How the U.S. Lost Out on iPhone Work

By CHARLES DUHIGG and KEITH BRADSHER
SolidarityEconomy.net via New York Times

Jan. 21, 2012 - When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products.

Apple has become one of the best-known, most admired and most imitated companies on earth, in part through an unrelenting mastery of global operations. Last year, it earned over $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google.

However, what has vexed Mr. Obama as well as economists and policy makers is that Apple — and many of its high-technology peers — are not nearly as avid in creating American jobs as other famous companies were in their heydays.

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

“Apple’s an example of why it’s so hard to create middle-class jobs in the U.S. now,” said Jared Bernstein, who until last year was an economic adviser to the White House.

“If it’s the pinnacle of capitalism, we should be worried.”

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Similar stories could be told about almost any electronics company — and outsourcing has also become common in hundreds of industries, including accounting, legal services, banking, auto manufacturing and pharmaceuticals.

But while Apple is far from alone, it offers a window into why the success of some prominent companies has not translated into large numbers of domestic jobs. What’s more, the company’s decisions pose broader questions about what corporate America owes Americans as the global and national economies are increasingly intertwined.

“Companies once felt an obligation to support American workers, even when it wasn’t the best financial choice,” said Betsey Stevenson, the chief economist at the Labor Department until last September. “That’s disappeared. Profits and efficiency have trumped generosity.”

Companies and other economists say that notion is naïve. Though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need, executives say.

To thrive, companies argue they need to move work where it can generate enough profits to keep paying for innovation. Doing otherwise risks losing even more American jobs over time, as evidenced by the legions of once-proud domestic manufacturers — including G.M. and others — that have shrunk as nimble competitors have emerged.

Apple was provided with extensive summaries of The New York Times’s reporting for this article, but the company, which has a reputation for secrecy, declined to comment.

This article is based on interviews with more than three dozen current and former Apple employees and contractors — many of whom requested anonymity to protect their jobs — as well as economists, manufacturing experts, international trade specialists, technology analysts, academic researchers, employees at Apple’s suppliers, competitors and corporate partners, and government officials.

Privately, Apple executives say the world is now such a changed place that it is a mistake to measure a company’s contribution simply by tallying its employees — though they note that Apple employs more workers in the United States than ever before.

They say Apple’s success has benefited the economy by empowering entrepreneurs and creating jobs at companies like cellular providers and businesses shipping Apple products. And, ultimately, they say curing unemployment is not their job.

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.”

‘I Want a Glass Screen’

In 2007, a little over a month before the iPhone was scheduled to appear in stores, Mr. Jobs beckoned a handful of lieutenants into an office. For weeks, he had been carrying a prototype of the device in his pocket.

Mr. Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen, according to someone who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry their keys in their pocket. “I won’t sell a product that gets scratched,” he said tensely. The only solution was using unscratchable glass instead. “I want a glass screen, and I want it perfect in six weeks.”

After one executive left that meeting, he booked a flight to Shenzhen, China. If Mr. Jobs wanted perfect, there was nowhere else to go.

For over two years, the company had been working on a project — code-named Purple 2 — that presented the same questions at every turn: how do you completely reimagine the cellphone? And how do you design it at the highest quality — with an unscratchable screen, for instance — while also ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif.

But by 2004, Apple had largely turned to foreign manufacturing. Guiding that decision was Apple’s operations expert, Timothy D. Cook, who replaced Mr. Jobs as chief executive last August, six weeks before Mr. Jobs’s death. Most other American electronics companies had already gone abroad, and Apple, which at the time was struggling, felt it had to grasp every advantage.

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

The impact of such advantages became obvious as soon as Mr. Jobs demanded glass screens in 2007.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

In Foxconn City

An eight-hour drive from that glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn City was further evidence that China could deliver workers — and diligence — that outpaced their American counterparts.

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles an estimated 40 percent of the world’s consumer electronics for customers like Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.

Foxconn, in statements, declined to speak about specific clients.

“Any worker recruited by our firm is covered by a clear contract outlining terms and conditions and by Chinese government law that protects their rights,” the company wrote. Foxconn “takes our responsibility to our employees very seriously and we work hard to give our more than one million employees a safe and positive environment.”

The company disputed some details of the former Apple executive’s account, and wrote that a midnight shift, such as the one described, was impossible “because we have strict regulations regarding the working hours of our employees based on their designated shifts, and every employee has computerized timecards that would bar them from working at any facility at a time outside of their approved shift.” The company said that all shifts began at either 7 a.m. or 7 p.m., and that employees receive at least 12 hours’ notice of any schedule changes.

Foxconn employees, in interviews, have challenged those assertions.

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

In China, it took 15 days.

Companies like Apple “say the challenge in setting up U.S. plants is finding a technical work force,” said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. In particular, companies say they need engineers with more than high school, but not necessarily a bachelor’s degree. Americans at that skill level are hard to find, executives contend. “They’re good jobs, but the country doesn’t have enough to feed the demand,” Mr. Schmidt said.

Some aspects of the iPhone are uniquely American. The device’s software, for instance, and its innovative marketing campaigns were largely created in the United States. Apple recently built a $500 million data center in North Carolina. Crucial semiconductors inside the iPhone 4 and 4S are manufactured in an Austin, Tex., factory by Samsung, of South Korea.

But even those facilities are not enormous sources of jobs. Apple’s North Carolina center, for instance, has only 100 full-time employees. The Samsung plant has an estimated 2,400 workers.

“If you scale up from selling one million phones to 30 million phones, you don’t really need more programmers,” said Jean-Louis Gassée, who oversaw product development and marketing for Apple until he left in 1990. “All these new companies — Facebook, Google, Twitter — benefit from this. They grow, but they don’t really need to hire much.”

It is hard to estimate how much more it would cost to build iPhones in the United States. However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.

But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also say they must go abroad.

Manufacturing glass for the iPhone revived a Corning factory in Kentucky, and today, much of the glass in iPhones is still made there. After the iPhone became a success, Corning received a flood of orders from other companies hoping to imitate Apple’s designs. Its strengthened glass sales have grown to more than $700 million a year, and it has hired or continued employing about 1,000 Americans to support the emerging market.

But as that market has expanded, the bulk of Corning’s strengthened glass manufacturing has occurred at plants in Japan and Taiwan.

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws, Corning’s vice chairman and chief financial officer. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

Corning was founded in America 161 years ago and its headquarters are still in upstate New York. Theoretically, the company could manufacture all its glass domestically. But it would “require a total overhaul in how the industry is structured,” Mr. Flaws said. “The consumer electronics business has become an Asian business. As an American, I worry about that, but there’s nothing I can do to stop it. Asia has become what the U.S. was for the last 40 years.”

Middle-Class Jobs Fade

The first time Eric Saragoza stepped into Apple’s manufacturing plant in Elk Grove, Calif., he felt as if he were entering an engineering wonderland.

It was 1995, and the facility near Sacramento employed more than 1,500 workers. It was a kaleidoscope of robotic arms, conveyor belts ferrying circuit boards and, eventually, candy-colored iMacs in various stages of assembly. Mr. Saragoza, an engineer, quickly moved up the plant’s ranks and joined an elite diagnostic team. His salary climbed to $50,000. He and his wife had three children. They bought a home with a pool.

“It felt like, finally, school was paying off,” he said. “I knew the world needed people who can build things.”

At the same time, however, the electronics industry was changing, and Apple — with products that were declining in popularity — was struggling to remake itself. One focus was improving manufacturing. A few years after Mr. Saragoza started his job, his bosses explained how the California plant stacked up against overseas factories: the cost, excluding the materials, of building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it was $6. In Taiwan, $4.85. Wages weren’t the major reason for the disparities. Rather it was costs like inventory and how long it took workers to finish a task.

“We were told we would have to do 12-hour days, and come in on Saturdays,” Mr. Saragoza said. “I had a family. I wanted to see my kids play soccer.”

Modernization has always caused some kinds of jobs to change or disappear. As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers, and then salesmen and middle managers. These shifts have carried many economic benefits, and in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed, economists say. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class.

Even Mr. Saragoza, with his college degree, was vulnerable to these trends. First, some of Elk Grove’s routine tasks were sent overseas. Mr. Saragoza didn’t mind. Then the robotics that made Apple a futuristic playground allowed executives to replace workers with machines. Some diagnostic engineering went to Singapore. Middle managers who oversaw the plant’s inventory were laid off because, suddenly, a few people with Internet connections were all that were needed.

Mr. Saragoza was too expensive for an unskilled position. He was also insufficiently credentialed for upper management. He was called into a small office in 2002 after a night shift, laid off and then escorted from the plant. He taught high school for a while, and then tried a return to technology. But Apple, which had helped anoint the region as “Silicon Valley North,” had by then converted much of the Elk Grove plant into an AppleCare call center, where new employees often earn $12 an hour.

There were employment prospects in Silicon Valley, but none of them panned out. “What they really want are 30-year-olds without children,” said Mr. Saragoza, who today is 48, and whose family now includes five of his own.

After a few months of looking for work, he started feeling desperate. Even teaching jobs had dried up. So he took a position with an electronics temp agency that had been hired by Apple to check returned iPhones and iPads before they were sent back to customers. Every day, Mr. Saragoza would drive to the building where he had once worked as an engineer, and for $10 an hour with no benefits, wipe thousands of glass screens and test audio ports by plugging in headphones.

Paydays for Apple

As Apple’s overseas operations and sales have expanded, its top employees have thrived. Last fiscal year, Apple’s revenue topped $108 billion, a sum larger than the combined state budgets of Michigan, New Jersey and Massachusetts. Since 2005, when the company’s stock split, share prices have risen from about $45 to more than $427.

Some of that wealth has gone to shareholders. Apple is among the most widely held stocks, and the rising share price has benefited millions of individual investors, 401(k)’s and pension plans. The bounty has also enriched Apple workers. Last fiscal year, in addition to their salaries, Apple’s employees and directors received stock worth $2 billion and exercised or vested stock and options worth an added $1.4 billion.

The biggest rewards, however, have often gone to Apple’s top employees. Mr. Cook, Apple’s chief, last year received stock grants — which vest over a 10-year period — that, at today’s share price, would be worth $427 million, and his salary was raised to $1.4 million. In 2010, Mr. Cook’s compensation package was valued at $59 million, according to Apple’s security filings.

A person close to Apple argued that the compensation received by Apple’s employees was fair, in part because the company had brought so much value to the nation and world. As the company has grown, it has expanded its domestic work force, including manufacturing jobs. Last year, Apple’s American work force grew by 8,000 people.

While other companies have sent call centers abroad, Apple has kept its centers in the United States. One source estimated that sales of Apple’s products have caused other companies to hire tens of thousands of Americans. FedEx and United Parcel Service, for instance, both say they have created American jobs because of the volume of Apple’s shipments, though neither would provide specific figures without permission from Apple, which the company declined to provide.

“We shouldn’t be criticized for using Chinese workers,” a current Apple executive said. “The U.S. has stopped producing people with the skills we need.”

What’s more, Apple sources say the company has created plenty of good American jobs inside its retail stores and among entrepreneurs selling iPhone and iPad applications.

After two months of testing iPads, Mr. Saragoza quit. The pay was so low that he was better off, he figured, spending those hours applying for other jobs. On a recent October evening, while Mr. Saragoza sat at his MacBook and submitted another round of résumés online, halfway around the world a woman arrived at her office. The worker, Lina Lin, is a project manager in Shenzhen, China, at PCH International, which contracts with Apple and other electronics companies to coordinate production of accessories, like the cases that protect the iPad’s glass screens. She is not an Apple employee. But Mrs. Lin is integral to Apple’s ability to deliver its products.

