” of peasants into the cities.[55] Thus, what emerges as a product of the remaining hukou system, as well as the economic reforms that attempt to create a capitalist labour market, is a vast number of urban migrant workers without residential rights, often referred to as the “floating population”[56]. This practically indefinite resource of labour made extremely low cost manufacturing on such an unprecedented scale possible.[57] Here, we can clearly observe the element of combined development. On the one hand, we find the introduction of a capitalist mode of production based upon large scale low wage labour, influenced by economic reform and interaction with ‘advanced’ capitalist economies. On the other hand, the hukou system eliminates the most fundamental characteristic of capitalism in itself, namely the “personal independence”[58] of the worker, who, through the hukou system is subject to political subordination, regarding their independence to choose where to work or live. What is more, the control exercised by the state extends much further into personal lives through the repressive measures of censorship and surveillance[59], thereby “disciplining the workforce and keeping social conflicts within bounds”.[60] A recent proposal by the Chinese government exemplifies this approach. Newly planned legislation would require all drivers of the taxi service Didi Chuxing to acquire urban residency permits.[61] In general, many of China’s internet titans such as Ali Baba rely on migrant workers to absorb the demand for low wage labour[62], yet the deliberate obstacle of the hukou system pushes migrant workers further into perilous conditions through essentially limiting workers’ freedom of movement within capitalist labour relations.

Organisational Structure of Enterprises

Chinese enterprises have undergone large reforms and restructuring, mainly aimed at increased privatization.[63] However, the most profitable state-owned enterprises (SOEs) remained under state control.[64] Nevertheless, the privatization of state-owned companies is not necessarily anything unique to China. What is more interesting in this case in the shift of organizational structure in Chinese companies, which will be demonstrated in the following. As we will see shortly, Western education of Chinese management has had an impact on the organizational structure of Chinese enterprises and thereby constitutes another example of combined development. The starting point to this process is the aftermath of the Cultural Revolution, which left China with a significant lack of trained Chinese mangers and staff to facilitate the technology transfer from the West and Japan that accompanied the open door policy of China toward the global economy.[65] Accordingly, especially during the 1990s, managers of SOEs were encouraged to complete Western-style management degrees and frequently visit companies in the West.[66] In their study, Ralston et al. trace the development of organizational structures in SOEs both before and after economic reform. They claim that prior to reforms, SOEs are generally best characterised by a ‘clan’ and ‘hierarchy’ culture, which implies a workplace environment similar to a family, with superiors acting as mentors and a high regard of loyalty trust and tradition, while upholding strong hierarchical structures.[67] However, they also trace a substantial shift in their comparison and argue that the integration into the word economy has led SOEs to embrace a more ‘market’ oriented organizational structure based on the aim to maximize productivity and profits.[68] Importantly however, a majority respondents still selected ‘clan’ culture as the most prominent type, with ‘market’ in second place.[69] Thus, rather than a complete restructuring of enterprise organization, there has been a particular convergence between pre and post reform management styles, which is likely to have been caused by the influence of Western training of Chinese management.[70] Another aspect of this are the vast numbers of Chinese students, who study abroad either in high school and later on at a university. By 2015, over four million Chinese students have studied abroad since 1978.[71] What makes this number even more impactful is the fact that the share of students returning from abroad with graduate degrees is continuously rising, amounting to 79% in the year 2016.[72]

Overall, the examples above illustrate the existing combinations in the Chinese socio-economic landscape. While the marketization of labour power was borrowed from Western capitalism[73], both the hukou and the danwei are notable Chinese characteristics that have undergone reform but remain influential and thereby shape today’s Chinese labour market into an amalgam of internal and external influences. Similarly, the new forms of SOE management also signify a form of combined development, which surfaces through the interaction of a previously dominant ‘clan’ enterprise organisation and Western management education. These examples show that far from posing a paradox, the peculiarities of Chinese development emerged as a result of the process of uneven and combined development.


Before drawing the final conclusion, let us briefly consider a crucial point. This essay has set out to understand the specific impact of U&CD on China. Despite not being the focus of this essay, it is important to keep in mind that by default, the same interaction between China and the global economy has also caused combined forms of development in the latter. In conclusion, this essay has presented the argument that the theory of U&CD provides an effective way to conceptualize the particular outcomes of Chinese economic development. Further, through applying U&CD we can resolve what first appears as a paradox – capitalist development under a self-titled communist regime. This is possible through examining the specific forms of combined development that are a manifestation of the interaction between China and the capitalist world economy, driven by the ‘whip of external necessity’ that was exerted on China in 1978. This was exemplified in this essay through the examples of the impact of the hukou and danwei on capitalist labour relations, as well as the impact of Western education and market integration on Chinese SOE management structures.  In sum, we can derive from this analysis that an understanding of ‘capitalism with Chinese characteristics’ requires a thorough examination into the internal and external forces that initially led to their development.


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Cohen, M. A. (2012). ‘Argentina’s Economic Growth and Recovery: The Economy in a Time of Default’. New York: Routledge.

Davidson, N. (2017). ‘Uneven and Combined Development: Modernity, Modernism, Revolution’. Online, available at: (page numbers taken from PDF) [Accessed: 20/04/2018].

Deutscher, I. (1984). ‘Marxism, Wars and Revolutions’. London: Verso.

Dunford, M.; Weidong, L. (2017). ‘A Century of Uneven and Combined Development: The Erosion of United States Hegemony and The Rise of China’. In: Вестник Мгимо-Университета, Vol. 5(56), pp. 7-32. Online, available at DOI:10.24833/2071-8160-2017-5-56-7-32 [Accessed: 23/04/2018].

Fan, C. (1995). ‘Of Belts and Ladders: State Policy and Uneven Regional Development in Post-Mao China’. In: Annals of the Association of American Geographers, Vol. 85(3), pp. 421-449. Online, available at DOI: 10.1111/j.1467-8306.1995.tb01807.x [Accessed 01/05/2018].

Huang, Y. (2008). ‘Capitalism with Chinese characteristics: Entrepreneurship and the State’. New York: Cambridge University Press.

Hung, H. (2013). ‘Labor Politics under Three Stages of Chinese Capitalism’. In: The South Atlantic Quarterly, Vol. 112(1), pp. 203-212. Online, available at DOI:10.1215/00382876-1891341 [Accessed: 26/04/2018].

Hung, H. (2016) ‘The China Boom: Why China will not rule the world’. New York: Columbia University Press.

ICEF – Data taken from:

IMF – Data taken from: World Economic Outlook Database 2018

Kerr, D. (2007). ‘Has China abandoned self-reliance?’ In: Review of International Political Economy, Vol. 14(1), pp. 77-104. Online, available at DOI: 10.1080/09692290601081178 [Accessed 05/05/2018].

Knight, J.; Song, L. (2005). ‘Labour Policy and Progress: Overview’. Chapter 2 in: Towards a Labour Market in China. Oxford Scholarship Online, available at DOI:10.1093/0199245274.003.0002 [Accessed: 28/04/2018].

Lin, J. (2011). ‘The comparative advantage-defying, catching-up strategy and the traditional economic system’. Chapter 4 in: Demystifying the Chinese Economy. Cambridge: Cambridge University Press. Online, available at DOI:10.1017/CBO9781139026666.005 [Accessed 01/05/2018].

Lorenz, A.; Wagner, W. (2007). ‘Red China, Inc. – Does Communism Work After All?’. In: Der Spiegel. Online, available at: [Accessed 02/05/2018].

Meisner, M. (1996). ‘The Deng Xiaoping Era – An Inquiry into the Fate of Chinese Socialism, 1978-1994’. Toronto: HarperCollins Canada Ltd.

Oi, J. C. (1999). ’Two Decades of Rural Reform in China: An Overview and Assessment’. In: The China Quarterly, No. 159, Special Issue: The People’s Republic of China after 50 Years, pp. 616-628. Online, available at: [Accessed: 26/04/2018].

Ralston, D., et al. (2006). ‘Today’s State-Owned Enterprises of China: Are They Dying Dinosaurs or Dynamic Dynamos?’. In: Strategic Management Journal, Vol. 27, pp. 825–843. Online, available at DOI:10.1002/smj.545 [Accessed 05/05/2018].

Rosenberg, J. (1994). ‘The Empire of Civil Society’. London: Verso.

Rosenberg, J. (2013). `Kenneth Waltz and Leon Trotsky: Anarchy in the mirror of uneven and combined development’, In: International Politics Vol. 50(2), pp. 183-230. Online, available at DOI:10.1057/ip.2013.6 [Accessed 25/04/2018].

Rosenberg, J., (2016). ‘Uneven and Combined Development: ‘The International’ in Theory and History’. Chapter 2 in: Anievas, A. & Matin, K. (eds.), Historical Sociology and World History: Uneven and Combined Development over the Longue Durée. London: Rowman & Littlefield International.

