Dark Clouds over the Boat: On China, Production, and Financialization
IMF Managing Director Christine Lagarde’s speech in China this week attracted attention, among other reasons, because of the somber rhetoric in her introduction:
. . . the global economy has entered a dangerous and uncertain phase. Adverse feedback loops between the real economy and the financial sector have become prominent. And unemployment in the advanced economies remains unacceptably high.
If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand. Ultimately, we could face a lost decade of low growth and high unemployment.1
Lagarde’s warnings caused tremors of uncertainty and concern all about.
The entirety of her speech, however, does not use somber rhetoric. Instead, she states her belief that, “fundamentally, China is on the right path.” She finds this belief supported by the tremendous growth in jobs in China, and also because it is, in her eyes, “on the right path in terms of reducing domestic vulnerabilities—by moderating the pace of credit growth, increasing provisioning and capital, and expanding scope of macroprudential policies.”2
Because China is “on the right path,” Lagarde emphatically stated that it thus has a key role to play in the attempts at recovery from the current global recession. Though she does not explicitly state so, one can assume Lagarde admires China because its economy remains rooted in production rather than (speculative) financialization.
That a major country remains rooted in production rather than financialization is very important. Throughout The Great Financial Crisis: Causes and Consequences (2009), John Bellamy Foster and Fred Magdoff recapitulate Paul Baran and Paul Sweezy’s central idea regarding capitalism: namely, that “the normal state of the monopoly capitalist economy is stagnation.”3 To resist and attempt to counteract this stagnating tendency, leaders of capitalist societies shift toward increasingly dangerous speculative growth of the financial market. Thus, the center of a capitalist economy shifts from material production to immaterial finance, essentially amounting to turning an economy into a gigantic casino.
What interests me is that Lagarde’s early comments, block-quoted above, essentially confirm Baran and Sweezy’s stagnation theory. What is “adverse” about the feedback loops between production and financialization is the stagnation interlinking the two. In their concluding chapter, “Back to the Real Economy,” Foster and Magdoff offer this diagnosis of the “feedback loop,” or stagnation amidst financialization: “The prognosis then is that the economy, even after the immediate devaluation crisis is stabilized, will at best be characterized for some time by minimal growth and by high unemployment, underemployment, and excess capacity.”4
In her address, Lagarde summarizes the outcomes of the recent Cannes Summit regarding the financial crisis, attended by G20 countries. Though she says the path to recovery will differ between countries, essentially what was agreed upon at the Summit was the need for a shift back to production, or what she calls the social dimension (and thus increased employment), and also increased regulation of the financial sector.5 These steps toward recovery attempt to reverse the inherent effects of financialization described by Foster and Magdoff.
Precisely what role China is to play during this attempted reversal of financialization’s fall-out, based on Lagarde’s speech, is unclear. In one sense, Lagarde celebrates China’s ability to remain based in production rather than drift too far into the dangerous waters of financialization. To avoid prolonged suffering from a decrease in product exportation to the international market, Lagarde encourages China to move toward national consumption of commodities as a way of further strengthening and developing its economy.6
This first sense, though, is overshadowed by a second, conveyed in Lagarde’s conclusion: “we are all in one boat. One global economy. Our fortunes rise together, and they fall together[.] . . . We have a collective responsibility—to bring about a more stable and more prosperous world, a world in which every person in every country can reach their full potential.” Because of this, Lagarde seems to implicitly encourage China to continue to prop up struggling Western economies as they attempt to recover from the financial meltdown. Though most of her talk is devoted to advising China on internal economic development, she nonetheless keeps China roped in to the global recovery movement through her use of the plural first person pronoun “we”: “If we do not act and act together, we could enter a downward spiral . . .”7
Where, then, do these two competing senses leave China? For the sake of its well-being, Lagarde advocates a sort of economic isolationism to avoid contracting toxic financial contagions. Yet China is also encouraged to continue contributing to global efforts to eradicate financial contagions from the world economy. So it seems the advice is to have your cake and export it, too.
Another problem emerges in addition to the conflicting message sent (described above): the risk of drifting into the same eventual danger of speculative financialization itself. Though China’s growth (the creation of 370 million jobs, widespread emergence from poverty throughout the country, and an economy expanding 10% per year, all in three decades8) is impressive, it is also resembles the normal rapid growth any country experiences when following the capitalist model. The consumption Lagarde encourages may help continue this exponential growth for some time, but China will presumably still experience a decrease in demand for the manufactured commodities, leading to the same path toward economic stagnation—and thus the rising risk of financialization.
The challenges China faces are serious and pressing. To complicate things further, the Eurozone crisis and the stalled attempts to reach a consensus in America on debt reduction both press China to take quick, decisive action—yet it must also make every effort to avoid imprudent, hasty, and ill-though courses. It must decide whether it’s better to stay in the boat or abandon ship and swim back ashore.
1 Christine Lagarde, “An Address to the 2011 International Finance Forum,” 9 Nov. 2011, International Monetary Fund (part 1)
2 Ibid (part 3)
3 Paul Baran and Paul Sweezy, Monopoly Capital: An Essay on the America Economic and Social Order (New York: Monthly Review, 1966), p. 108, rpt. In The Great Financial Crisis: Causes and Consequences (New York: Monthly Review, 2009), p. 14
4 Foster and Magdoff, p. 133
5 Lagarde (part 2)
6 Ibid (part 3)
7 Ibid (conclusion; part 1)
8 Ibid (introduction)