Mrs. Lin earns a bit less than what Mr. Saragoza was paid by Apple. She speaks fluent English, learned from watching television and in a Chinese university. She and her husband put a quarter of their salaries in the bank every month. They live in a 1,080-square-foot apartment, which they share with their in-laws and son.

“There are lots of jobs,” Mrs. Lin said. “Especially in Shenzhen.”

Innovation’s Losers

Toward the end of Mr. Obama’s dinner last year with Mr. Jobs and other Silicon Valley executives, as everyone stood to leave, a crowd of photo seekers formed around the president. A slightly smaller scrum gathered around Mr. Jobs. Rumors had spread that his illness had worsened, and some hoped for a photograph with him, perhaps for the last time.

Eventually, the orbits of the men overlapped. “I’m not worried about the country’s long-term future,” Mr. Jobs told Mr. Obama, according to one observer. “This country is insanely great. What I’m worried about is that we don’t talk enough about solutions.”

At dinner, for instance, the executives had suggested that the government should reform visa programs to help companies hire foreign engineers. Some had urged the president to give companies a “tax holiday” so they could bring back overseas profits which, they argued, would be used to create work. Mr. Jobs even suggested it might be possible, someday, to locate some of Apple’s skilled manufacturing in the United States if the government helped train more American engineers.

Economists debate the usefulness of those and other efforts, and note that a struggling economy is sometimes transformed by unexpected developments. The last time analysts wrung their hands about prolonged American unemployment, for instance, in the early 1980s, the Internet hardly existed. Few at the time would have guessed that a degree in graphic design was rapidly becoming a smart bet, while studying telephone repair a dead end.

What remains unknown, however, is whether the United States will be able to leverage tomorrow’s innovations into millions of jobs.

In the last decade, technological leaps in solar and wind energy, semiconductor fabrication and display technologies have created thousands of jobs. But while many of those industries started in America, much of the employment has occurred abroad. Companies have closed major facilities in the United States to reopen in China. By way of explanation, executives say they are competing with Apple for shareholders. If they cannot rival Apple’s growth and profit margins, they won’t survive.

“New middle-class jobs will eventually emerge,” said Lawrence Katz, a Harvard economist. “But will someone in his 40s have the skills for them? Or will he be bypassed for a new graduate and never find his way back into the middle class?”

The pace of innovation, say executives from a variety of industries, has been quickened by businessmen like Mr. Jobs. G.M. went as long as half a decade between major automobile redesigns. Apple, by comparison, has released five iPhones in four years, doubling the devices’ speed and memory while dropping the price that some consumers pay.

Before Mr. Obama and Mr. Jobs said goodbye, the Apple executive pulled an iPhone from his pocket to show off a new application — a driving game — with incredibly detailed graphics. The device reflected the soft glow of the room’s lights. The other executives, whose combined worth exceeded $69 billion, jostled for position to glance over his shoulder. The game, everyone agreed, was wonderful.

There wasn’t even a tiny scratch on the screen.

David Barboza, Peter Lattman and Catherine Rampell contributed reporting.

This time it's for real.

BY GIDEON RACHMAN

ForeignPolicy.com

JANUARY/FEBRUARY 2011

"We've Heard All This About American Decline Before."

This time it's different. It's certainly true that America has been through cycles of declinism in the past. Campaigning for the presidency in 1960, John F. Kennedy complained, "American strength relative to that of the Soviet Union has been slipping, and communism has been advancing steadily in every area of the world." Ezra Vogel's Japan as Number One was published in 1979, heralding a decade of steadily rising paranoia about Japanese manufacturing techniques and trade policies.

In the end, of course, the Soviet and Japanese threats to American supremacy proved chimerical. So Americans can be forgiven if they greet talk of a new challenge from China as just another case of the boy who cried wolf. But a frequently overlooked fact about that fable is that the boy was eventually proved right. The wolf did arrive -- and China is the wolf.

The Chinese challenge to the United States is more serious for both economic and demographic reasons. The Soviet Union collapsed because its economic system was highly inefficient, a fatal flaw that was disguised for a long time because the USSR never attempted to compete on world markets. China, by contrast, has proved its economic prowess on the global stage. Its economy has been growing at 9 to 10 percent a year, on average, for roughly three decades. It is now the world's leading exporter and its biggest manufacturer, and it is sitting on more than $2.5 trillion of foreign reserves. Chinese goods compete all over the world. This is no Soviet-style economic basket case.

Japan, of course, also experienced many years of rapid economic growth and is still an export powerhouse. But it was never a plausible candidate to be No. 1. The Japanese population is less than half that of the United States, which means that the average Japanese person would have to be more than twice as rich as the average American before Japan's economy surpassed America's. That was never going to happen. By contrast, China's population is more than four times that of the United States. The famous projection by Goldman Sachs that China's economy will be bigger than that of the United States by 2027 was made before the 2008 economic crash. At the current pace, China could be No. 1 well before then.

China's economic prowess is already allowing Beijing to challenge American influence all over the world. The Chinese are the preferred partners of many African governments and the biggest trading partner of other emerging powers, such as Brazil and South Africa. China is also stepping in to buy the bonds of financially strapped members of the eurozone, such as Greece and Portugal.

And China is only the largest part of a bigger story about the rise of new economic and political players. America's traditional allies in Europe -- Britain, France, Italy, even Germany -- are slipping down the economic ranks. New powers are on the rise: India, Brazil, Turkey. They each have their own foreign-policy preferences, which collectively constrain America's ability to shape the world. Think of how India and Brazil sided with China at the global climate-change talks. Or the votes by Turkey and Brazil against America at the United Nations on sanctions against Iran. That is just a taste of things to come.

Reuters/Brennan Linsley/Pool

"China Will Implode Sooner or Later."

Don't count on it. It is certainly true that when Americans are worrying about national decline, they tend to overlook the weaknesses of their scariest-looking rival. The flaws in the Soviet and Japanese systems became obvious only in retrospect. Those who are confident that American hegemony will be extended long into the future point to the potential liabilities of the Chinese system. In a recent interview with the Times of London, former U.S. President George W. Bush suggested that China's internal problems mean that its economy will be unlikely to rival America's in the foreseeable future. "Do I still think America will remain the sole superpower?" he asked. "I do."

But predictions of the imminent demise of the Chinese miracle have been a regular feature of Western analysis ever since it got rolling in the late 1970s. In 1989, the Communist Party seemed to be staggering after the Tiananmen Square massacre. In the 1990s, economy watchers regularly pointed to the parlous state of Chinese banks and state-owned enterprises. Yet the Chinese economy has kept growing, doubling in size roughly every seven years.

Of course, it would be absurd to pretend that China does not face major challenges. In the short term, there is plenty of evidence that a property bubble is building in big cities like Shanghai, and inflation is on the rise. Over the long term, China has alarming political and economic transitions to navigate. The Communist Party is unlikely to be able to maintain its monopoly on political power forever. And the country's traditional dependence on exports and an undervalued currency are coming under increasing criticism from the United States and other international actors demanding a "rebalancing" of China's export-driven economy. The country also faces major demographic and environmental challenges: The population is aging rapidly as a result of the one-child policy, and China is threatened by water shortages and pollution.

Yet even if you factor in considerable future economic and political turbulence, it would be a big mistake to assume that the Chinese challenge to U.S. power will simply disappear. Once countries get the hang of economic growth, it takes a great deal to throw them off course. The analogy to the rise of Germany from the mid-19th century onward is instructive. Germany went through two catastrophic military defeats, hyperinflation, the Great Depression, the collapse of democracy, and the destruction of its major cities and infrastructure by Allied bombs. And yet by the end of the 1950s, West Germany was once again one of the world's leading economies, albeit shorn of its imperial ambitions.

In a nuclear age, China is unlikely to get sucked into a world war, so it will not face turbulence and disorder on remotely the scale Germany did in the 20th century. And whatever economic and political difficulties it does experience will not be enough to stop the country's rise to great-power status. Sheer size and economic momentum mean that the Chinese juggernaut will keep rolling forward, no matter what obstacles lie in its path.

STR/AFP/Getty Images

"America Still Leads Across the Board."

For now. As things stand, America has the world's largest economy, the world's leading universities, and many of its biggest companies. The U.S. military is also incomparably more powerful than any rival. The United States spends almost as much on its military as the rest of the world put together. And let's also add in America's intangible assets. The country's combination of entrepreneurial flair and technological prowess has allowed it to lead the technological revolution. Talented immigrants still flock to U.S. shores. And now that Barack Obama is in the White House, the country's soft power has received a big boost. For all his troubles, polls show Obama is still the most charismatic leader in the world; Hu Jintao doesn't even come close. America also boasts the global allure of its creative industries (Hollywood and all that), its values, the increasing universality of the English language, and the attractiveness of the American Dream.

All true -- but all more vulnerable than you might think. American universities remain a formidable asset. But if the U.S. economy is not generating jobs, then those bright Asian graduate students who fill up the engineering and computer-science departments at Stanford University and MIT will return home in larger numbers. Fortune's latest ranking of the world's largest companies has only two American firms in the top 10 -- Walmart at No. 1 and ExxonMobil at No. 3. There are already three Chinese firms in the top 10: Sinopec, State Grid, and China National Petroleum. America's appeal might also diminish if the country is no longer so closely associated with opportunity, prosperity, and success. And though many foreigners are deeply attracted to the American Dream, there is also a deep well of anti-American sentiment in the world that al Qaeda and others have skillfully exploited, Obama or no Obama.

As for the U.S. military, the lesson of the Iraq and Afghan wars is that America's martial prowess is less useful than former Defense Secretary Donald Rumsfeld and others imagined. U.S. troops, planes, and missiles can overthrow a government on the other side of the world in weeks, but pacifying and stabilizing a conquered country is another matter. Years after apparent victory, America is still bogged down by an apparently endless insurgency in Afghanistan.

Not only are Americans losing their appetite for foreign adventures, but the U.S. military budget is clearly going to come under pressure in this new age of austerity. The present paralysis in Washington offers little hope that the United States will deal with its budgetary problems swiftly or efficiently. The U.S. government's continuing reliance on foreign lending makes the country vulnerable, as Secretary of State Hillary Clinton's humbling 2009 request to the Chinese to keep buying U.S. Treasury bills revealed. America is funding its military supremacy through deficit spending, meaning the war in Afghanistan is effectively being paid for with a Chinese credit card. Little wonder that Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, has identified the burgeoning national debt as the single largest threat to U.S. national security.

Meanwhile, China's spending on its military continues to grow rapidly. The country will soon announce the construction of its first aircraft carrier and is aiming to build five or six in total. Perhaps more seriously, China's development of new missile and anti-satellite technology threatens the command of the sea and skies on which the United States bases its Pacific supremacy. In a nuclear age, the U.S. and Chinese militaries are unlikely to clash. A common Chinese view is that the United States will instead eventually find it can no longer afford its military position in the Pacific. U.S. allies in the region -- Japan, South Korea, and increasingly India -- may partner more with Washington to try to counter rising Chinese power. But if the United States has to scale back its presence in the Pacific for budgetary reasons, its allies will start to accommodate themselves to a rising China. Beijing's influence will expand, and the Asia-Pacific region -- the emerging center of the global economy -- will become China's backyard.

China Photos/Getty Images 

"Globalization Is Bending the World the Way of the West."

Not really. One reason why the United States was relaxed about China's rise in the years after the end of the Cold War was the deeply ingrained belief that globalization was spreading Western values. Some even thought that globalization and Americanization were virtually synonymous.

Pundit Fareed Zakaria was prescient when he wrote that the "rise of the rest" (i.e., non-American powers) would be one of the major features of a "post-American world." But even Zakaria argued that this trend was essentially beneficial to the United States: "The power shift … is good for America, if approached properly. The world is going America's way. Countries are becoming more open, market-friendly, and democratic."