Trotsky, L. [1932(2007)]. ‘History of the Russian Revolution’. Chicago: Haymarket Books. Online, Available from: ProQuest Ebook Central [Accessed 01/05/2018].

Walker, R.; Buck, D. (2007). ‘The Chinese Road: Cities in the Transition to Capitalism’. In: New Left Review, Vol. 46, pp. 39-66. Online, available at:  [Accessed: 26/04/2018].

Wang, F. (2004). ‘Reformed Migration Control and New Targeted People: China’s Hukou System in the 2000s’. In: The China Quarterly, Vol. 177, pp. 115-132. Online, available at: [Accessed: 26/04/2018].

Warner, M. (1987). ‘China’s Managerial Training Revolution’. Chapter 5 in: Management Reforms in China, Warner, M. (ed). London: Frances Pinter.

Xie, Y. et al. (2009). ‘Danwei and Social Inequality in Contemporary Urban China’. In: Res Social Work, Vol. 1(19), pp. 283-306. Online, available at doi:10.1108/S0277-2833(2009)0000019013 [Accessed 05/05/2018].

Zhang, D.; Unschuld, P. (2008). ‘China’s barefoot doctor: past, present, and future’. In: The Lancet, Vol. 372, pp. 1865-1867. Online, available at DOI:10.1016/S0140- 6736(08)61353-7 [Accessed: 28/04/2018].


[1] IMF – World Economic Outlook Database 2018

[2] Lorenz, A.; Wagner, W. (2007). ‘Red China, Inc. – Does Communism Work After All?’. In: Der Spiegel.

[3] Meisner, M. (1996). ‘The Deng Xiaoping Era – An Inquiry into the Fate of Chinese Socialism, 1978-1994’. Toronto: HarperCollins Canada Ltd, p. xii.

[4] Cohen, M. A. (2012). ‘Argentina’s Economic Growth and Recovery: The Economy in a Time of Default’. New York: Routledge, p. xvii.

[5] Huang, Y. (2008). ‘Capitalism with Chinese characteristics: Entrepreneurship and the State’. New York: Cambridge University Press.

[6] Oi, J. C. (1999). ’Two Decades of Rural Reform in China: An Overview and Assessment’. In: The China Quarterly, No. 159, Special Issue: The People’s Republic of China after 50 Years, p. 627.

[7] Ibid.

[8] Huang, Y. (2008), p. xviii.

[9] Ibid., p. 8.

[10] Rosenberg, J., (2016). ‘Uneven and Combined Development: ‘The International’ in Theory and History’. Chapter 2 in: Anievas, A. & Matin, K. (eds.), Historical Sociology and World History: Uneven and Combined Development over the Longue Durée. London: Rowman & Littlefield International, pp. 18-19.

[11] Meisner, M. (1996), p. 18.

[12] Deutscher, I. (1984). ‘Marxism, Wars and Revolutions’. London: Verso, p. 195.

[13] Ibid., pp. 205-06.

[14] Hung, H. (2013). ‘Labor Politics under Three Stages of Chinese Capitalism’. In: The South Atlantic Quarterly, Vol. 112(1), p. 205.

[15] Hung, H. (2016) ‘The China Boom: Why China will not rule the world’. New York: Columbia University Press, p. 47.

[16] Zhang, D.; Unschuld, P. (2008). ‘China’s barefoot doctor: past, present, and future’. In: The Lancet, Vol. 372, p. 1865.

[17] Ibid., pp. 1865-66.

[18] Meisner, M. (1996), p. 194.

[19] Hung, H. (2016), p. 48.

[20] Boyle, C.; Rosenberg, J. (2018). ‘Explaining 2016: Brexit and Trump in the History of Uneven and Combined Development’. (Unpublished Manuscript, University of Sussex), p.11.

[21] Rosenberg, J., (2016), pp. 21-22.

[22] Trotsky, L. [1932(2007)]. ‘History of the Russian Revolution’. Chicago: Haymarket Books, p. 5.

[23] Rosenberg, J., (2016), p. 17.

[24] Ibid.

[25] Trotsky, L. [1932(2007)], p. 4.

[26] Ibid.

[27] Rosenberg, J. (2013). `Kenneth Waltz and Leon Trotsky: Anarchy in the mirror of uneven and combined development’, In: International Politics Vol. 50(2), p.196.

[28] Trotsky, L. [1932(2007)], p. 5.

[29] Fan, C. (1995). ‘Of Belts and Ladders: State Policy and Uneven Regional Development in Post-Mao China’. In: Annals of the Association of American Geographers, Vol. 85(3), p. 422.

[30] Meisner, M. (1996), p. 199.

[31] Lin, J. (2011). ‘The comparative advantage-defying, catching-up strategy and the  traditional economic system’. Chapter 4 in: Demystifying the Chinese Economy. Cambridge: Cambridge University Press, p. 102.

[32] Meisner, M. (1996), p. 201.

[33] Boyle, C.; Rosenberg, J. (2018), p. 12.

[34] Hung, H. (2013), p. 205.

[35] Kerr, D. (2007). ‘Has China abandoned self-reliance?’ In: Review of International Political Economy, Vol. 14(1), p. 83.

[36] Boyle, C.; Rosenberg, J. (2018), p. 8.

[37] Knight, J.; Song, L. (2005). ‘Labour Policy and Progress: Overview’. Chapter 2 in: Towards a Labour Market in China. Oxford Scholarship, p. 20.

[38] Davidson, N. (2017). ‘Uneven and Combined Development: Modernity, Modernism, Revolution’, p. 82.

[39] Dunford, M.; Weidong, L. (2017). ‘A Century of Uneven and Combined Development: The Erosion of United States Hegemony and The Rise of China’. In: Вестник Мгимо-Университета, Vol. 5(56), pp. 7-32.

[40] For Hukou see: Chan, K.; Zhang, L. (1999). ‘The Hukou System and Rural-Urban Migration in China: Processes and Changes’. In: The China Quarterly, Vol. 160, p. 819. For Danwei see: Xie, Y. et al. (2009). ‘Danwei and Social Inequality in Contemporary Urban China’. In: Res Social Work, Vol. 1(19), p. 283.

[41] Knight, J.; Song, L. (2005), pp. 26-27.

[42] Ibid., p. 41.

[43] Ibid.

[44] Xie, Y. et al. (2009), p. 283.

[45] Ibid., p. 294.

[46] Ibid., p. 286.

[47] Ibid., p. 294.

[48] Chan, K.; Zhang, L. (1999), p. 830.

[49] Wang, F. (2004). ‘Reformed Migration Control and New Targeted People: China’s Hukou System in the 2000s’. In: The China Quarterly, Vol. 177, p. 116.

[50] Knight, J.; Song, L. (2005), p. 25.

[51] Chan, K.; Zhang, L. (1999), p. 839.

[52] Wang, F. (2004), p. 129.

[53] Knight, J.; Song, L. (2005), p. 22.

[54] Walker, R.; Buck, D. (2007). ‘The Chinese Road: Cities in the Transition to Capitalism’. In: New Left Review, Vol. 46, p. 44.

[55] Davidson, N. (2017), p. 85.

[56] Chan, K.; Zhang, L. (1999), p. 831.

[57] Hung, H. (2013), p. 209.

[58] Marx, K., quoted in Rosenberg, J. (1994). ‘The Empire of Civil Society’. London: Verso, 144.

[59] Hung, H. (2013), p. 204.

[60] Meisner, M. (1996), p. 523.

[61] Clover, C.; Sherry, J. (2016). ‘Didi Chuxing to be hit by rules on migrant drivers’. In: Financial Times.

[62] Ibid.

[63] Walker, R.; Buck, D. (2007), p. 55.

[64] Oi, J. C. (1999), p. 625.

[65] Warner, M. (1987). ‘China’s Managerial Training Revolution’. Chapter 5 in: Management Reforms in China, Warner, M. (ed). London: Frances Pinter, p. 73.

[66] Ralston, D., et al. (2006). ‘Today’s State-Owned Enterprises of China: Are They Dying Dinosaurs or Dynamic Dynamos?’. In: Strategic Management Journal, Vol. 27, p. 833.

[67] Ibid., p. 831-32.

[68] Ibid., p. 839.

[69] Ibid., p.  838.

[70] Ibid., p.  838-39.

[71] Boyle, C.; Rosenberg, J. (2018), p. 14.

[72] ICEF: Increasing Numbers of Chinese Graduates Returning Home

[73] Meisner, M. (1996), p. 493.


The Contours of Capitalism in China

February 20, 2022 Leave a comment

China is the world’s second-largest economy and the world’s main industrial producer and exporter. How can we characterize the economic and social transformations that have marked China’s development over the past four decades?

