Andrew Fischer: The Chinese oversaving, I think, is a false argument. If you say it’s because of Chinese oversaving, what you’re basically implying is that Chinese households save a lot of money because their consumption is being repressed because of industrial policies in China that take money away from households and direct it toward enterprises, and as a result you have this imbalance in the economy created domestically by government intervention, which then creates a surplus of savings, which then results in the external balances and then results in more exports and not enough imports. Then, the foreign exchange earned through that, the reserves are placed in the US, and the US financial system, because it’s so adaptable, absorbs it all. That’s the savings argument. That doesn’t really make much sense. Well, if you were a pure neoclassical, neoliberal economist, you might agree with that. But it doesn’t make too much sense, theoretically in my mind.
I would adopt a Keynesian perspective, which is basically it’s the other way around. You have financialization and an increase, through finance, of demand in the US that drives imbalances and creates demand for those countries that are supplying the US with goods, and I think that’s much more what’s behind the story of what’s driving imbalances. That argument actually makes a lot of sense. If you look at chronology, the US deficit takes off well before the Chinese surpluses start to take off. When you look at historical trends, the savings argument is like putting the cart in front of the horse. If you look at just a simple time series of data, it’s very clear that the savings cart is behind the horse. You have this enormous demand coming out of the US that is driving a huge level of investment in China, and as a result the savings in China adjust to that. Not just household savings, because household savings have actually been following as a proportion of GDP or as a proportion of the total household income. The sources of savings are coming from foreign investment, from loans from the banking sector, from government subsidies, and also from retained earnings in enterprises that are reinvesting their own earnings. . . .
Within the domestic sector, wages are going up. The government is actually trying to implement wage increases. That’s part of the reason why average household consumption is actually rising quite rapidly, because, for all sorts of categories of salaried employment, they have had 15-20% salary increases each year for the last five or six years, or ten years even. So, the government has had a policy of trying to increase salaries. Now, the problem is that they are not necessarily increasing wages of actual workers of the manufacturing sector. . . . I think the key thing there is that China is obviously caught in a classic conundrum of export-dependent economies, which is that, when you are an export-dependent economy, particularly when your exports are largely based on, your main competitive factor is, low-skilled labor . . . there’s a strong pressure to keep wages down, because wages are not important to generating domestic demand. The classic Fordist model was that workers had high enough salaries to buy the cars they were producing, right? That link is cut in an export-dependent economy. So, the export sector in China has a strong incentive to keep wages down. The domestic sector in China has an incentive to raise wages. A part of the Communist Party also has an incentive to raise wages. So, I think there’s a political economy conflict there that is not easily resolved.
Health insurance is a key political battleground in China, a decisive battleground in China. We hear a lot about efforts to introduce health insurance for the population, moving towards a more universalistic model, which is a positive direction, but they are just taking small steps toward that goal. They haven’t gotten close to it yet. The problem of course is that — I think similar to India — health care is probably one of the primary factors in terms of causing people to fall into poverty in China. There is a saying in China: You are fine as long as you don’t fall sick. If you fall sick, you can’t work. The key to addressing inequality, I think, is in terms of moving towards universalistic forms of social policy in health and education and pensions and so on and having an integrated system, across rural and urban areas, so that migrants from rural areas can still have their health insurance and education in urban areas. That’s a critical, critical key factor because, if you don’t have that, the whole thing falls apart. Prime Minister Wen Jiabao for instance — I think it was in 2004 or 2005 — publicly acknowledged that all of the attempts at reforming the health care system in China since 1998 had been more or less failures and that they had to start from scratch again and really seriously think of how to do it. They’ve been struggling with it. They are aware of the problem, and they are willing to face it. I think there is a significant faction in the Communist Party that sees this as the primary goal along with other types of social policy reforms if China is to move away from the precipice. If they don’t, and if they keep going on this path of rising inequalities, the model cannot but exhaust itself in, say, the next five or ten years. If they start reaching the middle to upper range of Latin American types of inequalities, I don’t see how they can sustain this model.
Andrew Fischer is Senior Lecturer at the International Institute of Social Studies of Erasmus University Rotterdam. This video, produced for NewsClick, was released on YouTube on 8 February 2010. The text above is an edited partial transcript of the video.