Both George W. Bush and Bill Clinton took a similar view that globalization and free trade would serve as a vehicle for the export of American values. In 1999, two years before China's accession to the World Trade Organization, Bush argued, "Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy.… Trade freely with China, and time is on our side."

There were two important misunderstandings buried in this theorizing. The first was that economic growth would inevitably -- and fairly swiftly -- lead to democratization. The second was that new democracies would inevitably be more friendly and helpful toward the United States. Neither assumption is working out.

In 1989, after the Tiananmen Square massacre, few Western analysts would have believed that 20 years later China would still be a one-party state -- and that its economy would also still be growing at phenomenal rates. The common (and comforting) Western assumption was that China would have to choose between political liberalization and economic failure. Surely a tightly controlled one-party state could not succeed in the era of cell phones and the World Wide Web? As Clinton put it during a visit to China in 1998, "In this global information age, when economic success is built on ideas, personal freedom is … essential to the greatness of any modern nation."

In fact, China managed to combine censorship and one-party rule with continuing economic success over the following decade. The confrontation between the Chinese government and Google in 2010 was instructive. Google, that icon of the digital era, threatened to withdraw from China in protest at censorship, but it eventually backed down in return for token concessions. It is now entirely conceivable that when China becomes the world's largest economy -- let us say in 2027 -- it will still be a one-party state run by the Communist Party.

And even if China does democratize, there is absolutely no guarantee that this will make life easier for the United States, let alone prolong America's global hegemony. The idea that democracies are liable to agree on the big global issues is now being undermined on a regular basis. India does not agree with the United States on climate change or the Doha round of trade talks. Brazil does not agree with the United States on how to handle Venezuela or Iran. A more democratic Turkey is today also a more Islamist Turkey, which is now refusing to take the American line on either Israel or Iran. In a similar vein, a more democratic China might also be a more prickly China, if the popularity of nationalist books and Internet sites in the Middle Kingdom is any guide.

ROBYN BECK/AFP/Getty Images

"Globalization Is Not a Zero-Sum Game."

Don't be too sure. Successive U.S. presidents, from the first Bush to Obama, have explicitly welcomed China's rise. Just before his first visit to China, Obama summarized the traditional approach when he said, "Power does not need to be a zero-sum game, and nations need not fear the success of another.… We welcome China's efforts to play a greater role on the world stage."

But whatever they say in formal speeches, America's leaders are clearly beginning to have their doubts, and rightly so. It is a central tenet of modern economics that trade is mutually beneficial for both partners, a win-win rather than a zero-sum. But that implies the rules of the game aren't rigged. Speaking before the 2010 World Economic Forum, Larry Summers, then Obama's chief economic advisor, remarked pointedly that the normal rules about the mutual benefits of trade do not necessarily apply when one trading partner is practicing mercantilist or protectionist policies. The U.S. government clearly thinks that China's undervaluation of its currency is a form of protectionism that has led to global economic imbalances and job losses in the United States. Leading economists, such as New York Times columnist Paul Krugman and the Peterson Institute's C. Fred Bergsten, have taken a similar line, arguing that tariffs or other retaliatory measures would be a legitimate response. So much for the win-win world.

And when it comes to the broader geopolitical picture, the world of the future looks even more like a zero-sum game, despite the gauzy rhetoric of globalization that comforted the last generation of American politicians. For the United States has been acting as if the mutual interests created by globalization have repealed one of the oldest laws of international politics: the notion that rising players eventually clash with established powers.

In fact, rivalry between a rising China and a weakened America is now apparent across a whole range of issues, from territorial disputes in Asia to human rights. It is mercifully unlikely that the United States and China would ever actually go to war, but that is because both sides have nuclear weapons, not because globalization has magically dissolved their differences.

At the G-20 summit in November, the U.S. drive to deal with "global economic imbalances" was essentially thwarted by China's obdurate refusal to change its currency policy. The 2009 climate-change talks in Copenhagen ended in disarray after another U.S.-China standoff. Growing Chinese economic and military clout clearly poses a long-term threat to American hegemony in the Pacific. The Chinese reluctantly agreed to a new package of U.N. sanctions on Iran, but the cost of securing Chinese agreement was a weak deal that is unlikely to derail the Iranian nuclear program. Both sides have taken part in the talks with North Korea, but a barely submerged rivalry prevents truly effective Sino-American cooperation. China does not like Kim Jong Il's regime, but it is also very wary of a reunified Korea on its borders, particularly if the new Korea still played host to U.S. troops. China is also competing fiercely for access to resources, in particular oil, which is driving up global prices.

American leaders are right to reject zero-sum logic in public. To do anything else would needlessly antagonize the Chinese. But that shouldn't obscure this unavoidable fact: As economic and political power moves from West to East, new international rivalries are inevitably emerging.

The United States still has formidable strengths. Its economy will eventually recover. Its military has a global presence and a technological edge that no other country can yet match. But America will never again experience the global dominance it enjoyed in the 17 years between the Soviet Union's collapse in 1991 and the financial crisis of 2008. Those days are over.

UE and Taunton, Mass. Set Own Course

in Fight Against Job Outsourcing

By Roger Bybee
SolidarityEconomy.net via ZNet

Dec. 14, 2010 - The American economy increasingly functions like a high-tech machine that efficiently plunders money from the vast majority of citizens and shoots a jetstream of the cash upward into the bank accounts of the richest 1%. At the same instant, it sends family-supporting jobs zooming off to Mexico, China, India and other low-wage sites.

The Republican landslide, enabled by a weak job-creation strategy coming from the White House, might lead you to think that a majority buys into the notion of letting the economic machine run on, continuing to chew up lives and communities.

However, a growing number of restless and desperate Americans in places like Taunton, Mass., a factory town of 50,000 hard-hit by unemployment, are showing that they understand how disastrously the machine works for them.

They increasingly realize that they must fight to save every endangered job and do battle to preserve decent pay, benefits and union representation.

They also understand that the Great Recession will continue--despite record profits and bonuses for the few at the apex of the economic pyramid—until ordinary Americans have jobs and wages to buy American-made products and get the economy providing prosperity for all.

PROPAGANDA ASSAULT

The experience of watching America becoming economically polarized between the super-rich and vast majority fueled overwhelming sentiment against extending tax cuts to the richest 2%.

But predictably, citizens' responses to pollsters turned around to 68% support once Americans were subjected to weeks of an incessant bi-partisan bombardment from party elites and media pundits telling them that only the uninformed would be foolish enough to oppose the Obama-Republican deal.

The results of this propaganda onslaught left President Obama and other members of the Democratic elite busy congratulating themselves on their clever bargaining and slick salesmanship. However, the facts remain that the deal will do next to nothing on job creation while ballooning the deficit and playing into the hands of Social Security privatizers. 

Obama and the Republicans are also pressing ahead with with a new free trade deal with South Korea despite a projected job loss of 200,000, Obama's consistent campaign pledges and 53% of Americans believing that free trade deals have hurt the U.S, up from 32% in 1999.

CRUCIAL EXAMPLE: PEOPLE CAN FIGHT BACK

But regardless of the cynical deals and manipulation of public opinion being directed by the White House, workers in places like Taunton, Mass. are continuing their struggles at the grass-roots level against the destruction of America's productive base and its dwindling supply of good jobs.

In Taunton, members of United Electrical, Radio and Machine Workers Local 204 have been taking on Esterline Technologies, a Bellevue, Washington aerospace firm, which plans to move about 100 jobs to a non-union plant in California and an even lower-wage plant in Tijuana, Mexico. The Taunton plant, which makes silicone gaskets for aircraft, has been consistently profitable and productive, yet Esterline is in a rush to sell off the plant's equipment and get production rolling in the other facilities.

Esterline had originally promised the workers that it would give them the right of first refusal on the plant's equipment, as the UE sought to pursue either running the operation on their own or as a subsidiary of another firm. But Esterline reneged when the union demanded that the company adhere to the UE-Esterline contract and Massachusetts law on closing the plant.

So despite $119.8 million profits last year, Esterline announced that it needed to sell off the machinery to cover the cost of severance payments. It quickly announced plans for a Dec. 12 auction to dispose of the equipment.

But Local 204 responded on two fronts. First, the UE took action to halt the auction. It persuaded elected officials like US Rep. Barney Frank, state legislators and the City Council to request that Esterline delay the auction until at least Feb. 15.

The union also alerted unionists throughout New England about Esterline's plans to destroy the workers' dreams of saving their jobs and to head for the repressive low-wage paradise of Mexico as rapidly as possible. Facing both the pressure from the elected officials and the prospect of a large rally of militant unionists furious about more jobs going off to Mexico, the company announced a delay in the auction until Jan. 19.

MOVING AHEAD ON EMINENT DOMAIN

Second, the city of Taunton is moving ahead—with unanimous support from the City Council and mayor—to pursue the use of "eminent domain" to seize the machinery of Esterline Technologies' local plant if necessary. The city will also need the support of the Democratically-controlled Maassachusetts Legislautre, which reconvenes in January.

"Eminent domain" is a doctrine under which private property may be taken, with compensation, by governmental units for a compelling public purpose. While often used by huge corporations to raze neighborhoods for new factories that could be located elsewhere, this time the UE and the Taunton City Council are preparing to use eminent domain against Esterline.

In the scope of things, the fight in Taunton is one small battle at a time when at least 15 million are unemployed. But the fierce determination of the UE Local 204 members represents a total rejection of all the messages from corporate, political and media elites that working people must simply "get used to it" when CEOs decide to send their jobs off to Mexico or China in search of even greater profits.

NO RECESSION AT THE TOP

For those running America's economic machine, things could not be rosier. Corporate profits in the third quarter set an all-time record. CEO pay at the 100 largest corporations is 1,723 times as much as their average workers make. The richest 1% possess more wealth than the bottom 90% of Americans.

Wall Street, dominated by a small circle of insiders who set the rules will be once again be handing out record bonuses for 2010:

    According to an October estimate, Wall Street firms are set to pay out $144 billion in bonuses this year, which would break a record for the second year in a row.

But regardless of the Republican landslide Nov. 2 that provides no real mandate, there are powerful signs that the basic unfairness of the economic system is widely recognized by the majority of the American people.

"Worries about side effects of trade and outsourcing seem one of the few issues on which Americans of different classes, occupations and political persuasions agree," the Wall Street Journal reported.

That's why the example of a small union local and a small factory town taking on a giant corporation sending jobs to Mexico is so crucial. The public mood is impatient and volatile, and an example like Taunton could eventually provide the spark for a much broader battle.

UE Local 204 and Taunton are showing that it is possible to ignore those who tell them hope is futile and globalization's carnage is inevitable—and take effective action.

Earlier reports on the UE campaign in Taunton:

    * UE Fights Defense Firm's Plan to Scrap Machines and Mass. Workers (9/10/2010)
    * Memo to Labor Movement: Follow UE's Lead and Fight Corporate Outsourcing (9/28/2010)
    * Masters of Eminent Domain? Union, Struggling Mass. Town Take on Aerospace Giant (11/19/2010)
    * UE Determined to Clip Wings of Aerospace Giant, Save Jobs in Mass. (11/30/2010)

Poster: 1989, Only Socialism Can Save and Develop China

Information and Analysis:

Towards a world for people not profit

How China Rises

by Noah Tucker

Nov 4th 2007

SolidarityEconomy.net via 21st Century Socialism

What lessons can be drawn from China's spectacular and sustained economic growth?