How should we analyze the economic and social transformations in China four decades after the reforms initiated by Deng Xiaoping?1 Forty years ago, China’s economy grew at an annual average rate of 9.5 percent, when the world average was below 3 percent. As a result of that expansion, its gross domestic product (GDP) increased fivefold in the period since, which explains why it is now the world’s second-largest economy. It is the world’s main industrial producer and exporter, and it is the most important place to which almost all other countries export their products. This is some of what has happened since 1978, when Deng began the path of reforms aimed at capitalist restoration. China is still officially defined as a “socialist market economy.” But is that just a euphemism to avoid talking about capitalism?

Primitive Accumulation “with Chinese Characteristics”

As I wrote recently, it is nearly impossible to think that a “Chinese miracle” could have taken place without the 1949 revolution, which achieved national unity, led to a break with imperialism (until the restoration of diplomatic relations initiated by Mao in the early 1970s), liquidated large agricultural landowners, and aimed at strengthening a nationalized industry. None of this had been possible for the nationalist Kuomintang or any other sector of the bourgeoisie; it was achieved by the revolution.2Theses on the Eastern Question,” the Chinese Communist Party (CCP) members entered the ranks of the KMT, joining forces to fight the imperialist occupation. It was the KMT that ended up suppressing the insurrections in Shanghai and Canton in 1927 — with Stalin, who had already consolidated his leadership of the USSR through the county’s ongoing bureaucratization, ordering the CCP to obey the KMT leadership. This all fell under the conception that in this “first stage” of the revolution, the working class was not called on to lead. In 1934, the KMT openly resumed its efforts to exterminate the Communists by accelerating a final break. After the revolution, the KMT fled to Taiwan, where it maintained dominance with the support of imperialism.

As Ho-fung Hung argues, the Communist Party was able to “extract and concentrate scattered rural surplus” and direct it toward urban industrial growth, thanks to “rural collectivization” and “price scissors” (meaning that state-owned industry paid the peasants less and charged them more for its products). This led to high growth rates “until the mid-1970s, when the growth momentum generated by the central-planning system was exhausted and the economy came to a standstill.”3The China Boom: Why China Will Not Rule the World (New York: Columbia University Press, 2016), 54.

This “primitive accumulation” has been a key input for capitalist restoration because, as happened in Soviet Russia and eastern Europe, some state property has been taken over by state bureaucrats in a bid to become “entrepreneurs.” This left “a vast pool of healthy and educated surplus laborers in the countryside.”4 It can thus be argued that “the current boom in China is built on the industrial foundations established in the Mao period.”5

From the beginning all the revolution’s progressive legacies crystallized into a “truncated” transition to socialism because the Chinese Communist Party (CCP) bureaucracy played such a powerful role in shaping it, while the working class played a diluted one.6Estrategia socialista y arte militar (Buenos Aires: CEIP, 2017), 394. These legacies were the preconditions for initiating, from Deng onward, a path of social regression hand in hand with capitalist restoration.

At the same time, as Juan Chingo argues, “In the context of the historical setback represented by the capitalist restoration, the Chinese economy has benefited — contradictorily — from the ‘advantages of backwardness.’”7Mitos y realidades de la China actual” (Myths and realities of today’s China), Estrategia Internacional, no. 21 (September 2004). One of the main reasons why the effects of capitalist restoration in China contrast with the ravages of the USSR and eastern Europe is that the starting points could not be more different. As Fan Gang points out, the economies of the latter “were highly industrialized and highly nationalized when the reforms began,” and “more than 90 percent of the population were workers in state-owned enterprises.”8 In China, by contrast, 80 percent of the population was working in agriculture in 1978:

It was basically an agricultural society at that time, with a gross domestic product per capita of only 100 U.S. dollars. … As long as China was not a highly industrialized or nationalized economy, it was much easier to proceed with reforms and provide growth in income and in the economy as a whole, to restructure while it was developing.9

This did not make the introduction of capitalist social relations any less violent for the hundreds of millions of peasants thrown into the dormitory factories and permanent migration, or for the environment, as most industrialized Chinese cities became leaders in pollution. But unlike what happened in the USSR and eastern Europe, where integration into capitalism represented a fall into the abyss for the entire working class, in China the effects would be different for the “old” and “new” workforce, the latter being able to hold on to “their current situation initially” as “a relative improvement over their living conditions in the backward Chinese countryside.”10

The path to capitalist restoration in China proceeded in four phases:

  1. The decollectivization of agriculture, the first of Deng’s reforms. “In 1982, People’s Communes (the Chinese form of collective agriculture) were officially dismantled. On paper, the rural land remained under collective ownership by village communities. In fact, land was distributed to individual households, who had full control over the use of land.”11China and the Twenty-First Century Crisis (New York: Pluto Press, 2016), 25. Initially, this right of use did not allow one to transfer ownership. During the first decade of reforms, “the driving force of growth [was] private enterprises and rural collective enterprises, many of which were private ones in disguise.”12China Boom, 61. There also began the incipient joint ventures between state enterprises and foreign firms in an effort to obtain technology. The stimulus to the rural private sector led to economic growth, but at the same time it led to a strong deficit in the external accounts (balance of payments) because there was an increase in imports (of means of production and consumer goods) but not in exports.13China and the Twenty-First Century Crisis, 25 At the end of the 1980s, under the auspices of Deng and Zhao Ziyan — then the CCP general secretary — there began an economic reform with a clearly neoliberal orientation, under which all price controls were quickly eliminated. This increased inflation, which reached 21 percent in 1988. “Surging inflation and growing corruption hurt not only the urban working class, but also intellectuals and college students. The rapid escalation of social discontent led to the political crisis in 1989.”14
  2. The Tiananmen massacre, which took place the same year as the collapse of the USSR and the former eastern European states. This was a turning point that would eventually accelerate the restoration. As Chingo points out, “The fear generated by the Tiananmen Square uprisings tipped the balance towards a conservative orientation in politics while economic liberalization was deepening.”15 After some years of impasse during which the internal balance in the CCP tipped in favor of the sectors most reluctant to accelerate pro-market reforms (whose difference “was more about the pace and extent of the market-oriented reform than about its necessity within the ‘birdcage’ of state socialism”16China’s Rise in the Age of Globalization: Myth or Reality? (London: Palgrave Macmillan, 2018), 171. or “socialism with Chinese characteristics,” a formula that became an umbrella under which all capitalist restoration policies were introduced), it was revitalized again in 1992, but its center was located on another terrain. The sectors most reluctant to continue along the path of openness “negotiated with Deng Xiaoping, who insisted on the continuity of the reforms. … As time went by, there were no more sectors that opposed the reforms in the power structures.”17 According to Hung, “Entrepreneurial capitalism was then followed by state-led capitalism in the 1990s and beyond, when large, urban-centered SOEs [state-owned enterprises] displaced and subjugated the private sector.”18China Boom, 61. The SOEs were heavily restructured to adapt to the economic performance criteria of capitalist firms, which the American investment banks were called on to evaluate, to such an extent that financiers Carl Walter and Fraser Howie could claim in 2011 that “Goldman Sachs and Morgan Stanley made China’s state-owned corporate sector what it is today.”19Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise (New York: Wiley, 2012), 10. The corporate sector was reconfigured mainly in the decade from 1993 to 2003. Since 1995, under the motto “hold on to the big, let go of the small,” efforts were concentrated on developing national “champions,” the largest firms, which were given abundant financial assistance, markets with limited competition, and other advantages, while the privatization of smaller SOEs advanced. As Li notes, “When the Communist Party elites decided to undertake massive privatization in the 1990s, the urban working class found itself politically isolated. Because of the presence of a large and rapidly growing capitalist economic sector, the state sector working class was left with little economic bargaining power. The class war of the 1990s ended with the victory of the new Chinese capitalist class.”20China and the Twenty-First Century Crisis, 30.
  3. The deployment since 1992 of export-oriented industrialization (EOI). Developed almost entirely by foreign private capital, this strategy was used to open the economy and allow foreign investment. With its gigantic availability of labor power, which transnational capital could put to use by paying low wages, China played a central role in so-called productive internationalization, in which many industries were relocated from the imperialist countries to the dependent economies and production was subdivided into several partial processes taking place in different countries.21Crisis y contradicciones del ‘capitalismo del siglo XXI” (Crisis and contradictions of 21st-century capitalism), Estrategia Internacional, no. 24 (December 2007–January 2008); Esteban Mercatante, “Las venas abiertas del Sur global” (The open veins of the Global South), Ideas de Izquierda, no. 28 (May 8, 2016); Estaban Mercatante, “Una carrera hacia el abismo” (A race to the bottom), Ideas de Izquierda, no. 30 (July 2, 2016). China has become the center of world industrial production by far. China’s entry into the World Trade Organization (WTO) — for which it made “commitments … broader actually than any WTO member has made,” as Ambassador Charlene Barshefsky, the American negotiator involved in the agreement, stated at the time,22China’s Application for Accession to the World Trade Organization,” Hearing, April 13, 1999. — was a turning point in attracting foreign investment and expanding exports. In 1990 China exported only 1.17 percent of internationally traded manufactures; 20 years later, it was the leading exporter. In 2018 it exported 14 percent of all manufactured goods, followed by Germany (9.26 percent), the United States (8.63 percent), Japan (4.67 percent), and France (4.04 percent). Initially, the investments the country attracted were exclusively aimed at developing the “labor-intensive” links of the global value chains, but as I pointed out in an earlier article, the state concentrated its efforts on raising the technological content of its exports, not only by supporting national firms but also by betting on foreign firms to partner with national ones and transfer technology and establish more complex production links. China became the world’s “great seller” and the United States its great buyer, giving rise to “global imbalances,” in which the great imperialist power has become chronically dependent on financing from China. This remains the case even though bilateral relations have lately been marked by confrontation.
  4. The slowdown of China’s export-led growth in the aftermath of the 2008 economic crisis. Although world trade fell sharply during the Great Recession, it partially recovered, but it was much slower. In previous decades world trade, along with investments, had been increasing more than world output. But now it grew less than the economy almost systematically, and this has been exacerbated in recent years by trade disputes. China kept its economy from collapsing as a result of the global downturn in 2008, but since then one of the engines of its growth has weakened: exports. It maintains its export leadership, but foreign sales no longer propel the economy as they once did. As a result of the crisis, the question arose whether China’s economy needed a “rebalancing” so that it would depend less on exports and more on producing for domestic demand, not only for investment (which was already high and increased to 50 percent of GDP) but also for consumption. But such a rebalancing did not happen, because although wages increased, they could not absorb enough of the country’s output. Rebalancing was thus prevented because both the multinational capitalist exporters and the Chinese bourgeoisie resisted sacrificing China’s competitive advantage in the international market: its comparatively low wages. Domestic demand was stimulated by accelerating investments, creating monumental infrastructure works and large-scale real estate development, which fueled bubbles that began to appear in 2015 (before which the government had tried to contain them by taking advantage of the nationalized financial system). They also further fed the development of SOEs. Finally, as a result of the imbalances produced by the crisis, China entered into an increasingly aggressive competition to penetrate new countries commercially and to direct investments in ambitious infrastructure projects outside its territory, such as the Belt and Road Initiative.23

