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Saving
the Chinese Economy from the Global Financial Crisis
By
Henry C.K. Liu
This article appeared in AToL on December 23,
2008 as China's inflation-free route from crisis
The structural problem of the Chinese economy
can be
described in one sentence: China produces from plants financed by
foreign
investment that operate with low domestic wages for foreign markets
that pay
with dollars that cannot be used in the domestic economy.
The solution to this structural problem can also
be summed
up in one sentence: China
must finance plants with sovereign credit to produce for the domestic
market
where consumer purchasing power will come from high wages, with
sovereign
credit repaid from increased tax revenue from a vibrant domestic
economy.
The adverse impact from the current global
financial crisis
on the Chinese economy originates from the export sector financed by
foreign
capital. Foreign markets have abruptly contracted since mid 2007 to
cause
massive closure of ten of thousands of foreign joint-ventures or
wholly-owned
enterprises, big, medium and small, in the Chinese export sector
located along
the coastal regions. Many of these enterprises normally repatriate
their profit
continually, leaving little or no reserve funds to keep operating in
slow
periods. At the first sign of financial distress, the absentee owners
of these enterprises
find it expedient to simply shut down operations and vanish from the
local scene,
leaving millions of Chinese migrant workers suddenly unemployed with no
severance pay or unemployment insurance payments, not even train fare
to return
home. The foreign investors just abandon their money-losing factories,
in which
they hold little equity, for foreclosure by lending institutions. These bankrupt export enterprises are not
likely to reopen as few expect the global financial crisis to recover
soon.
Five years earlier, in 2003, Premier Wen Jiabao
drew national
attention by personally demanding back wages owed to a migrant worker
by his abusive
employer to be paid. In February 2008, the National People’s Congress
(NPC) accredited
the qualification of three rural migrant workers as newly-elected
deputies,
making them the first group of “spokespersons” for migrant laborers all
over
the country in the national legislature. This development is a historic
breakthrough that will help normalize the gap between urban and rural
development
and the oppression of migrant workers by unsavory employers, domestic
and
foreign.
The Central Committee of the Communist Party of
China (CPC)
issued a landmark policy document on rural reform and development in
October 2008,
vowing to enhance safeguard of the rights of migrant workers, ensuring
them equal
wages and benefits, including their children’s education, public health
and affordable
housing as those received by resident citizens. Since China
adopted the reforms and opening-up policy in 1978, the number of
migrant
workers to the coastal export regions has grown to ever 200 million. China
has been improving rules and laws to cope with the new changes and
ensure
migrant workers’ rights. The unjust condition of migrant workers has
become a
microcosm of worker conditions in the socialist market economy in
general. We
need to remember that to eliminate such unjust conditions for workers
was the driving
force of the Socialist Revolution that began in China
in 1921.
The Dongguan City Association of Enterprises
with Foreign
Investment estimates that 9,000 of the 45,000 factories in the cities
of
Guangzhou, Dongguan, and Shenzhen — the heart of China's industrial
south — are
expected to close before the Chinese New Year in late January 2009.
That could
mean up to 2.7 million workers facing unemployment immediately, the
association
said. If the trend continues, unemployment can be expected to double
every
quarter.
The current global financial crisis has
accelerated a
process already underway to upgrade China’s
economy from low-tech, labor intensive factory jobs to high tech
manufacture of
higher value-added products and high skill jobs in the service industry
sector.
The plan to correct the imbalance of development between the coastal
regions
and the interior regions is tied to China’s
effort to shift its economy from excessive export dependency toward
domestic
consumption and development. Yet the pace of restructure must be
further
accelerated with the aim of a full employment economy based on balanced
domestic
development and consumption within a period of five years.
For China,
the only viable strategy is to shift these bankrupt export factories in
the
coastal regions toward the domestic market. But the domestic market at
present is
too weak in consumer demand due to low wage income to absorb the
overcapacity
in export. Thus no funds are available in the private credit and
capital
markets to finance urgently needed restructuring of the export sector
on a
national scale. Market forces are simply
not up to the task.
To kick start a new economic strategy of
shifting the Chinese
economy from export dependency to domestic construction, the Chinese
government
needs to establish a Commission to Restructure the Chinese Economy
(CRCE), as a
special agency in the State Council under the direct control of the
office of
the Premier, with emergence powers to deal with the unemployment
fallout from
the sudden collapse of the export sector that will soon threaten social
stability.
The proposed CRCE should have full authority to
formulate
and implement a national economic recovery program with appropriate and
adequate credit creation power to finance an urgently needed recovery
to
provide full employment at high wages. Equally importantly, CRCE must
have full
government authority to commit unconditionally to the timely repayment
and
retirement of this temporary debt created by sovereign credit.