As Hu Jintau remarked at the 17th Congress of the Chinese Communist Party, the period since the previous Congress five years ago has been extraordinary. China's economic achievements have been arousing not only astonishment and admiration but also some anxiety.
In the past twelve months alone, The People's Republic of China (PRC) has overtaken Canada as the biggest source of imports to the USA, and overtaken the USA as the biggest source of imports to the European Union. Concern about the low level of investment in Africa has been displaced by concern about the effects of the high level of Chinese investment in Africa; there is now even anxiety about the effects of investment by Chinese state-owned firms into the Western economies.

The Chinese Communist Party is also expressing concerns. The themes of its 2007 Congress included protection of the environment and the achievement of social harmony. According to some estimates, China has displaced the USA as the world's biggest source of greenhouse gases. Inequality is rising as fast as pollution: China now has over 800 individuals with a personal wealth of more than a hundred million US dollars each, up from 500 in 2006; while the average income in rural areas of China is 480 dollars per year.

Made in China.

Hu Jintau's remark on the extraordinary nature of the most recent years can be faulted in only one sense: China has been making phenomenal economic strides, and along the way accumulating serious social  problems, for almost three decades.
How China achieved its status as the world's fastest-growing major economy is a matter, not just of academic curiosity, but of practical interest. The Cuban government, for instance, is being urged from within and outside the island to follow China's example in order, supposedly, to generate greater prosperity. So far, the official position of the Cuban Communist Party is that they will not take this path.
The dominant explanation for China's progress towards industrial superpower status is that the country's growth was, until the late 1970s, held back by socialist institutions: state and collective ownership, and central planning; it is the incremental replacement of these by private ownership, the competitive market and other capitalist institutions which has propelled China's rapid and sustained development.
This position was put succinctly in the section on the Chinese economy in the CIA's 2005 World Factbook:

Reforms started in the late 1970s with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, the foundation of a diversified banking system, the development of stock markets, the rapid growth of the non-state sector, and the opening to foreign trade and investment. China has generally implemented reforms in a gradualist or piecemeal fashion, including the sale of equity in China's largest state banks to foreign investors and refinements in foreign exchange and bond markets in 2005. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978.

Some experts have argued that this is a one-sided picture. As Professor Dani Rodrik of Harvard University remarks:

China is not a straightforward story of export growth achieved through trade openness and free market forces.

Dani Rodrik notes a curious feature- not only have reforms been slow whereas growth has been fast, but major economic reforms followed the increase in the growth rate, rather than preceding it:

The standard list of recommendations for countries pursuing this goal [of successful integration in the global market] includes: dismantling quantitative restrictions on imports, reducing import tariffs and their dispersion, making the currency convertible for  current account transactions, eliminating bureacratic red tape and other impediments to direct foreign investment, improving customs procedures, and establishing the rule of law. Measured by these guidelines, China’s policies resemble more those of a country that messed up big time than those of a country that became a formidable competitive threat in world markets to rich and poor countries alike. In brief, China opened up very gradually, and significant reforms lagged behind growth (in exports and overall incomes) by at least a decade or more. While monopoly state trading was liberalized relatively early (starting in the late 1970s), what took its place was a complex and highly restrictive set of tariffs, non-tariff barriers, and licenses. These were not substantially relaxed until the early 1990s.

Another critic of what is aptly described as the 'market fundamentalist' position is Dr Peter Nolan of Cambridge University. In his book Transforming China, Nolan shows that China has retained much of the active, guiding and proprietorial role of the state in the economy; even today, most of banking, heavy industry, extraction and much of the export-manufacturing sector still in national and local government ownership; many of the most important foreign direct investment projects take the form of joint ventures involving the Chinese state; all land is, at least notionally, publicly owned; and, of course, the Chinese Communist Party has remained in power. Dr Nolan contrasts the successes of China's gradual and controlled marketisation with the economic and social catastrophe which overwhelmed the countries of the former USSR when they abandoned socialism and were embraced by ‘free market’ capitalism.
While noting some of the PRC's developmental problems, including the country's failure (at the time of the book's publication in 2004) to build any major home-grown transnational companies, Peter Nolan concludes that China is succeeding because it has found a way between the extremes, on the one hand of the 'Stalinist' model of full public ownership and state planning, and on the other, the rampant capitalist market:

Neither Stalinism nor free-market capitalism can be enduring political-economic philosophies because both will be, or have already come to be, seen by the mass of the population in different countries to be inadequate in providing them with a better quality of life.  Some form of market socialism is the only viable long-term basis for meeting most people’s aspirations.

The terms 'market socialism' and 'socialism with Chinese characteristics' are used by the Chinese Communist Party to define the country's economic and social system. But one might ask whether a more accurate term for a system in which the state takes a very active and dominant economic role, but in which there are multimillionaires and paupers, stock exchanges and high unemployment, and in which people even have to pay upfront for their medical care and their children's schooling, might not in fact be 'state capitalism'.
Either way, we are still left with the assumption that market forces, managed to a greater or lesser degree by the state, release special capacities for efficiency and productivity which non-market arrangements cannot facilitate. Is this proved by China's economic history since the mid-Twentieth Century?
To guage this, we must take into account three matters.
The first is that economic development depends on the introduction of more advanced machinery and production-related knowledge - that is, technology. For all less developed economies, that means importing technology from the industrially advanced countries and applying it successfully in local conditions. Even the most advanced countries rely hugely on importing technological developments from each other, by means which include cross-investment, purchase of technology licences and buying foreign machinery.
Secondly, countries in which workers are paid lower wages have a big potential advantage in competitive world trade, because, other things being equal, they can produce cheaper goods. But other things are not equal. Aspects which restict the less developed countries from benefiting in global trade from their relatively lower wages stem from the very fact that they are less developed- not only do they have generally lower levels of technology, but they have lower levels of infrastructure, education, and health.
Third and by no means least: national economies exist within a global context which is dominated militarily and politically by the USA and economically by the advanced capitalist countries of North America, Western Europe and Japan; is regulated by international institutions controlled by those countries; and in which transnational corporations which are almost exclusively based in those countries own and control hugely important resources including the most up-to-date technology. The People's Republic of China was and still is a Third World nation. Its per-capita GDP, even when measured by purchasing-power parity, is $7,600 per person, considerably less than one-fifth that of the United States.
As we shall see, moving away from full public ownership and implementing market reforms has indeed been crucial for China in overcoming barriers to more rapid development; but these measures have been necessary in a very different way from that given in the usual explanations. It is acknowledged by all that the increase in China's foreign trade, especially trade with the West, has been an indispensible factor in the country's increased economic growth since the late 1970s. Yet the conventional economic analysts never make a connection with the obviously relevant fact: that China was enabled to increase its trade with the USA and other Western countries, including both its imports of technology and its exports of manufactured goods, because Western economic restrictions against China were relaxed during this period.
Let us begin by confronting the assumption that only by increasing the role of market forces can a country develop rapidly and dynamically. There are many counter-examples for this, but one in particular stands out in its relevance.
Socialist modernisation
On 6th April 1960, Colonel Wilfred J. Smith (PhD), Member of the American Academy of Political and Social Sciences, delivered a lecture on China’s astounding economic growth to the Industrial College of the US Armed Forces:

Looking at Red China this morning, I’d like to indicate that we can’t appreciate the present unless we have some understanding of the past.  And the fact that Red China has developed any economic potential, that she has made the strides which she has made, is a phenomenon of history.  Actually, just a few short years ago, within the lifetime of many of us living today, China was purely an agrarian country…

Colonel Smith informed his audience that during its first five year plan, 'Red China' had enormously increased its output of coal, petroleum, cement, steel and other metals; greatly extended its railway network; erected new bridges; built plants to produce trucks and tractors; and was rapidly developing its light industries. The Chinese had even built an atomic reactor. He also remarked that since the communists had taken power there had been an almost seven-fold increase in the number of higher education students, of whom a growing number were women:

Women used to be rather conspicuous by their absence in Chinese colleges and universities. Today there are over 100,000 Chinese women in colleges and universities. Forty percent of these young women are studying science - - either medicine, engineering, physics, or some other brand of science.

Colonel Smith predicted:

There will be a utilisation of every possible resource, be it human, be it mechanical or be it scientific.  China is trying to develop a great industrial economy today and yet utilise her manpower, of which she has such an excess…  And, gentlemen, there can be little doubt that China is making enormous strides industrially – unbelievable strides.

The Chinese communists had been piloting socialist methods of economic organization in territory under their control, even before they took national state power.  In June 1949, US Ambassador to China John Leighton Stuart telegraphed Secretary of State Dean Acheson in almost hysterical terms about developments in Manchuria, North East China:

…Chinese Commies have adopted as their own, in Manchuria more than anywhere else, such Soviet tools as: Planned economy, socialist competition, production quotas, heroes Chinese labour, high pressure enthusiasm in press, self-criticism, participation workers in factory management, use trade unions and workers organizations as instruments state administration.

Stuart added that the Chinese Communists announced their accomplishments in the North East with pride, reflecting “to some extent satisfaction” with the Soviet model of development.

'Study the advanced production experience of the Soviet Union. Struggle for the industrialisation of our country.' Artist: Li Zongjin

The People’s Republic of China was established in circumstances not dissimilar to those pertaining at the founding of most of the other communist regimes in the 20th Century.  The country, very poor and backward and with minimal industry, had been torn by colonial rule, foreign invasions and years of civil war.
A study published by the United Nations University summarises the developments that followed the adoption of socialist planning in the whole of mainland China:

Following the three years of economic rehabilitation from 1949 to 1952, China initiated and established a relatively flexible central planning system. The first Five-Year Plan for national economic development was carried out between 1953 and 1957. An initial basis for socialist industrialization, involving the construction of 694 ‘above-norm’ projects (including 153 major ones), was planned and completed.

Between 1953 and 1956, the annual average increase in the gross output value of industry was 19.6 per cent and of agriculture 4.8 per cent. During that period, more than 110 large industrial enterprises were completed, mostly in heavy industry. This laid the groundwork for Chinese socialist industrialization. The value of the industrial output of the state-owned enterprises reached around 53 per cent, and that of the collectively owned 19 per cent, in the year 1957. The remaining industrial enterprises were in the category of either joint state/ private ownership or private ownership…

From 1953 to 1959, while state ownership of industry was rapidly increasing, China's average annual growth in GDP was 10.59%, a rate very similar to current figures. There is another similarity: both in the 1950s and since the late 1970s, industrial growth was based on state-led programmes to import foriegn machinery and expertise, and to develop and apply this technology in Chinese conditions. The technology transfers of the 1950s came from the USSR, Czechoslovakia and other new socialist countries of Eastern and Central Europe.

It was in this period that China founded its motor vehicle production industry. As Walter Arnold for the Japan Policy Research Institute notes, it was in 1953 that:

… the First Auto Works, FAW, was formed in a Sino-USSR cooperative effort that led to the production of the first Chinese truck that rolled off the assembly line on July 15, 1956.  Two years later China’s first domestically made passenger car, [the] Hongqi, was launched and the first cross-country motor vehicle went into production.  It appeared that following the Soviet model, China was now on track to produce a larger mix of motor vehicles...

Yang Yao of the Centre for Economic Development at Beijing University, although a critic of socialist planning, concedes that China’s technological development during its period of co-operation with the Soviet Union brought benefits which lasted many years. The joint projects:

…laid the foundation of China’s modern industry, their impacts can still be felt even today…  The imported technologies not only brought industry to China, but also brought new knowledge and skills. Thanks to the more than 3000 Soviet experts and many others from the Eastern European countries, China quickly gained necessary skills and trained a capable workforce. In addition, more than 20,000 people were sent to Soviet Union and Eastern European countries to take formal education or training. These people had become the backbone of China’s technological capacities in the subsequent years until very recently when the new generation of college graduates after the Cultural Revolution matured in the late 1980s and early 1990s. Thanks to meticulous plans aided by the Soviets, the imported projects were allocated in a way to level the regional disparities of industrial development in the country.