What Shapes the Economy? Private Capital or State-Owned Enterprises?

How should we define China economically and socially based on what has emerged from these transformations over four decades? Although China has developed capitalist sectors, some analysts maintain that China cannot yet be called capitalist. Let’s not forget that China awakened in the historian Giovanni Arrighi a fantastical, speculative hypothesis about the development of a non-capitalist market that would be projected from there to the rest of the planet.24Adam Smith in Beijing (London: Verso, 2007). Since the publication of Arrighi’s thesis in 2007, a lot has changed in China. But even today, Marxists such as Michael Roberts reject the idea that China is capitalist; for Roberts, the law of value operates on the Chinese economy, but its “impact is ‘distorted,’ ‘curbed’ and blocked by bureaucratic ‘interference’ from the state and the party structure to the point that it cannot yet fully dominate and direct the trajectory of the Chinese economy.”25China: Three Models of Development,” Blogging from a Marxist Economist, July 2015. The author relies on this to argue that it is not a capitalist economy. He acknowledges that “there has been a significant expansion of privately owned companies, both foreign and domestic, over the last 30 years, with the establishment of a stock market and other financial institutions.”

But the vast majority of employment and investment is undertaken by publicly owned companies or by institutions that are under the direction and control of the Communist party. The biggest part of China’s world-beating industry is not foreign-owned multinationals, but Chinese state owned enterprises. The major banks are state-owned and their lending and deposit policies are directed by the government …There is no free flow of foreign capital into and out of China. Capital controls are imposed and enforced and the currency’s value is manipulated to set economic targets. 26

David S. G. Goodman falls largely in line with Roberts. He characterizes China as “a mixed economic system in which a growing market sector interacts and hybridizes with, but largely remains subordinated to, a more established state sector.”27Class in Contemporary China (Cambridge: Polity, 2014), 29.

These approaches are based on the fact that the weight of SOEs in the economy is certain. If we look at how assets are distributed today according to the type of firm, what we will see is that SOEs continue to be the corporate sector that manages the most resources, by far. In the industrial sector, SOEs have two-thirds of total assets, while privately owned industrial firms have one-third, according to the latest data from China’s National Bureau of Statistics. If we look at the Chinese firms that made it onto the latest Fortune Global 500 list of the planet’s 500 largest companies — a list on which China now has more companies than any other country — we see that the overwhelming majority are state-owned, either totally or partially. In many cases, these firms have limited global reach, operating primarily within China itself, but they achieve their rankings by virtue of the scale that the Chinese market allows.

It is also public companies, not private ones, that lead China’s foreign investment abroad. In other words, most of the productive capital disbursements made by China in other countries are by SOEs. China’s foreign direct investment outflows ranked fourth in the world in 2019; it accounted for 8.9 percent globally, after Japan (17 percent), the United States (9.5), and the Netherlands (9.4 percent). In 2010, 90 percent of China’s foreign investment was made by SOEs, and now the proportion has fallen to 60 percent (along with a formidable increase in the country’s total investment abroad in the 2010s). That means more Chinese private firms are investing abroad.

It should be noted, however, that the distinction between publicly and privately owned companies is rather blurry. As Lee Jones notes, “Many limited liability companies (LLCs), which comprise 43.2 percent of COFDI [Chinese outward foreign direct investment], involve a mixture of private and public shareholders, with SOEs sometimes enjoying controlling stakes. SOEs own an estimated quarter of private firms, including subsidiaries listed on foreign stock markets; likewise, many SOEs have private shareholders.”28Beyond ‘China, Inc.’ — Understanding Chinese Companies,”, July 13, 2020.

The picture of the overwhelming majority of state-owned corporations changes when we look at the export sector. SOEs now account for 10 percent of the country’s total exports, whereas in 1995 they accounted for 67 percent of sales abroad. Today, 90 percent of exports are shared equally between firms wholly or partly owned by foreign capital and Chinese private equity firms. Foreign firms (mostly from the imperialist countries that continue to exploit China’s cheap labor force) had the largest share of China’s exports in 2006, reaching almost 60 percent. As far as Chinese private capital firms are concerned, their share of exports was almost nonexistent in 2000 and barely 10 percent in 2004. Although they have increased their share, “most of these exports by [privately owned enterprises] remain in low-value sectors, such as clothing and cheap consumer goods.”29Socialist Register 2019: A World Turned Upside Down?, ed. Greg Albo and ‎Leo Panitch (London: Merlin Press, 2019), 166.

China’s most complex exports are classified as “processed with imported materials”; they are the “most dynamic and technologically advanced” and “are at the heart of China’s integration into the global value chains of the world’s top TNCs [transnational companies].”30 In the case of these exports, the companies with foreign capital participation have consistently varied between 80 and 85 percent since 2006. This is an area that accounted for one third of exports in 2017. Most of these exports are made by exclusively foreign capital companies (60 to 65 percent), while a part of this total is made up of joint ventures between Chinese and foreign capital. SOEs export less than 5 percent in this area, and private firms export the remaining 10 percent. “The dominance of foreign capital in China’s most technologically advanced exports is staggering, especially when considering that most observers continue to assume that Chinese exports are exported by Chinese firms.”31

Korean firms such as Samsung and LG do their own assembly in China and are among the county’s top-10 exporters. Multinational firms such as Apple operate in China through outsourcing. In 2015, of the top-10 exporting firms, only two were of Chinese origin. The country’s leading exporter that year was Hon Hai Precision Industry (Foxconn), a Taiwanese company that makes half its turnover assembling phones for Apple. Five other Taiwanese companies were also among the top-10 exporters in China in 2015, and together with Foxconn they accounted for 71 percent of the total exports from the top 10 and 11 percent of the country’s total sales. The only two Chinese firms among the top 10 exporters were Huawei and the oil company Sinopec.32

In short, private (and mostly foreign) capital continues to dominate foreign trade, while SOEs are predominant in the economy as a whole (in which foreign trade has lost some relevance in recent years because the economy has grown more than exports).

To what extent can it be said that SOEs have thus far managed to escape the constraints of the law of value? They have been able to do so to the extent that they have consistently managed to maintain lower levels of profitability than private capital without that preventing them from taking on large-scale debt to sustain ambitious expansion plans. If we look at the ratio of profits to assets in state-owned industrial holdings, it is half that of the private sector in the economy. China’s corporate sector is thus not entirely subject to the pressures of profitability, yet it has continued to grow and invest. This is thanks to the Chinese financial sector — one of the world’s least deregulated and most open to private capital — which has provided the financial resources to sustain corporate growth. Of China’s total accumulated debt, which, counting the public and private sectors, reached 317 percent of GDP in the first quarter of 2020, half (150 percent of GDP) is in the hands of the nonfinancial corporate sector, which quadrupled between 2008 and 2020, according to BIS data. The OECD estimated in 2018 that 82 percent of the nonfinancial corporate debt in China was in the SOEs.