Economic recovery through the shifting from
export
dependency to domestic development requires coordinated actions by both
the state
and the private sectors. The government’s role is to guide private
sector
incentives toward a national full employment plan through tax
incentives and
regulatory regimes. Government fiscal spending should be limited to
funding
infrastructure, both physical and social, that cannot be efficiently
financed
by private or even collective capital. Consumer
demand should be enhanced as a priority in a national income policy to
quickly raise
wage levels in parallel with a well-funded social security program to
eliminate
the need for over-saving out of concern for emergency health expenses
and provision
for old-age security.
CRCE will be responsible for launching
immediately a massive
work creation program to achieve in-place national full employment with
minimal
relocation of population. This program can be financed outside of the
government’s fiscal budget by a “pre-financing” regime through the use
of
“work-creation certificates”, a form of special purpose money specially
designed to facilitate job-creation in the socialist market economy.
Under the “pre-financing” regime, the State
Council will
authorize the CRCE, with full support of the Finance Ministry, to issue
“work-creation
certificates” that mature every three months and renewable up to five
years. These
certificates are distributed by the CRCE to local public works agencies
and
participating financial institutions that lend to private enterprises
engaged
in the job-creation in the program to shift export enterprises toward
the
domestic market. Firms that need cash in order to participate in job
creation
projects ordered by local public works agencies and private enterprises
approved by CRCE, can draw on “work-creation certificates” against the
accounts
of local public works agency or industrial customers of the
participating
financial institutions.
The financial institutions accepting the
work-creation certificates
can treat such certificates as commercial paper which can be discounted
at
commercial banks which in turn can discount them at the People’s Bank
of China,
the central bank. The process will provide the needed liquidity to
facilitate
the payment of wages outside the range of the government’s fiscal
budget.
The CRCE will undertake to redeem one fifth of
all
work-creation certificates issued through the central bank as the
economy and
tax revenue recover and expand. As collateral for the work-creation
certificates,
the Finance Ministry will deposit in the central bank a corresponding
amount of
tax vouchers good for paying taxes. As the Ministry of Finance redeems
work-creation certificates, the tax vouchers would be returned to the
Finance Ministry.
It is important that the government must stand firmly behind the
commitment to
redeem the work-creation certificates in order to protect their
financial integrity. New series of
five-year work creation
certificates can be issued as needed.
Credit creation outside of the government’s
fiscal budget for
the purpose of job creation poses no threat of inflation. It is a more
responsible alternative to tax increases to support a balanced budget.
The
fiscal cost of redeeming work-creation certificates will be offset by
the
corresponding decrease in welfare subsidy cost due to unemployment. As
fiscal surplus
accumulates from full employment at rising wages, the surplus can be
used to
reduce taxes and increase fiscal spending on upgrading physical and
social
infrastructure. This approach is the shortest route to full employment
at
rising wages while shifting the economy from export dependency toward
domestic
development.
Since the export market is and will always be
small compared
to the full potentials of the Chinese domestic market, profitability of
productive enterprises can be sustained through an economy of scale to
reduce
unit cost. Such unit cost reduction can be achieved by rising
productivity made
possible by expanding sales volume in the domestic market. Export then
will
only have to pay for the cost of needed imports to maintain a balanced
trade.
As industrial enterprises tap the growing
domestic market,
aggregate sales revenue will support wage rise as the portion of profit
previously reserved by middleman foreign distributors and importers can
now be
use to support higher wages which in turn will strengthen domestic
consumer
demand. Some upward movement of prices should be allowed to adjust
price gap
between agricultural produce and manufactured products to raise farm
income. A
government price policy should be instituted to prevent destructive
cut-throat
price competition and below-cost dumping in both profitable and
unprofitable
markets. Excess profit should be taxed to prevent overinvestment in
profitable
sectors. Of special importance is to narrow the gap of wholesale and
retail
prices for farm produce to increase net income of farmers while holding
down
consumer prices.
To keep the 10 million migrant workers current
being laid
off by the export sector employed at an annual wage level of the
equivalent of
US$10,000 (CNY 68,490), a work creation certificate program of US$100
billion (CNY
684,9 billion) is needed. To keep the 10 million college graduates from
unemployment, another work creation certificate program will be needed
at US$100
billion. This is well within the financial capability of the Chinese
economy as
it amount to only 20% of the over US$2 trillion in foreign exchange
currently
held by China.
It is important to understand that this amount is not fiscal spending,
but
sovereign credit that will be repaid as the economy develops.
China
does not have to accept the fate of financial crisis made in the US,
if Chinese policymakers have the courage to think independently and to
boldly
experiment with new approaches. To eliminate poverty, China
must first eliminate a poverty of creative ideas among its policymaking
circles
overwhelmed by wholesale acceptance of voodoo neoliberal market
fundamentalism
propaganda.
December 21, 2008
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