Red traders
Right-wing critics frequently make two allegations against the socialist planned economies of the 20th Century.  These are, firstly, that industrialisation was carried out for its own sake, without a corresponding improvement in the conditions of the population; and, secondly, that economic development was autarkic, ie that trade was deliberately restricted and self-sufficiency was promoted.  Autarky is regarded as inimical to economic growth because it does not allow scope for nations to specialize in what they can do best and to economise by importing what is difficult to produce at home.
Neither of these allegations can be substantiated by reference to China.
From the onset of the Cold War in the late 1940s, the USA pursued a policy aimed at depriving the Soviet Union of goods which would help it develop economically and militarily, (‘strategic materials and equipment’) including all high-technology products.  When these selective sanctions were formalized in 1949 through CoCom, the economic arm of NATO, China and the other newly socialist countries were also targeted.  In 1950, sanctions against China were intensified.  Chinese assets in the USA were frozen and a complete ban on US trade with China was instituted; using the pretext of the Korean War, the USA succeeded in winning the United Nations in 1951 to a policy of a total embargo against the PRC.  The majority of countries followed the embargo in whole or part.  After the end of the Korean War in 1953 the sanctions were maintained, though with diminishing enthusiasm on the part of the allies of the USA.
Given that from 1946 to 1948, between 48% and 57% of China’s import trade, and 20% to 30% of its export trade, was with the USA, China was regarded as highly vulnerable to trade sanctions.  More aggressive measures were also considered. A 1951 CIA memo suggested that the interruption of China’s foreign trade:

…by economic warfare measures and by naval blockade would create unemployment and unrest, hinder industrial production and development, and create serious financial and administrative problems.

The memo also gave a positive estimate of the likely effectiveness of:

…a campaign of aerial and naval bombardment against selected ports, rail systems, industrial capacity and storage bases.

The response of China’s communist leaders to these considerations was twofold.  Industry, hitherto sited mainly on and near the coastline where it was vulnerable to blockades and bombardment, was re-sited deeper into the country.  In reaction to the US-imposed sanctions there was at first, not 'autarky' but a switching of economic relations towards the other socialist countries; China also sought to engage with those capitalist countries, including Britain, which increasingly resisted US pressure and became willing to engage in some trade with  the PRC; and it used the European colonies of Hong Kong and Macao as routes to further trade with the West (Hong Kong became very rich as a result).  While in its period of close alliance with the USSR and full membership of the new ‘socialist camp’ of nations, China flowered as a trading nation, diversifying in its export products and trade partners:
Trade between China and selected countries (millions of US dollars)
                                    1950            1952            1959
USA                              238.12          0.05            0.00
UK                                73.51            25.81          197.00
Hong Kong                   163.66          303.84        211.50
and Macao
USSR                            338.44          1064.21      2097.00
Romania                       0.27              1.39            58.42
Czechoslovakia            10.36             97.74         210.39
Total of all imports        582.78          1,118.25   2,119.99
Total of all exports       552.36           822.94      2,261.35
Total foreign trade       1,134.14        1,941.19   4,381.34
Categories of China’s exports (millions of US dollars)
                                 1950                    1959
Farm produce            278.57                 725.04
Textiles                      32.80                   626.19
Local products           180.94                 351.69
Metal materials          44.03                   276.94
Handicrafts                 - -                        42.80
Machinery                   0.63                    94.79
Source: China Today: Foreign Trade, via Shu Gang Zhang

Divided we fall
However, in the late 1950s the bond between the Soviet Union and China came under increasing strain.  The USSR’s leadership under Kruschev expressed grave doubts about Chinese preparations for what Mao called the ‘Great Leap Forwards’, a scheme which the Soviet side regarded as a foolhardy attempt to jump over necessary stages in the maturing of economic and social developments.  The results of the first Five Year Plan had exceeded expectations and this convinced the Chinese Communist Party that almost anything was possible given the political will.

'Study the Soviet Union, to advance to the world level of science.'

Artist: Li Lang

Of greater importance for the alliance was an increasingly public disagreement on how to respond to the pressure and threats from the USA, which successfully pursued a ‘divide and conquer’ strategy in respect of the two communist powers.  The US, while continuing to discipline its allies to prevent the export of technology to both China and the USSR, took a much harder political, military and economic line against the PRC; this included a continued trade embargo, refusal of diplomatic recognition and using its veto to prevent China having a seat in the United Nations; there was also the threat of atomic war against the Chinese should they attempt to re-take the island of Taiwan, still occupied by the US-sponsored 'Nationalist' forces who had been defeated on the mainland in 1949.  To the Communist Party of China, the USA was not merely the imperialist enemy in an abstract sense but was engaged in diplomatic and economic warfare, backed up by open nuclear blackmail against their country’s territorial integrity.  Having (with the assistance of Soviet military equipment) fought US forces directly and quite successfully in Korea in the early 1950s, the Chinese did not regard the Americans as invincible.
The Chinese communist leadership saw the USSR’s policy of seeking ‘peaceful co-existence’ with the USA, and the Soviet refusal to provide China with the technology to develop its own nuclear weapons, as treacherous and disrespectful; the USSR viewed the Chinese policy as extremely risky in the face of a United States which had demonstrated its eagerness to engage in foreign imperialist wars – eg Korea, and even to use its nuclear weapons, as it had on Hiroshima and Nagasaki.
The resultant Chinese-Soviet split of 1960 entailed a withdrawal of the Soviet technical advisors, the end of technical training programmes and other technology transfers from the USSR to China, and a steep reduction in China’s trade with the USSR and Eastern Europe. The continued US-led embargo made it impossible for the PRC to source many essential inputs from the capitalist countries.
The negative effects of this for China’s industrial modernisation can be gauged from the following figures:
Selected industrially significant imports to China (millions of US dollars)
                                                    1950        1959        1963
Complete sets of equipment        0.40        688.94      54.60
Instruments / tools                       67.59     450.70       76.36
Industrial chemicals                    140.31      430.72       238.92
Source: China Today: Foreign Trade, via Shu Gang Zhang
As one example of the severe industrial crisis which this precipitated, China's output of motor vehicles fell from over 22,000 in 1960 to 4,000 in 1961.
The industrial setback was coincidental with the consequences of very poor climatic conditions for agriculture, described by Col. Wilfred J. Smith as follows:

Nineteen hundred and fifty nine, gentlemen, was one of the most disastrous years as far as farming is concerned in Red China.  Eighty percent of their best agricultural area was just damaged with everything - - from rain, drought, pests.  If you name it, they had it.  They had all kinds of disasters. It was the worst year in a century, in my opinion.

In this context, the reforms of the Great Leap Forward, in which people moved into large communes and some heavy industry was decentralized to the countryside, were not generally successful.  Together, these events were disastrous, but not disastrous enough for anti-communist commentators today, who use a fraudulent statistical method to exaggerate the numbers of deaths from food shortages, and claim furthermore that these deaths were purely due to policies pursued by the Chinese Communist Party.  Ignoring the sharp decrease in the birth rate which accompanied the harvest failures and the social upheaval of the reforms, they make a projection that China’s population ‘should have' increased by 30 million more than it actually did in the early 1960s; following this,they attribute the full difference to deaths by famine.  Professor Utsa Patnaik of Jawaharlal Nehru University, New Delhi, disputes these bogus claims:

In this initial period of the ‘Great Leap’, household activities like cooking and child minding were also briefly socialised with the establishment of communal kitchens and crèches to free women for labour, and mobility increased greatly as women moved to project work. With such a reversal of the old patterns of life and work amounting virtually to social dislocation, it would not be surprising if the decision to have children was postponed, reflected in a fall in the birth rate… The exaggerated figures of 30 million or more ‘famine deaths’ in China are arrived at after including the missing millions because they were not born and, indeed, were not conceived at all…
More responsible estimates place excess mortality in China between 10 to 13 million during the 1959-61 period if the increased crude death rate during these years is compared to the level of 1958. The excess toll of this order is bad and is a permanent blot on the otherwise impressive record of welfare gains in the Maoist era. The highest level of the crude death rate in China's famine in 1960 which was 25.43 per 1,000 was incidentally, lower than the 'normal' average crude death rate during 1955-60 in eighteen developing countries; while the ‘normal’ Indian crude death rate was very close at 24.6 per 1,000 during the same period, 1955-60. Needless to say, no one talks of ‘famine’ in these developing countries or even in India -a good example of academic inconsistency.” [My emphasis]

After three years of traumatic economic contraction, China made a strong recovery and resumed its economic development, though at a less rapid pace.  Yang Yao cites the following figures for the PRC’s average annual GDP growth:
1953-59 (socialist planning in alliance with the USSR)                                 10.59%
1960-62 (‘Great Leap Forward’, end of joint projects with USSR)                minus 8.79%
1963-78 (socialist planning in international isolation)                                  8.60%
1979-95 (access to Western technology and trade, ‘market socialism’)      10.09%
In keeping with the threats to China by the USA, and China’s worsening hostility with the Soviet Union, a very large proportion of the fruits of the PRC’s industrial development from 1963 to 1978 was used for military purposes.  The proportion of GDP allocated for defence in this period has been estimated as approximating 20%. Without foreign assistance, China created an arsenal of atomic and then hydrogen warheads in the 1960s, putting it ahead of France in nuclear weapons development; China’s first space satellite launch in 1970 proved its capacity to deliver these warheads. The impressive welfare gains to which Professor Patnaik refers continued despite this enormous diversion of resources.
Socialist welfare
The fruits of China’s socialist industrialisation were used to undertake some very important tasks which beneficially transformed the lives of hundreds of millions of people.  Electric power and lighting was brought to most of the country.  Clean water and sewage systems were established in the towns. Isolated districts were connected by new transport links.  The progress in modernisation of farming, alleviating the toil of life in the countryside, is illustrated by the following figures:
                                                                 1957            1978
Irrigated area
(percentage of arable land)                      24.5%         45.2%
Mechanically irrigated area                       1.1%            25.0%
Mechanically ploughed area                      2.3%           40.7%
Large / medium tractors (thousands)       14.7             557.4
Combine harvesters (thousands)              1.8              19.0
Source: Nolan

One of the most stunning achievements of China following the communist revolution was the improvement in the health of the people.  This was enabled by a two-pronged approach, described in a US Library of Congress Country Studies article:

An emphasis on public health and preventive treatment characterized health policy from the beginning of the 1950s. At that time the party began to mobilize the population to engage in mass ‘patriotic health campaigns’ aimed at improving the low level of environmental sanitation and hygiene and attacking certain diseases. One of the best examples of this approach was the mass assaults on the ‘four pests’--rats, sparrows, flies, and mosquitoes--and on schistosoma-carrying snails. Particular efforts were devoted in the health campaigns to improving water quality through such measures as deep-well construction and human-waste treatment. Only in the larger cities had human waste been centrally disposed. In the countryside, where ‘night soil’ has always been collected and applied to the fields as fertilizer, it was a major source of disease. Since the 1950s, rudimentary treatments such as storage in pits, composting, and mixture with chemicals have been implemented.
As a result of preventive efforts, such epidemic diseases as cholera, plague, typhoid, and scarlet fever have almost been eradicated.

Curative treatments, previously available only to the privileged, became available without charge; a network of national, provincial and local facilities was developed by the Ministry of Public Health.  Health workers were trained in both traditional and Western medicine:

In 1949 only 33,000 nurses and 363,000 physicians were practicing; by 1985 the numbers had risen dramatically to 637,000 nurses and 1.4 million physicians.