The level of indebtedness reached by many firms has not prevented them from continuing with expansion plans, which shows that the Chinese state has preserved flexibility by limiting the privatization of the financial sector. But the need to create massive debt to limit the weight of economic imperatives is another indicator of the extent to which the law of value weighs on the economy.

Transformations in the Class Structure

Although Goodman emphasizes the domination of the state sector, illustrates how there developed class sectors associated with capital’s growing importance. In 1978 there were no entrepreneurs or private business owners. In 1988 they represented 3.1 percent of the active population. In 2001 it was 8.1 percent, and by 2006 it had reached 10.8 percent. Meanwhile, managers, who represented 0.2 percent of the labor force in 1978, were 2.6 percent in 2006. At the same time, the number of managers in state and public companies and the party bureaucracy increased from 1 percent of the working population to 2.3 percent. If we exclude the latter, no less than 13.4 percent of the population owns or manages private capital. Technicians and professionals, commercial employees and office workers, who in 1978 accounted for 7 percent of the working population, reached 23.4 percent in 2006.33Class in Contemporary China, 60, table 2.2.

An important aspect of characterizing the advance of capitalism in China is what has happened to the working class. At first glance, “full-time” workers represent a smaller percentage of the working population than at the beginning of the reforms (they went from 19.8 percent in 1978 to 22.4 percent in 1988, and dropped to 14.7 percent in 2006). But this is misleading, since a large part of the population registered as employed in the rural sector (which fell from 67.4 to 40.3 percent as a result of land decollectivization) are in fact migrant workers “who work in non-agricultural activities for six months or more within a year in the cities or the rural areas outside the township of their official residence.”34China and the Twenty-First Century Crisis, 32. When these rural migrant laborers are working in the city — according to Li, they represented one-third of the labor force in 2012 — they have no access to any of the social benefits available to the urban labor force, such as retirement funds or health insurance. This is because those benefits are associated with the registration of domicile (hukou), which these migrants cannot legally attain. They are “illegal” within their own country.

The elimination of social benefits and the guarantee of employment in perpetuity that was enshrined in the so-called “iron rice bowl,”35Tiefanwan (iron rice bowl) is the Chinese term for an occupation that includes guaranteed job security, a steady income, and benefits. It was a feature of some employment in SOEs. were key milestones in creating a “labor market,” without which there can be no talk of capitalism. Historically, the SOE ensured employment and wages, making the threat of unemployment virtually nonexistent. The functioning of capitalism requires not only that this threat be real but also that it form “a disposable industrial reserve army,” which “belongs to capital quite as absolutely as if the latter had bred it at its own cost,” as Marx wrote.36Despidos y baja de salarios: Los usos de la crisis y la ‘doctrina del shock’” [Layoffs and downsizing: The uses of the crisis and the “shock doctrine”], Ideas de Izquierda, April 12, 2020. Some of these commitments still exist on paper for the workforce employed by SOEs, but they have become irrelevant and omit those employed in the private sector. In addition, rural migrant laborers who spend much of the year working in the cities without being registered are a “second-class” citizenry that abets the general degradation of working conditions and facilitates the spread of these “market” mechanisms.

China Is Understandable Only as a Result of Uneven and Combined Development

One cannot characterize China only according to the relative weight of the capitalist and state sectors in its economy. One’s starting point must be the transformations that were taking place worldwide when China initiated its capitalist restoration and how these transformations are key to explaining aspects of China’s “exceptionalism.” China’s accelerated growth, the formation of its state-owned “national champions,” and its development as the world’s main export platform would be unthinkable without an accelerated productive internationalization over the last decades, one that turned several Asian countries — and a few countries elsewhere — into centers of capital accumulation, above all China. Whatever amount of private capital was operating in the Chinese economy, it was undoubtedly the main thing fueling the country’s transformation.

Let’s look first at what China has meant in the world capitalist system. The capitalist developments produced in China by foreign capital, oriented toward export-oriented manufacturing, were the flip side of the imperialist countries’ deindustrialization (relative or absolute, depending on the productive branch). With its low wages, China was a key element in the so-called “global labor arbitrage” concept that the Morgan Stanley economist Stephen Roach used to explain a practice multinational companies have been deepening since the 1980s. This “arbitrage” consists of taking advantage of the low-wage labor force in dependent countries by relocating production that used to be in developed economies, beginning with the most “labor-intensive” tasks. This creates an international division of production processes and moves forward other links of the value chain. This arbitrage markedly changed “how the pie was sliced” among the classes, as the country’s income was increasingly generated by private capital investment. This occurred in the imperialist countries as well as in the countries that attracted investment, while other dependent economies were left behind. China, with its current population of nearly 1.4 billion and a workforce of 940 million people, was a centerpiece of the so-called “doubling” of the world labor force available to transnational capital, which according to the ILO went from 1.9 billion people in 1980 to 3.5 billion today. This resulted from the integration of the former bureaucratized workers’ states into world capitalism and the greater economic openness of all dependent countries — consecrated in 1995 with the creation of the World Trade Organization. This all began systematically at the end of the 1970s under pressure from the United States, the European Union, and Japan, and with the encouragement of the IMF and the World Bank with the “structural reforms” they imposed in every debt crisis.37China, India, and the Doubling of the Global Labor Force: Who Pays the Price of Globalization?,” Asia-Pacific Journal — Japan Focus 3, no. 8 (2005); see also Florence Jaumotte and Irina Tytell, “Globalization of Labor,” Finance and Development 44, no. 2 (2007): 20.

Over the past decades China’s high level of growth took place because the country became a pole of attraction for global capital (this was also the case, to a lesser extent, with other “developing” economies). But there are other elements, too. For example, the imperialist countries had relatively low economic growth during the same period. Their growth rates differed and they developed in very different phases, but on average the imperialist economies grew much less than they did in the postwar boom years — the other side of uneven development on a planetary scale.

It is from this global “sociometabolism” that we must characterize what China has become, in a process of unequal and combined development, taking the concept developed by Leon Trotsky first to characterize the peculiarities of Russia and later to establish a more general law of capitalist development.

Shaped by the penetration of capital, China changed profoundly in its economic and social structure. All publicly owned production was reconfigured, and SOEs were now listed on the stock exchange like any private firm, even though that they are not fully conditioned by the profitability restrictions that private capitalist companies face.

The Chinese economy’s aggregate productivity is 25 percent that of the U.S. economy’s (and also lower than that of Argentina — something difficult to believe but that shows just how misleading a statistic it is). This must also be viewed through the lens of uneven and combined development. China is actually several Chinas. There is the ultramodern China located mainly in the southeast, with “islands” in the rest of the country that house the technological developments, the Chinese “Silicon Valley” (Shenzen), and all the export industries; it enjoys high levels of productivity, and some social strata — in the minority — have high consumption capacity. There is another China that intermingles modernization with gigantic infrastructure projects and underutilized housing projects. There are vast rural areas where agricultural production continues on individual plots (subject to the pressures toward the complete commodification of land and its concentration); this clashes with the development of large-scale capitalist production, which seeks to monopolize more territory.

China has quickly become one of the most unequal societies as a result of three combined processes. One was the “dispossession” of state ownership of the means of production, which in China as in Russia was partially converted to private ownership by sectors of the bureaucracy (the fact that the Chinese state did not decompose, as happened in the USSR, limited the rapacity, but it did not eliminate the process itself). Another was the effort to create a national bourgeoisie — and not just large public enterprises — that would broaden the bases of capitalism. Third, it was also a spontaneous product of the functioning of the system that produced worldwide increases in inequality during these decades of unbridled capitalism. Although China’s per capita wealth is still lower than that of countries such as Argentina, since 2019 it has been the country with the largest number of people who find themselves among the wealthiest 10 percent of the world (although the United States still leads in the number of people in the wealthiest 1 percent). In other words, China has a not inconsiderable stratum of people situated within the highest levels of global wealth, although this may be “rickety” for China’s levels. In terms of billionaires, it is at the top of the list — 799, with a combined wealth of $1.12 trillion (almost 10 percent of the total Chinese economy). That is more than the next two countries combined: the United States (626) and India (137). It is another sign that more than 40 years after the beginning of the restoration, China is, beyond a doubt, a capitalist society — despite the peculiarities of its combined development.

