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Dark Clouds over the Boat: On China, Production, and Financialization

by on November 11, 2011

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)

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From → Archives, C. Ryan

  1. I have mentioned before that I believe the U.S. and western nations are in a shadow economic proxy war with China that is slowly being revealed to the public. Yesterday, President Obama and Australian Prime Minister Julia Gillard held a joint press conference to announce the deployment of more U.S. military to Australia. Almost immediately, China denounced (via the media) the increased troop presence in their sphere of influence.

    Western nations have been content to build up China’s infrastructure (by both providing funds and in many cases the actual construction) in return for cheap labor. Now that western countries can no longer maintain the façade that they have economic control over China, military force, veiled in the form of global humanitarian interventionism, is being used as a last gasp effort to exert control over the economic giant they helped create.

    Lagarde used the phrase “on the right path” to describe China’s government attempts (whether they are for show or legitimate attempts remains to be seen) to pull the reigns on the blistering pace of its economy. Because China is such a massive supplier to western countries, as Lagarde points out in her address, it must make some concessions to the companies countries who utilize Chinese labor. But the fact remains that even with efforts to slow down its economic engine, China has too large a population and too undervalued a currency to simply stop growing at a rate that worries western leaders.

    Words matter, so it is important to pay attention to the message being sent by western nations to China right now.

    In yesterday’s joint press conference, President Obama reinforced Lagarde’s message by using similar wording when he said that “China needs to accept the responsibilities that come with being a world power…” and “…play by the rules of the road.”

    The growing presence of both U.S. diplomatic envoys and military “advisors” belies the language of mutual economic obligation however. In light of western moves into Africa and southeast Asia, the language of Lagarde and Obama starts to resonate with desperation rather than cooperation.

  2. C. Ryan Knight permalink

    Mike, do you see the (continued) military build-up as a way to potentially push China into military action against the U.S.? If so, such a move by the U.S. seems rather short-sighted considering the ominous signs of potential (or even probable) military action against Iran in the relatively-near future. And considering Russia’s support for both Iran and China, the risks in such moves seem all the more immense.

  3. Well, anything is possible, just ask the belligerents of WWI. I don’t see it so much as the U.S. deliberately pushing China into action as it is upping the ante to control resources. The U.S. is now using its military like the British Empire used their navy, to protect and expand their economic resources.

    The Dutch and British carried out a very protracted shadow economic war throughout the 17th and 18th centuries that occasionally flared up into actual open conflict. I’m not sure we should rule out such a situation arising again, this time between the U.S. and China.

    I do however see an aligning of the nations/economies who are tired of being constrained by the west, especially now that western nations/economies are in such a weakened state. So my reference to WWI and those entangling alliances is not just tongue in cheek and you are correct to point out the risk of military use. But the west is far from over and is still a potent ally/enemy, both militarily and economically, so I think that is why we see China ceding ground in Africa right now.

    But Asia, and especially Southeast Asia, is a different story, and the U.S. is building up a troop presence at the doorstep of what China sees at its sphere of influence. I’m thinking Burma is on the horizon as a recipient of “humanitarian intervention” from the U.S., and that may be too much for China and its economic allies.

  4. Professor Knight,

    As Editorial Director of Monthly Review Press, I am happy to see your references to the Foster and Magdoff book on the economic crisis. I don’t think many commentators grasp the large number of contradictions facing the Chinese economy. Ecological catastrophe is one that eludes most writers. As does the remarkable inequality that has and will continue to fuel social conflict and worsen the environmental crisis.

    Michael Yates

  5. C. Ryan Knight permalink

    Mr. Yates,

    Thanks for visiting and reading. You’re precisely right regarding ecological catastrophe.

    I read the most recent MRP email update regarding the new edition of Herman and Peterson’s The Politics of Genocide, recently released. Once I obtain a copy and read it, I intend to post a piece here on the issues raised therein, particularly in the new introduction.

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