On all measures of health, China not only improved greatly but exceeded the performance of the capitalist countries with comparable incomes. Average life expectancy in China was 32 in 1949. Under socialism it more than doubled, rising to 67 in 1981.  This figure of 67 compares to 52 in India and an average of 50 for low income countries in 1981.
In this period, the People's Republic of China also achieved relatively good educational results in comparison to other Third World countries. The following figures are for 1978:           
                                 % of age group                % of age group                  % Adult
                                 in primary school              in secondary school           literacy

Low income                 74                                    20                                     43
countries*
Middle income              95                                   41                                     72
countries
India                           79                                    28                                     36
China                          93                                    51                                     66
*Excluding China and India
Source – World Bank, World development report 1981, via Nolan
The historic compromise
China’s economic and social progress in the 1960s and 1970s can hardly be regarded as sluggish, particularly given the country's external circumstances. Yet in terms of their strategic ambitions, the leaders of the Chinese Communist Party (CCP) faced increasingly problematic prospects. Within the global communist movement, the Soviet Communist Party defeated the CCP's challenge for influence in the 1960s; during the 1970s, the new communist-led states in the Third World - Cuba, Vietnam, Angola, Mozambique, Ethiopia and Afghanistan - aligned themselves increasingly with the USSR rather than China. Even North Korea refused to remain a specific ally of China, instead maintaining diplomatic equidistance between both the socialist giants.
Further, in respect of regional economic power: the People's Republic of China, although its growth rate was better than the Third World average, was falling behind some other states: first Japan, then South Korea and Taiwan, emerged as dynamic, very rapidly growing economies by importing and assimilating Western technology and orienting their economies towards exports.

When Mao met Nixon. 1972

In this context, the Chinese Communist Party leadership took its decision to respond to the overtures of the USA, a decision of immense importance in its consequences. Former US National Security Council staff member Michel Oksenburg wrote in the elite US journal Foreign Affairs in 1982:

While the past decade of Sino-American relations have been largely constructive, the ten years have not been on a steady incline; rather there have been two strong forward spurts, from Spring 1971 through May 1973 and from May 1978 through early 1980.

US Secretary of State Henry Kissinger visited China secretly in July 1971, and in October of that year the USA lifted its UN veto - China replaced the Taiwan regime in the United Nations and took its place on the Security Council; Oksenburg notes that although there was unhappiness within sections of the Chinese Communist Party about being used as a pawn to weaken the international bargaining position of the Soviet Union, this was offset by a softening of the US embargo against China.  China’s total trade with the USA, which had been non-existent from 1953 to 1971, rose to $475 million in 1975.
The subsequent improvement in US-China relations, for which US imperial strategist Zbigniew Brzezinski had been pushing strongly, had powerful economic motivations from the Chinese side.  As Oksenburg notes:

In February [1978] the National People’s Congress placed economic development at the top of China’s agenda. This significantly enhanced the attractiveness of a closer relationship with the United States for the technology and capital it could offer. 

For the USA, the strategy was that of playing China off against the more potent communist enemy, the USSR. Though both of their economies were negatively affected by the US-imposed trade sanctions implemented though CoCom, also known as the 'economic arm of NATO', the PRC and the Soviet Union had been on unfriendly terms since 1960.
Jeffrey T. Richelson of the National Security Archive notes the close links between the economic-technological and the military-political in US-China relations:

Both the United States and China perceived that significant economic and political benefits could result from an opening of the other's markets. For the United States, China represented a market of unprecedented size — hundreds of millions of potential individual consumers. It also has come to represent a country with a government that could commit billions of dollars to purchases of airplanes and other equipment. U.S. policymakers have also viewed trade as a means by which to influence Chinese foreign and military policy. Thus, Zbigniew Brzezinski, the assistant to the president for national security affairs in the Carter administration, supported the transfer of technology to China as a means of developing a strategic relationship...
In May 1978, Morton Abramowitz, deputy assistant secretary of defense for international security affairs, accompanied National Security Adviser Zbigniew Brzezinski to Beijing. In a meeting with a senior Chinese defense official, Abramowitz gave a highly classified briefing on the deployment of Soviet forces along the Chinese border and pulled out of his briefcase satellite photographs of Soviet military installations and armor facing China. China continued to receive such photography. 

Discussions at top leader level included the subject of military action against countries considered to be too close to the USSR.  As Terry McCarthy in TimeAsia recalls:

The decision [by China] to send what amounted to nearly 250,000 troops into [ie, to invade] Vietnam had been taken seven months before and was well-telegraphed to those who cared to listen. When [Chinese President] Deng Xiaoping went to Washington in January 1979 to cement the normalization of China's relations with the United States, he told President Jimmy Carter in a private meeting what China was about to do--and why. Not only did Beijing feel Vietnam was acting ungratefully after all the assistance it had received during its war against the U.S., but in 1978 Hanoi had begun expelling Vietnamese of Chinese descent. Worst of all--it was cozying up to Moscow.

Simultaneously, the US allowed a major reduction of its restrictions on trade. According to Oksenburg, in 1979:

…the President [Carter] supported MFN [Most Favored Nation status] for China and went further.  He supported Vice President Mondale’s recommendation that the United States clearly differentiate between China and the Soviet Union [in China’s favour] on a whole range of bilateral issues: export controls, eligibility for Export-Import Bank financing, MFN, and so on. Mondale informed the Chinese of this basic decision during his August 1979 trip.

MFN, without which a normal trading relationship with the USA is impossible due to tariff barriers, was granted to China on February 1st 1980.
President Reagan continued this policy. In 1981, his Secretary of State Alexander Haig made a visit to China:

Haig informed the Chinese that the President was willing to consider the sale of weapons to China and was relaxing export controls on high technology items to China.

Under Reagan, there were further US-China covert actions against two other countries which were then allied with the USSR - Afghanistan and Cambodia:

By fall 1981 the United States was involved with China, Pakistan, Egypt, and Saudi Arabia in a covert aid program. Saudi Arabia provided the money, Egypt provided training, China provided weapons, and the United States provided Kalashnikov rifles, antitank missiles, and other weapons from U.S. and Egyptian stocks. The program would continue and expand until and beyond the Soviet withdrawal [from Afghanistan] in 1988. In 1980 the two nations worked jointly to deny the new pro-Vietnamese government in Phnom Penh a seat in the United Nations. They also began discussions on ways of supporting the Cambodian resistance to the Vietnamese intervention.

Those discussions produced both Chinese and U.S. covert action programs to support elements of the Cambodian resistance, all of whose elements were encompassed by the Government of Democratic Kampuchea (CGDK). The U.S. dealt exclusively with the two non-Communist factions led by Prince Sihanouk and Son Sann. The PRC, on the other hand, provided aid to all three CGDK factions and was most closely associated with the Khmer Rouge and Pol Pot, who were responsible for the deaths of 700,000 to 1,000,000 Cambodians. China was willing to exert pressure on the Khmer Rouge to allow the U.N. Transitional Authority in Cambodia (UNTAC) access to Khmer Rouge-controlled areas to undertake reconnaissance of cantonment sites.

The gains from the point of view of US imperialist strategy from this mutual somersault in the relationship with Beijing were immense.  With China now an uneasy but active ally rather than an adversary, the USA under Reagan was able to concentrate on its ultimately successful policy of isolating the USSR internationally and ‘spending it into the ground’ in the arms race.
From the Chinese point of view, the granting of MFN trade status and the relaxing of technology sanctions was a major step forward. In 1980, China exported $981million worth of goods to the USA and imported $3,830 million from the USA, a total trade of $4,811 million.  This was a five-fold increase since 1978.
But the PRC has had to do much more in order to advance toward its current status as an industrial and trading superpower.
Technology is fertile
At the beginning of the 'reform and opening up' process, the structure of China's economy was almost fully socialist- that is to say, nearly all legally conducted productive activity took place under conditions of collective ownership and of national and local state ownership. Most of the population (71% in 1980) worked in collective farms. State owned enterprises (ie, nationally owned production units) produced the vast majority of products in all industrial sectors. Units owned by local communities and controlled by local government, known as township-village enterprises, contributed 9% of overall industrial production in 1978.
In the conventional analyses, the changes to this socialist structure are seen as creating success through their effects on the economic behaviour of individuals and institutions within China, the assumption being that markets and private ownership enhance efficiency and engender entrepreneurial dynamism. The dominance of these abstract neo-liberal concepts, allied with the blinkered failure to consider the international political context, the role of advanced technology and the way in which access to global markets has been gained, has obscured two very concrete effects of China's reforms:-
A) By progressively moving from socialist to capitalist economic arrangements, and thus ceasing to pose an ideological threat to the West, China was enabled to progressively reduce the politically inspired barriers to trading and investment relationships with the rich capitalist countries; further, it has striven to carry out sufficient privatisation and de-regulation to meet the conditions required by international institutions: eg, for membership of the World Trade Organisation and the recognition of 'Market Economy Status' by the European Union (the EU imposes discriminatory terms of trade against countries which are not deemed to be 'market economies').
B) By moving towards capitalism, China has become a highly profitable place for transnational companies to invest in and sell to. The Chinese state has been able to use both inward investment and negotiations on imports as means of aquiring foreign-developed technology.
An early and well-publicised reform, the ending in 1981 of China’s collective farming system, is often credited for a big increase in the country’s food production: suggesting that private farming is, by its nature, more productive than systems in which the land is owned and worked in common.  The facts give little support for this assertion. 
By using fertilizers, irrigation, mechanical methods and other inputs, the Chinese were already increasing the productivity of the land in the decade before de-collectivisation. Taking grains for example:
Year            Fertilizer application per hectare, kg     Yield per hectare, kg
1969           97.6                                                       1,794
1979           166.6                                                     2,785
1989           268.8                                                     3,632
Source: Heilig

The productivity increase from 1969 to 1979, under the collective system, is 55%, as against only a 30% rise over the subsequent ten years. Of course, agricultural yields vary from year to year due to climatic factors.  Line graphs of overall annual agricultural production in China between 1961 and 2000 [3] show fluctuations around the trend which is a rising straight line; among the variations is an increase in the rate of improvement in production in the early 80s, followed by stagnation in the second half of the decade. While the general trend then continues to rise until the late '90s, there is no long-term gain apparent from de-collectivisation.
It is important to note that China has not so far privatised or even fully individualised its agriculture.  Land, which is leased to families on a roughly egalitarian basis, remains collectively owned and cannot yet be bought or sold; local government has retained responsibility for projects (including irrigation) and large machinery.
When other factors are considered, the case for the attribution of improvements in Chinese farm production to the positive effect of de-collectivisation and markets is not impressive. Firstly, the remuneration of farmers by the state needs to be taken into account.  The nationwide introduction of the ‘household responsibility system’, replacing collective farming in 1981, was preceded in 1979 by big rises in state procurement prices paid to farmers (an average 21% price increase, with the bonus for above-quota production raised from 30% to 50%), thus vastly increasing both incentives and the resources available for investment.  The further agricultural reforms in 1985, which increased the role of the market and reduced that of the state, were followed by stagnation rather than increases in production.  The rising output of the 1990s was accompanied by a series of further very substantial increases in state procurement prices.
Then there is the matter of continuing improvements in agricultural technology.  Since 1979, new higher-yield crop varieties were introduced by central and local government initiative; machinery and artificial fertilizers became more widely available.  There was also a further extension of irrigation. 
The move to individual family farming in China did have very real significance.  It was crucial internationally as a demonstration of China’s seriousness in abandoning communism - thus assisting China in overcoming the politically motivated trade barriers; also, it ended the guarantee of agricultural employment – thus causing displaced agricultural workers to enter the emerging labour markets in both the countryside and the urbanised areas, and ensuring that industrial wages did not increase too quickly.
The socialist enterprise paradox
During the first phase of reform, from 1978 to 1993, there was no privatisation of state owned enterprises (SOEs) and workers were not made redundant from these firms. Although formal autonomy of enterprises from the state was somewhat increased as was the role of profit as an incentive, the state retained control of the appointment of senior managers and the financing of the firms. The SOEs expanded their production in absolute terms; although those in light industry, which require lower levels of investment in fixed assets, lost much of their market share, mainly to the local government-owned firms known as township-village enterprses (TVEs).
From the point of view of pro-market theory and practice, SOEs are an anathema. If they cannot all be fully privatised or forced into bankruptcy, those that remain must at least be reformed into companies which resemble capitalist firms in every way, except that the state retains a majority shareholding. As Dr Zhengxu Wang of the National University of Singapore has remarked:

Of all the problems China is facing in its transforming from a command economy to a market economy, none is more formidable than the reform of SOEs, or State-Owned Enterprises. This legacy of the old command economy system, designed and established with both technical and financial help from the Soviets in the early 50s, became the main target of Chinese reform policy makers as early as the early 80s, shortly after the reform began. After two decades of experiments, while other former socialist countries have technically privatized all their previous SOEs, China is still struggling to find a way to reinvent and reengineer these economic establishments...