“We suffer not only from the living, but from the dead,” wrote Marx in his preface to Capital, referring to the havoc wrought by the combination of old money and new capitalist wealth in Germany in those years.38Capital, vol. 1, preface to the first German edition (1867). The same could be said of China today — a combination of the madness of ultramodern life, the attempt to lead in technological innovation, and the preservation of 19th-century methods of labor exploitation in many factories. In recent years, society has been torn between powerful economic development and the expansion of Chinese companies around the world, which contrasts with the unsatisfied greed of bourgeois and petit bourgeois sectors that find the space left by “statism” to private initiative insufficient — as Au Loong Yu points out,39Strength and Contradictions of the Chinese Economy: An Interview with Au Loong Yu,” Left Voice, September 13, 2018. even if this does not prevent the tycoons’ continual enrichment.

The CCP bureaucracy, which took decades to establish its global influence within the established order, have been struggling for years with realizing its imperial aspirations amid the continually escalating aggressiveness of U.S. imperialism. These are all tensions that arise from the fact that China is imbued with capitalism. How they will be resolved is still an open question that will define China’s place in the global hierarchy.

First published in Spanish on August 16 in Ideas de Izquierda.

Translation by Scott Cooper


Varieties of Capitalism and Rethinking the East Asian Model

February 18, 2022 Leave a comment

In their work on varieties of capitalism (VoC), Soskice and Hall (2001) identified several types of capitalism, such as liberal market economies (LMEs), coordinated market economies (CMEs), and mixed market economies (MMEs). They argue that each type of capitalism is stable and efficient in terms of its economic performance, owing to complementarity among its institutional components. However, Lee and Shin (2018) show that each type corresponds to different economic outcomes in terms of economic growth, unemployment, and equity. They also observe that the change of a country from one type to another has led to the existence of convergence and divergence among countries.

A similar contrast was also made in Acemoglu et al. (2012), when they considered the US model of capitalism and the Western European model as “cutthroat” capitalism versus “cuddly” capitalism, respectively. Cutthroat capitalism is good for innovation but generates inequality, whereas cuddly capitalism is better at redistributing income and protecting employment and health, but worse at producing frontier innovation. Aghion et al (2020) try to compare the US and Western European models again in terms of how they are dealing with and responding to the Covid-19 crisis.

This paper focuses on East Asian economies led by Japan, followed by the Asian Tigers, namely, Korea and Taiwan, to discuss the evolution of their performance and changes in type over time, from the VoC perspective. First, I discuss the interesting puzzle of the emerging convergence of Japan and Korea toward the LMEs or Anglo–Saxon economy, despite the apparent differences in underlying institutions: labour market, corporate governance, and welfare systems. Then, I identify the financialisation of an economy as a force that drives this convergence, signalled by decreasing economic growth rates and rising inequality in East Asia. Finally, I re-evaluate Asian economies in the context of the coronavirus disease in 2019, the ‘Covid-19 pandemic’, which has suddenly halted globalisation and further questioned the superiority of shareholder capitalism, mostly adopted in LMEs and associated with financialisation and globalisation.

I argue that a new balance is needed between shareholder and the stakeholder capitalism in East Asia. I also discuss the implications of the retreat of globalisation for East Asia and other emerging economies in general, in terms of the “globalization paradox” proposed by Rodrik (2011). I argue that the retreat of globalisation is a good opportunity to resolve the paradox or the ‘trilemma’ by restoring autonomy in domestic economic policymaking over interest rates and exchange rates, while imposing some adjustments on formerly excessive capital mobility. These changes in policy stance are required to build a crisis-resilient macro-financial system, given the brewing of the post-pandemic bubble and the increasing mismatch between real and financial sectors around the world.

Varieties of Capitalism, Financialisation, and the End of East Asian Capitalism

Soskice and Hall (2001) have provided an important way to understand and compare economic systems around the world. They focus on how firms enter into a relationship with other actors, such as workers, suppliers, business associations, governments, and other stakeholders. According to Soskice and Hall (2001), an economy is classified as an LME when firms use market institutions, such as competition and formal contracts, to coordinate a relationship. Alternately, an economy is classified as a CME when firms use a non-market relationship, such as strategic interaction among actors, as a form of coordination. Accordingly, they classify the US, the UK, Australia, Canada, New Zealand, and Ireland as LMEs; Germany, Japan, Switzerland, the Netherlands, Belgium, Sweden, Norway, Denmark, Finland, and Austria as CMEs; and France, Italy, Spain, Portugal, Greece, and Turkey as countries with an ambiguous position as MMEs. These classifications are similar to the existing conventional classification, that is, most LMEs are UK or US-offspring countries, whereas CMEs comprise mostly Continental and Northern European countries.

I aim to understand East Asian economies, especially Japan and the Asian Tigers, namely, Korea, Taiwan, given their spectacular achievements in terms of growth and equity. Their economies tended to feature high growth and low inequality during their peak growth, which has earned them the label of East Asian miracles by the World Bank (1993). Kalinowski (2015) shows that East Asian capitalism remains a distinct state-led model that differed from the liberal, neo-corporatist, or welfare state capitalism in the West in terms of its reaction to the global economic crisis in 2008 by using big fiscal stimulus packages. This difference may be associated with a path-dependent transformation of the East Asian developmental state (Kim and Thurbon 2015; Thurbon 2016).

However, these economies have recently been going through radical changes as they record slow growth and rising inequality. The new situations lead to questions on whether we are facing the end of East Asian capitalism (characterised by high growth and low inequality) and convergence toward the LME (characterised by low growth and high inequality). Lee and Shin (2018) confirm this hypothesis by using a quantitative (cluster) analysis. This is different from the VoC literature, which tends to use the variables representing the underlying institutional characteristics of economies. Lee and Shin (2018) use outcome variables to compare economic performance, including the growth rate of GDP per capita, employment rate, and top 10% income share.

As shown in Table 1, a statistical analysis by Lee and Shin (2018) indicate that the LME group is associated with slow growth, high inequality, and a medium level of employment, whereas the CME group has modest growth, low inequality, and sound employment rates. Between these two groups is the MME group, with the lowest rates of employment, which probably reflect labour market rigidity. The East Asian group exhibits the highest growth and lowest inequality but only before the 2000s. In the 2000s and after, Japan and Korea joined the LME group and Taiwan joined the CME group, leaving the former East Asian group empty. Their choices may imply the end of East Asian capitalism. These results are not that surprising because the top 10% share of the national income is currently the highest in the US, at over 45%, followed closely by Korea, reaching 45% in 2010, and Japan with 40% (Lee and Shin 2018). Korea and Japan have experienced disruption, or crisis, such as the bubble and burst of the 1990s in Japan and the 1997 financial crisis in Korea, that led to a liberal and open economy (Shin and Lee 2018; Lee et al. 2020). During the crisis, Korea implemented IMF policy prescriptions in exchange for a bailout loan (Lee et al. 2002). Japan has also experienced a similar change since the burst of its economic bubble in the late 1990s. In particular, the Koizumi administration implemented liberalization policies, such as privatization and deregulation, from 2001.

Table 1: Four types of capitalism and their economic outcomes

Source: Table 1 of Lee et al. (2020).

Many institutions in Japan and Korea have evolved similarly to those in the US. First, the financial market is liberalised to allow more foreign shares of stocks and to strengthen shareholder capitalism. Second, the labour market is liberalised to promote labour flexibility and weaken the long-term employment system. Consequently, the share of part-time or irregular workers to the total employment rate has rapidly increased in Japan and Korea (Shin and Lee 2018; Lee et al. 2020). In the meantime, the divergence between Korea and Taiwan seems to be driven by the top 10% income share; the top 10% income share has increased gradually in Taiwan but at much slower rates than in South Korea since the late 1990s. This difference in the evolution of inequality between these two economies may be caused by various shocks from the Asian financial crisis, which strongly affected the South Korean economy, but minimally affected the Taiwanese economy, which avoided the crisis (Lee et al. 2020).

The above discussion presents the foundation to argue for the convergence of East Asian capitalism toward Anglo–Saxon capitalism. However, the question remains as to how this convergence can happen despite the continuing differences in underlying institutions, such as labour, financial systems, firm ownership, and governance. For instance, despite some trends toward flexibility, the labour markets in Korea and Japan are still less flexible than those in the US or the UK. Moreover, the nature of firm ownership and government in Asia is also quite different from that in the US or the UK, where ownership is quite dispersed over a large number of individual investors. Consequently, the forces that push these economies toward the LME group in terms of slow growth and high inequality remain unknown. The strong candidate variable must be the tendency for financialisation (Lee et al. 2020).

An increasing volume of literature has focused on the negative aspect of financialisation coupled with shareholder capitalism, which forces firms to pay high dividends to shareholders rather than use profits for reinvestment, which leads to slow growth (Dore et al. 1999; Lazonick 2010, 2014). The growing dominance of financial sectors is related to rising income inequality in developed countries (Alvarez 2015; Godechot 2012; Hacker and Pierson 2010; Kus 2012; Lin and Tomaskovic-Devey 2013; Stockhammer 2013; Tomaskovic-Devey et al. 2015). In the Korean context, Kim and Cho (2008) confirm that firms with high shares of equity owned by foreign shareholders tend to be associated with low investment because they are subject to demands by shareholders for more dividends. In many economies, including the US and Korea, capital markets no longer function as sources of additional funding for listed companies, but rather as a channel for value extraction in the form of stock repurchases and dividends (Lazonick and Shin 2019).[1] Lee et al. (2020) confirm this tendency for value extraction, which is that more money has flowed out of, rather than into, Korean listed firms since 2003, although such firms previously enjoyed a net positive inflow of money.

The macro-level consequences of this situation are the decreasing of fixed capital investment as a share of GDP and the increasing outflow of capital (in the form of repatriated profits and interest payments) in balance-of-payment figures.[2] In other words, the rise of shareholder capitalism, which prioritizes distributing profits as dividends to shareholders rather than funding reinvestment, seems to be slowing down investment, which in turn slows down economic growth rates. This symptom, associated with financialisation, is also a source of increasing income inequality, in addition to effects of skill-biased technological changes, including automation. Shin and Lee (2019) show that increased shares of stockholders in profits or financial resources of non-financial sectors have led to rising inequality, measured by the top 10% income share in OECD countries, whereas the influence of skill-biased technological change (which is perceived to lead to more inequality among labour-based incomes) is not a robust enough variable to explain inequality.

Financial globalisation is argued to cause rising inequality. Stockhammer (2013) finds that financial globalisation, measured by the log of external financial assets and liabilities divided by GDP, is significantly and negatively correlated with labour income share by using country-level data. Distinguishing financialisation and ‘financial development’, meaning ‘better functioning of financial markets’, Lee and Shin (2019) find no support for the argument that financial development, such as the high ratio of stock market valuation to GDP, reduces inequality by relaxing the credit constraints of the poor and see no evidence that financial development aggravates inequality. A simple focus on financial development or high education is not sufficient to reduce inequality (Lee and Shin 2019). Thus, government policies or reform measures, including differentiated taxation on dividends and reinvestments, are necessary to curve financialisation by inducing non-financial firms to focus on productive reinvestment from profits and by discouraging high dividends for shareholders.

Covid-19 and the Rebalance between Shareholder and Stakeholder Capitalism

The Covid-19 pandemic has been a major shock to the world economy and its constituent economies, including the varieties of capitalist economies. A big blunt has been observed in the US, which has not recovered as quickly as Western European economies and Asian economies such as China, Korea, and Japan (Popov 2020). Western European economies have also revealed their weaknesses in their initial responses and thus suffered greatly. One of the common weaknesses of the Western world is its reliance on East Asia for the production of masks and other medical devices, including the test kits. Overall GVC (global production chains) have revealed weakness associated with too widespread a fragmentation over diverse countries. Thus, Covid-19 also signals the retreats of the Anglo–Saxon style shareholder capitalism that has driven globalisation or neoliberalism since the 1980s. Since the 1980s, the efficiency or profit maximisation forced by shareholders seeking short-term profit has resulted in a high degree of globalisation of production chains.

Lazonick (2010, 2014) points out that the US economy maintained manufacturing until the 1980s but the rise of shareholder capitalism and financialisation since then has forced US firms to relocate their factories abroad to meet the demands of shareholders and increase profitability. This change has turned the US economy into a service-oriented economy with the hollowing out of the manufacturing industry. Lee and Shin (2019; table 1) confirm that the LMEs as a group with more than two member economies was only observed in the mid-1980s, and the US joined Canada and the UK to form the LME group only during the late 1980s or the early 1990s. This emergence of the LMEs since the mid-1980s is consistent with neoliberalism being dominant only since the 1980s.

Shareholder capitalism is again being criticised after the Covid-19 pandemic outbreak. For example, Boeing was heavily criticised when the company asked for financial help from the public sector because it paid – before the pandemic outbreak – a huge amount of money to its shareholders (with its top five all PEFs) in the form of dividends and stock buybacks, rather than reserved profits for in-house reserves or reinvestment funds. Even before the pandemic crisis, the top firms and their business leaders declared their desire to reset capitalism toward more consideration for various stakeholders besides just shareholders. These changes have been signaled by a series of occasions, including the August 2019 ‘Statement on the Purpose of a Corporation’ by the top 181 business leaders in Washington DC in the US, which was immediately followed by the initiatives of the Financial Times under the heading of ‘Capitalism: Time for a reset’. These movements culminated in the January 2020 Davos Forum, which endorsed stakeholder capitalism as the vision for the future of capitalism.

The pandemic is the final blow to globalization, or over-fragmented GVC, after the two preceding blows of the 2008-09 global financial crisis (GFC) and the US-China trade war. The GFC was the first blow to financial globalization, followed by the setback against trade globalization of the US-China trade war. Finally, the pandemic outbreak signaled a major setback to production globalization. Just as the pandemic is considered a warning against human destruction of the environment, it is also a call to restore the vitality of the capitalist market economy by rebalancing against over-globalization and over-loaded shareholder capitalism. Shareholder capitalism and globalization have been pointed out in economics literature as the main sources of low growth and high inequality, as discussed in the preceding section.

While the Covid-19 crisis has indicated more advantages toward manufacturing-oriented economies than service-oriented economies, East Asian economies, such as Korea, are also suffering from slow growth and rising inequality that have been exacerbated since the pandemic. One aspect of the necessary reforms is the correction of the tendency of financialisation associated with shareholder capitalism, which includes a practice that provides equal rights to short- or long-term shareholders in terms of rights for voting and dividends. Measures that promote long-term holdings of stocks and thus enhance firm value are also needed to provide privileges to long-term shareholders, which is consistent with the idea of stakeholder capitalism.

The idea of stakeholder capitalism is that firms are to be run in the interests of a broad spectrum of stakeholders that include not only shareholders but also clients, managers, workers, and nearby communities, who are often holders of long-term, firm-specific interests and even stocks. Thus, providing the same voting and dividend rights to those who own stocks for only several years and weeks does not promote enhancement of the long-term value of firms, and it may lead to short-term profits or performance-seeking value.

East Asia may learn from the EU, which has initiated several reforms to curb the negative influence of shareholder capitalism. The EU Parliament passed a law in 2015 that changed its firms’ corporate governance (Stabilini 2015). The new law allows firms to provide more voting rights or more dividends to tenured or long-term shareholders who hold their stocks for more than two years. Following this law, the 2014 Florange Act has been implemented in France. Owing to this Act, many of the firms (or more than 54%) in the French stock market, including Electricite de France, Air Liquide, Credit Agricole, L’Oreal, Lafarge, and Group SEB, have opted to issue stocks that provide special favour to tenured stockholders. These new innovative practices are not possible under the current corporate law in Korea, which follows the idea of shareholder capitalism by sticking strictly to the rule of one share and one vote, regardless of holding period.

East Asian states, such as Korea, may learn from other countries and seriously consider changing their corporate law. Even the US allows its firms to issue dual-class stocks in the initial public offering in NASDAQ, which gives special favour in terms of voting power to the founders of the firms. Using this clause, the founders of many high-tech firms in the US may manage their firms from long-term perspectives and tend to be aggressive in trying innovative new projects. These dual-class stocks are all issued to US firms, including Facebook, Google, and Amazon (Zeiler 2014).

In sum, East Asian economies may take the Covid-19 crisis as an opportunity to turn their economies around by adopting measures that can curb the ongoing tendency of financialisation and restore the original strength of Asian capitalism, such as high growth and good equity. Instead of maintaining the old version of East Asian capitalism, they can also be reborn through hybrid capitalism, rebalancing elements from shareholder and the stakeholder capitalism with East Asian capitalism at its original core.

The Globalisation Paradox and a Crisis-Resilient Macro-Finance System: The Case of Korea

Globalisation has become stalled by a series of events, including the Covid-19 pandemic outbreak. The consequences of this change for emerging economies can be interpreted by the “globalization paradox” raised by Rodrik (2011). In his book, Rodrik (2011) proposes a trilemma that globalization, national sovereignty, and democracy cannot go together, and thus one can have only two out of the three. He argues that globalization tends to suppress either national sovereignty or democracy because it often tends to consider the interests of global businesses the top priority against the interests of the national government or workers. Under globalization, the national government is left with less room or tools for domestic economic policies, including interest rates and exchange rates. With globalization suddenly stalled after the pandemic and affected by the rising protectionism of the Trump government in the US, alternative economic systemic arrangements can be explored to provide autonomy in domestic economic policies for emerging countries. In particular, given the possibility of financial crises that may result from the mismatch between a quick financial recovery versus weak non-financial businesses, owing to the massive release of diverse kinds of emergency loans, subsidies, and the printing of money in some countries as an aftermath of the Covid-19 pandemic outbreak, emerging countries are advised to install a crisis-resilient macro-financial system in preparation for the coming burst of the financial bubble built over the pandemic period.