Pressures for the reform of China's publicly owned firms have come from inside and outside the country. Peter Nolan observes:

It is no longer practically feasible to benefit fully from trade with and investment from the developed countries without agreeing to extensive economic liberalisation of international economic relations, especially those implemented by the WTO (including TRIPS and World Telecoms Agreement).

To succeed in its aim of joining the World Trade Organisation, China had to accept during protracted negotiations with the United States that there would be further liberalisations, not merely of its international economic relations, but of the internal structures of its economy. As Nolan's account indicates, China's ambition of becoming a WTO member provided the USA with the means to insist on thorough and extensive changes:

The WTO agreement with the US is 250 pages long, with a detailed account of the steps that China agrees to take in order to implement the WTO rules... It is the most detailed agreement yet signed by any country on its entry to the WTO - far more specific than that signed by India, for example. Under the terms of the agreement, China must cease to provide special support for large state-owned enterprises. Within China, the WTO rules require the whole country to become an internal free trade area. China has been granted only a five-year adjustment period before it must implement in full the rules of the WTO.

China's entry to the WTO was finally approved in November 2001. The required reforms, which included a commitment to open up the domestic banking market, had to be completed by November 2006.
As we shall see, it is quite true that without 'special support', forbidden by the terms of China's WTO membership, enterprises which continue to operate in the same way as they had done under the socialist system have a disadvantage in competition with capitalist-type firms within a 'free trade area'. This in no way means that socialist-type enterprises are inherently less productive, or more expensive, in their contributions and costs to the overall national ecomomy, than are capitalist firms; or that a country in which a high proportion of production takes place within socialist-type units will fail in economic competition with other countries- as is demonstrated by the first fifteen years of China's reform process.
From 1978 to 1992, the growth of output in the heavy industrial sectors, which were almost fully state-owned, was almost 11% per year on average, providing the intermediate products- electricity, steel, cement, chemical fibres, fertilizers, etc- which were needed by the rest of the economy. The largest SOEs increased their share of total industrial output, and the nationally owned enterprises as a whole continued to be the biggest category of firms in the economy, producing 48% of China's industrial output in 1992. In first phase of reform, the pivately owned enterprises accounted for only a small proportion of China's GDP, producing  less than 15% of China's industrial output even by 1993. In this period, China's overall GDP grew at annual rates of around 10%.
How is it that socialist-type production units can clearly make a very valuable contribution to overall economic development, while it is accepted that many of them will 'fail' in competition with capitalist-type companies in an economy organised on a purely 'free trade' basis? Zhengxu Wang notes that economic enterprises under China's socialist system performed two crucial functions:

In the command economy era, the SOEs served as production organs where raw materials are turned into industrial products. The planning commissions in national or local governments decide for each SOE what needs to be produced and how much. In such a system, the government agencies plan what to produce, supply resources, and distribute the products...
An SOE is a social unit in that, besides providing life long employment to its employees, it also provides all the necessary social services to its employees and their family: housing, healthcare, child care, education, grocery, to name a few. In some sense, a unit takes care of its employees 'from the cradle to the grave'. At a certain point of time, SOEs in China provided such services for more than 112 million workers and their families. This social service function became a huge difficulty when it comes for the policy makers to change SOEs into market competition oriented firms.

Clearly, there can be no 'level playing field' of competition between on the one hand these socialist-type enterprises, whose responsibilities include both contributing to overall economic development on the basis of central and local plans, as well as providing for a broad range of the needs of employees and their families; and on the other hand capitalist firms, whose only objective is to make profits. The capitalist firms appear to operate at lower costs- whereas in fact the costs which they are not obliged to meet must still be borne by the rest of society.
But the pro-market analysts do not consider that much of the alleged efficiency of privately owned firms is simply the externalisation of costs; rather, they complain that it is the state owned enterprises which operate unfairly, because their investments are financed by state owned banks without full regard to the rules of the market. This offence against capitalist morality is known as the 'soft budget constraint', a term coined by János Kornai, a guru of anti-socialist economics.
Accepting that China refuses simply to privatise all its nationally owned firms, Professor Dwight H. Perkins of Harvard University sets out a second best solution:

There is no secret as to what needs to be done. State-owned enterprises must be made fully autonomous and responsive primarily to market forces...
Firstly, these enterprises must stand on their own feet financially and face a hard budget constraint. Money borrowed should be paid back at market interest rates, and the failure to do so should lead to bankruptcy... Inputs should be paid for at market prices. Outputs should be sold on competitive markets where market entry is as easy as scale and financing requrements allow...
Secondly, management of state enterprises must be chosen by people whose sole or primary concern is with the profitability of the enterprise.

Writing in 2000 as China approached its accession to the WTO, Perkins noted that the Chinese had gone a considerable way to meeting these conditions, although he complained that:

*Managers are picked... by government and party officials who apply a wide range of criteria, only one of which is profits.

Propping-up, guiding and bringing along
In 1994, 1999 and again in 2003, pro-market government decisions triggered rounds of layoffs of millions of workers and of full and part-privatisations, first of the small and then many of the larger SOEs. The fact of the mass redundancies of workers from state-owned industry in the second phase of China's reform process is used by pro-market analysts to suggest that the SOEs had previously been over-staffed and that this amounted to a form of 'concealed unemployment'; with the implicit lesson that the discipline of market forces is required to ensure that enterprises employ only the necessary number of workers.
But no such conclusion needs to be drawn from the millions of dismissals of workers from China's SOEs since the mid-1990s. Two processes were taking place which, as we know from Western capitalist experience, result in workforce 'downsizing': the loss of market share by many enterprises in competition with firms which were allowed to operate (at the level of the company) with lower costs, and the rapid introduction of new machinery, allowing greatly increased output by fewer workers.

Oil tanker 'Xingchi' launched at the Guangzhou Shipyard. Shares in Guangzhou Shipyard International are owned 42.61% by the State, 25.57% by domestic holders and 31.82% by overseas share holders.

Nevertheless, the remaining nationally owned firms are given a crucial role in China's development programme. SOEs, still supervised and majority-owned by the state (although a minority proportion of shares are often sold on international stock exchanges) dominate sectors which require long-term investment programmes and which produce goods and services which are regarded as strategically necessary for the nation as a whole. Li Rongrong, who is currently the Chairman of the State Asset Supervision and Administration Commission (the body which guides the operations of the SOEs), explained in 2003:

Public ownership, as the foundation of the socialist economic system, is a basic force of the state to guide and promote economic and social development and a major guarantee for realizing the fundamental interests and the common prosperity of the majority of the people…  The state owned economy has taken a dominant place in major trades that have a close bearing on the country’s economic lifeline and key areas, and has propped-up, guided and brought along the development of the entire socio-economy.

Pointing out that the revenues, profits and output of the state sector had in the period of 1989 to 2001 increased greatly, Li listed the proportion of state ownership (in terms of sales revenue) in several key industries which remain mainly publicly owned – petrochemicals 69.3%; oil 92.1%; power 90.6%; auto industry 72%; metallurgical industry 64.4%; railway sector 83.1%; ordnance 99.5%; shipbuilding, aeronautical and astronautical industries 84.5%.  Thus he claimed:

The influence and control capacity of SOEs have further increased. State owned economy has played an irreplaceable role in China’s socialist modernisation drive.

Industries where national public ownership is still predominant are performing extremely well.  In shipbuilding, for example, China is now in a strong third place and appears to be on its way to fulfilling the target set by Premier Zhu Rongji of becoming the world’s number one shipbuilder by 2015.  As the North China news service DailanNews reported in March 2005:

China's rise in market share has come at the expense of such publicly traded shipbuilders as South Korea's Hyundai Heavy Industries Co. and Japan's Mitsui Engineering & Shipbuilding Co. China, the world's No. 3 shipbuilder, raised its share of new orders by 2 percent to 17 percent last year and won its first contract to build liquefied gas tankers.
'In volume, China can overtake the Koreans by 2015,’ says Aled Smith, 36, who helps manage $300 million at M&G Ltd. in London, including shares of Hyundai Heavy. ‘They are building very aggressively.’
China's 600 shipyards, mostly state-owned, charge about 10 percent less than competitors and are more flexible in building to specifications, according to Clarkson Plc, the world's largest shipbroker. 

In August 2006, China announced a further large rise in ship production under state direction:

China's shipbuilding industry continues to grow rapidly with shipbuilders getting new orders totaling 16.08 million deadweight tons in the first half of the year, a 113-percent rise over the same period last year, the National Development and Reform Commission (NDRC) said in Beijing on August 31.
The NDRC said shipbuilders hold total orders of 50.92 million deadweight tons in the first half of the year with an increase of 43 percent, accounting for 20 percent of the world's market share.
The national Medium-and Long-Term Plan of the Shipbuilding Industry, which was approved in August by the State Council, the country's cabinet, said the industry should accelerate its restructuring and upgrading to become strong enough to drive the growth of related sectors…
The plan stated that China needs to break the bottleneck of insufficient production capacity of auxiliary sectors and develop the ability to independently design high-technology ships and ocean engineering equipment.
The plan said the production of the country's shipbuilding industry was expected to take more than 25 percent of the world market.

The TVEs and state-led modernisation
A change which is credited for much of the rapid expansion of the Chinese economy during the first phase of economic reform was the growth of the township-village enterprises.  The TVEs, which are mainly rural community-owned firms, run on a commercial basis and whose profits contribute to local government revenues, increased their production from 9% to 27% of overall industrial output between 1978 and 1993. Some of the TVEs became quite large operations, eating into the market-share of many of the nationally state-owned enterprises.  Alongside, there was also the emergence of a small domestically-initiated private sector. Since 1993, a rising proportion of the TVEs have been privatised.
These developments have been cited to support the claim that SOEs are comparatively less efficient and flexible, with the implication that independence from national planning and the primacy of the profit motive are special factors which liberate forces for growth. 
Two crucial factors need to be considered when evaluating this suggestion. The first is that workers in the SOEs work shorter hours and have much better wages, working conditions and other employee benefits than in the TVEs and the domestic private sector.  This is confirmed by all studies, including that of Xiao-Yuan Dong of the University of Winnipeg, who also found that in the period of 1994 to 2001:

…the mean labour productivity of the urban workers increased by 96.7 percent and their real wages rose by 64 percent.  By contrast, the labour productivity of the rural workers increased by 2.08 fold but their wages rose only 47%.