The globalization trilemma can be compared with the conventional trilemma (or the ‘impossible trinity’) in macroeconomics, such that free capital mobility, autonomous monetary policy (interest rates), and free-floating exchange rates cannot go together and at least one out of the three has to be sacrificed. Thus, advanced economies tend to choose the combination of free capital mobility and autonomous monetary policy. By contrast, some of the emerging economies, such as Korea before its OECD entry in 1993, tend to favour autonomous monetary and exchange rates as trades are extremely important for catch-up stages of economic development. This combination of a twin autonomy of interest rates and exchange rates is implemented well in many emerging economies at their catching-up growth stage, including China. By contrast, premature financial liberalization for free capital mobility has often resulted in a financial crisis, as shown by the Asian financial crisis in the late 1990s. Consequently, even the IMF has become cautious about suggesting full-scale financial liberalization and acknowledged the necessity of active management of the capital account (capital control) under certain conditions (Ostry et al. 2010).

The IMF, the World Bank, or the Washington Consensus (Williamson 1990) used to propose financial liberalization for emerging economies, implying that it would bring in more financial resources for an economy lacking domestic funds. However, more often than not, financial liberalisation is followed by financial crisis rather than steady economic growth, as observed in the 1997 Asian crisis involving Korea, Thailand, and Indonesia. While these economies had to ask for the emergency loans from the IMF, only Malaysia avoided this situation by imposing capital controls. Korea embraced the first wave of radical liberalization of capital accounts as a requirement to join the OECD – which is considered a club of rich countries – in the mid-1990s. The outbound financial liberalization had enabled chaebols (Korean big businesses) to borrow funds nominated in USD at much lower rates in the international market than in the domestic banks. The 1997 Asian financial crisis can be attributed to this “premature” or careless integration “into international financial markets, excessive short-term borrowing abroad with a maturity mismatch, and weak domestic financial sectors” (Nayyar 2019, p. 83).

The post-crisis reform package implemented in Korea is one of the most comprehensive and decisive set of reforms undertaken by any country following a major crisis (Lee 2016, p. 112). Numerous Korean institutions were forced to change or evolve, similarly to those in the US (Lee et al. 2002). For instance, the financial market was liberalized and most restrictions on foreigners’ domestic investments were lifted. Consequently, foreigners’ share of stocks in Korean firms increased rapidly from less than 3% in the mid-1990s to more than 40% in the 2000s, which strengthened shareholder capitalism. Jang-Sup Shin and Ha-Joon Chang (2003) argue that the IMF programme demanded Korea pay an extremely expensive price to follow a neoliberal or Anglo–Saxon model, which is not suitable for a country with newly achieved compressed development.

However, this comprehensive reform and another round of financial liberalization have not been effective in protecting Korea from the risk of another financial crisis in the aftermath of the 2008-09 GFC. During the onset of the GFC, hot money suddenly flew out of Korea to go back to the Wall Street because of a liquidity crisis at the heart of capitalism, and thus the Korean Won again suffered a huge and sudden depreciation (Lee et al. 2020). This situation stopped only after Korea agreed a bilateral currency swap with the US which enabled the supply of dollars to the foreign exchange market in Korea and was ineffective for 15 months. Korea learned a hard lesson from the negative spillover of the crisis in Wall Street in 2008-09. The Korean experience may provide some hint in seeking a blueprint for a crisis-resilient macro-financial system, which would also make sense in this post-pandemic era.

Following Williamson (1999) and Ferrari-Filho and Paula (2008), Lee (2016) proposes a kind of macro-policy framework that can be described as “an intermediate system” with managed capital mobility and an explicit option of Tobin taxes, a version of the managed or flexible BBC (basket, band, crawl) exchange rate system, and with relative independence in monetary policymaking with a new balance between interest-rate and exchange-rate targeting. With regard to specific macro-level measures, fees on short-term financial flow (or Tobin tax) and reserve requirements are suggested, discouraging the buying and selling of foreign exchange for extremely short-term purposes (Lee 2016; Lee et al 2020).[3] At the micro-level, the key task against external shocks is to manage foreign assets and liabilities in corporate and bank dimensions. In particular, the level of and trend in short-term foreign liability need to be managed and monitored, covering not only domestic banks but also domestic branches of foreign banks, and the optimal hedge ratio needs to be used as a sophisticated investment strategy. For example, a minimum requirement in the ratio of foreign liquid assets over total foreign assets is suggested. A core funding ratio, such as foreign loan to foreign deposit, is also recommended. It helps not only reduce currency mismatch but also increases the core funding base, which is relatively stable even in times of financial turmoil.

Some of these measures were adopted by the Korean government in 2011 in the name of ‘three macro-prudential’ measures, including regulations on banks’ positions in forward exchange markets (150% of equity capital), taxes on non-deposit foreign exchange debt, and the LCR (liquidity coverage ratio) which is the regulation of minimum high-liquidity foreign exchange-based assets (e.g., US treasury bonds) to be held against net cash outflow expected for a month (e.g., withdrawal of deposits), in addition to a tax on foreigners’ interests income from holding Korean bonds (Lee 2016, p. 143). Since then, the Korean economy has maintained stability in the macroeconomic sense. However, managing the possibility of sudden inbound or outbound flows of short-term capital remains a challenge. In this post-pandemic recession, all the emerging economies tend to lower their interest rates but this measure may increase the possibility of capital flight whenever an exogenous shock is observed. Following Korea’s policy initiatives associated with the ‘three macro-prudential’ measures, each country is advised to conceive and install its own schemes for macro stability.

These three measures worked again during the economic shock from Covid-19. In March 2020, global financial markets were suffering from the shock of the outbreak of the pandemic. As a precautionary measure, on 19 March, the US federal reserve board extended Dollar swap lines to nine economies – Korea, Brazil, Mexico, Singapore, Sweden, Norway, Denmark, New Zealand and Australia – in addition to the existing swap agreement with the five core advanced economies. This sudden intervention helped to stabilise the foreign exchange market facing the sharp explosion of demand for dollars. In the Korean market, the exchange rates dropped or decreased from about 1,300 Won per dollar to 1,200 Won by the end of June.

Besides this currency swap, the three macro-prudential measures had an additional stabilising role by reducing the possibility of capital flight. First, the Bank of Korea decided that the commercial banks’ position in forward exchange markets was now enlarged from the prevailing 200% to 250% of equity capital for Korean branches of foreign banks, and from 40% to 50% for domestic banks.[4] Second, no taxes will be charged on the increased amount of non-deposit foreign exchange debt incurred to commercial banks during the three months from April to June 2020. Third, the Ministry of Finance of the Korean government announced that the LCR (liquidity coverage ratio) was now reduced from the prevailing ratio of 80% to 70% until May 2020.[5] These cases suggest that these measures can be useful in adjusting the inflow and outflow of hot money during the times of macro-financial uncertainty, particularly for emerging economies without reserve currency.

Summary and Concluding Remarks

As reflected in the expression “East Asian miracle” (World Bank 1993), East Asian economies saw remarkable performance of high growth and low inequality, thereby forming a separate East Asian capitalism group within the VoC typologies. There are strong signs that these economies have recently been converging to the LME group, featuring low growth and high inequality, features shared by East Asian economies since the 2000s. Financialisation is arguably one cause for these outcomes of low growth and high inequality. I re-evaluate East Asian capitalism in the context of the Covid-19 pandemic, which has suddenly halted globalization and further questioned the superiority of shareholder capitalism associated with financialisation and globalization. I propose rebalancing between shareholder and stakeholder capitalism. By doing so, East Asian economies can be reborn as a hybrid capitalism, with East Asian capitalism at its original core, to restore their growth momentum in an inclusive way. I also argue that the post-pandemic retreat of globalisation is a good opportunity to restore autonomy in domestic economic policymaking over interest rates and exchange rates, while imposing some adjustments over formerly excessive capital mobility.

Keun Lee


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[1] Lazonick (2014) shows that 54% and 37% of US companies’ earnings had been spent on stock buybacks and dividends in 449 firms among the 500 S&P firms from 2003 to 2012, respectively.

[2] Lee et al. (2020) also show that the amount of outflow funds of the Korean economy in the form of dividends and interest income is greater than that of foreign direct investment (FDI) inflow. For instance, Korea gained 26.9 billion USD FDI inflow in 2018 but released 29.7 billion USD in the form of dividends and interest payments to foreign investors in either FDI or portfolio investment (financial investment trading stocks and bonds in capital markets). The dividends payment to GDP ratio is rapidly increasing from less than 1% in the early 2010s to more than 1.3% in 2018. In Korea, the fixed investment to GDP ratio was above 35% during the pre-crisis period in the 1990s. However, it declined to 30% in the 2000s and has continued declining in the 2010s.

[3] Some reserve requirement policies require foreign investors to place some of the funds in a bank for a period. As the fund can be used for investment after a specified period, the long run capitals are not hindered to flow.




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