Chinese-owned firms outside national state control have been able in several sectors to gain market share simply because their workforce receives less in pay and benefits from the company, and also works longer hours: thus making production costs- for the firm, not for society as a whole- much cheaper.

The second factor is that the general direction of the diffusion of technology has been from the SOEs to the TVEs and domestic private firms, from large firms to small firms, and from the urban areas to the countryside.  Yang Yao of Beijing University remarks:

The most significant event in the 1980s might be the emergence of the rural industrial sector and technical transfers from urban industry to this sector. The rural industrial sector is characterized by high labor intensity and has become a major engine for China’s economic growth. Entering the 1990s, two events are worth mentioning. One is the emergence of private firms and their absorbing of technologies from the state sector.

The Chinese state has taken a leading role in ensuring that technical advances are spread to and utilized by the different sectors of Chinese industry.  One of its initiatives is the Star Project, aimed at improving the technological capacity of small and medium-sized firms, especially in the countryside.  The government spent 8.22 billion yuan (990 million US dollars) on the Star Project in a single year, 1997.  Other processes are also at work:

First, large firms are more likely to innovate their own technologies, small firms are more likely to buy ready technologies. This of course is related to small firms’ relatively weak innovation capacities. Second, small firms seldom buy foreign technologies while large firms do. Third, the most effective channel for small firms to get new technologies is to cooperate with large firms to form joint ventures or to become a large firm’s subcontractor. In this way, small firms can quickly obtain large firms’ more advanced technologies as well as improve their efficiency by specializing. Fourth, rural firms rely on the city to provide them with technicians. Many urban retirees are hired by rural firms and a considerable number of urban technicians work in rural firms as a second job.

So alongside the state initiatives, there has been a considerable informal technological subsidy within China's economy from the larger, mainly state-owned firms to the smaller collectively-owned and private firms. However, as is the case in nearly all countries, China has aquired the great majority of its new production-related knowledge from abroad.

Made in Taiwan
Third World countries have in their lower labour costs a big potential advantage in inter-country competitive trade, but for most poor nations this is offset by much lower levels of general education, health, and infrastructure. On these aspects China was in a rather better position than most other low-income countries. Following the relaxation of  US-imposed trade barriers, the People’s Republic of China was able to enter into the practical and commercial process of engagement in the world market; in other words, it could engage in trading competition with other countries.  But it still faced the global control of resources, including up-to-date technology, by the transnational companies and financial centres based in the richest nations. 
For pathways to economic growth in this circumstance, the Chinese People’s Republic had some successful examples available nearby in the close US allies Japan and South Korea, each of which had utilized technology transfers, central guidance of the economy and promotion of exports in order to exploit their lower average wages (as compared to the USA and Western Europe), thus gaining international market share in key sectors.  A model followed with interest by the Chinese planners lay within their own historical and internationally recognized territory – the state-managed capitalist economy of Taiwan.
The US-backed ‘Republic of China’ regime, which had retreated to the island of Taiwan in 1949 during the victory of the Chinese Communist revolution, applied the advertised principles of capitalist ‘freedom’ neither in its economic nor in its political structures (contested presidential elections were not held until 1996).  While heavily subsidized by US aid, all of Taiwan’s banks and much of its industry were state-owned. Strictly controlling imports, the government assisted and instructed firms in producing manufactures for export. In the mid-1960s, this already successful strategy was supplemented by an additional means:

…three export-processing zones (EPZs) were constructed to attract multinational corporations to move their production bases to Taiwan. For those foreign firms located in the EPZs, import and export procedures were kept as simple as possible to reduce the administrative costs of producing in Taiwan. No duties were levied on the imported machinery and goods for reprocessing in the zone areas. The first such export-processing zone was established in 1966 in Kaohsiung and two more were added in 1971. Foreign capital poured into Taiwan to take advantage of ample supply and relatively inexpensive labor and favorable tax incentives provided by the government. These foreign investments not only created a lot of job opportunity and earned much needed foreign exchanges for Taiwan, but also brought much needed technology into Taiwan… these technologies and well-trained engineers and labors were quickly spread to other parts of Taiwan as people moved around or started their own business. Since big multinational electronic firms were the largest investment at that time, the transferred technologies did give Taiwan a healthy start when the government decided to develop the information industry in Taiwan.”

The People’s Republic of China established the first of its own ‘Special Economic Zones’ in 1980.  The paperback writers of neo-liberal globalisation, Yergin and Stanislaw, enthuse:

Three were established in Guangdong province, including Shenzhen, across from Hong Kong, and in Fujian province across from Taiwan. Their whole orientation was outward; they were export-processing zones, and they were the magnet by which to draw in foreign investment.  Beijing gave local authorities in the SEZs unprecedented autonomy in trade and investment decisions. The concept was expanded to a number of cities in the mid-1980s.  From then on, the coastal cities drove the economy forward.

It does not assist the narrative of Yergin and Stanislaw’s tall tale, in which market forces are the dynamic, creative hero and socialism is the lethargic villain, to remark the significance of the geographical positioning of the SEZs.  By the late 1970s, workers in Taiwan and Hong Kong had gained some benefit from their employers’ world market successes in the form of increased wages.  The mainland Chinese could undercut these rates of pay, and the Taiwanese and Hong Kong capitalists therefore began investing in the very nearby SEZs of the People’s Republic.  SEZs were ‘magnetic’ for a further reason – by absolving the foreign entrepreneurs of tax, the PRC gave them a huge de-facto state subsidy by providing workers whose education and health care, and infrastructure whose building and maintenance, was paid for by the public sector. 
There followed a massive exodus of industry from Hong Kong and Taiwan to mainland China.  In Hong Kong, the share of manufacturing in GDP contracted from 22% in 1980 to 4.4% in 2002. The Taiwanese and Hong Kong firms were followed into the Chinese mainland by firms from the USA, Japan, and other countries. 
Investment as technology transfer
Beside its lower wages, mainland China has advantages which most developing countries do not possess. For the big US, Japanese and European-owned transnationals, one of China’s particularly attractive features as an investment destination is the huge size of its potential home market, an aspect which has given Chinese planners considerable power both in attracting and controlling foreign investment, using as a means of acquiring and assimilating technology. The report on the implementation of the 1993 plan for national economic and social development explained official policy as follows:

We shall guide the orientation of foreign investment in accordance with the state's industrial policies, directing foreign investment towards infrastructure and basic industry construction, key projects and upgrading technology in existing enterprises, in particular towards projects to increase the export of foreign currency earning projects.

The Fifteen Year Programme for Technical Transfer (1981-1996) of the Chinese power equipment industry exemplifies this policy. Through this programme, the State Council and the Ministry of Machine Building, with the intermediation of the China National Import-Export Corporation, negotiated with the Western transnational firms Combustion Engineering (later ABB) and Westinghouse for transfers of technology to China's two leading power equipment companies, Harbin Power Equipment Company (HPEC) and Shanghai Electrical Company. Peter Nolan remarks:

During the 1980s the technical transfer program raised the unit production capability at Shanghai from 125 to 300 MW and at HPEC from 200 to 600 MW. The program was a calculated risk for the MNCs [multinational companies]. They felt that if they assisted the upgrading of the Chinese power equipment industry, then they might be able to use this as leverage with the Chinese government to gain access to the potentially vast Chinese market.

Another example is the motor industry. Walter Arnold of the Japan Policy Research Institute notes that:

During... [the 1960s and 1970s], China’s automotive sector was nearly cut off from international interchange. Thus, China was unable to keep up with the development of new automotive technologies and production methods that revolutionized the world motor vehicle industry in the late1960s and during the 1970s.

Immediately following China’s re-admission to the world market, Volkswagen was one of the first Western companies to enter the People’s Republic:

After long and difficult negotiations that began in 1978, Germany’s Volkswagen entered a joint venture with Shanghai Automotive Corporation [SAIC], and Shanghai-VW was set up to produce the Santana model in 1984. After initial equipment set up, Shanghai-Volkswagen began trial production began in 1985.

The Chinese government was fully involved in this process:

The forays into China by Western motor vehicle companies were remarkable as the Central government insisted on strict 50 per cent or better Chinese ownership and control of all Sino-foreign automotive joint venture and cooperative arrangements.  Clearly, China aimed to develop its automotive sector independently with foreign automotive enterprises relegated to supply capital and provide technological assistance, and ownership on a limited ownership basis…
In the early 1980s, China’s central authorities helped dispatch numerous technical delegations to the world’s leading automotive producers who were eager to induce foreign investment and technology transfer to revitalize China’s ailing motor vehicle plants.  For the automotive sector and its advocates in the central government, revitalizing China’s motor vehicle industry became synonymous with China’s ‘Open Door’ to acquire advanced foreign automotive technology and management methods.

The advantages gained by Volkswagen and the other early entrants were seen by other transnational producers.  By 1994, GM, Ford, Citroen, Fiat, Honda, Nissan, and Toyota were in negotiations with the Chinese authorities.

On October 31, 1995, after a most arduous process, Shanghai Automotive Industry Corporation [SAIC] and GM signed a basic joint venture agreement for US $1.57 Billion to construct a Greenfield plant on a site in Shanghai’s Jinqiao Export Processing Zone in Pudong.  The new automotive plant was designed to produce 100,000 sedans per year, and it was decided to produce two Buick models modified for China.  GM-Shanghai’s Pudong facility became equipped with the latest automotive machinery and robotics and was furnished with process technology transferred from GM’s world wide operations.

The major Japanese producers are now also involved in joint-venture operations in China.  In the biggest ‘tie-up’ so far, in 2002, Nissan concluded negations with the state-owned Dongfeng Motor Group to create a jointly-owned firm which is now producing trucks, coaches and cars.
Walter Arnold concludes that China has learned from the experience of other industrialising Third World countries, and will maintain a degree of national control of its development:

Chinese analysts leave no doubt that the automotive sector will not be allowed to be ‘colonized’ similar to Brazil or Mexico where the global giants largely dominate the production arrangements.  Moreover, China long aspired to establish a viable domestic motor vehicle industry, a goal that is attained by forging strategic links to foreign technology and capital that eventually empower some of the Chinese producers to attain world level competitiveness.

However, the continuing inward investment into China is now being accompanied by a reverse flow.  China’s foreign currency holdings, now second only to those of Japan, are being employed in an international corporate buying spree.  Among hundreds of foreign acquisitions, Chinese firms have bought Korean car maker Ssanyong, Japanese pharmaceutical company Toa Seiyaku and IBM’s PC manufacturing division; in February 2007, China’s state-owned car manufacturer SAIC launched a saloon car which was the fruit of its acquisition of Britain’s former car-maker Rover. Mototorque reported:

The Roewe 750 went on sale in Beijing and Shanghai today and is aimed at China’s emerging monied classes, stressing luxury and comfort.The 750 saloon will use design work undertaken by Rover MG prior to its collapse and work with British engineers Ricardo 2010 Consultants, whose workforce includes many erstwhile RMG Rover employees.

China's foreign investment surge includes not only acquisitions of companies with production expertise, but of strategic mineral resources.  The PRC also purchases increasing amounts of advanced machinery and technology licenses; currently, the biggest source of these imports is the countries of the European Union. Of the $22.02 billion in value of foriegn technology imported by China in 2006, $11.3 billion went to foreign-invested enterprises and $8.99 billion to the SOEs.
Unharmonious society
Media reports on social conditions in China present a contradictory picture. The cliche that hundreds of millions of people have been 'lifted out of poverty' is repeated endlessly, alongside lurid accounts of worsening social problems which threaten to engulf the country in conflict. Both of these claims have a basis in fact. Most people, not merely the rising class of millionaires, have gained materially as a result of China's huge increase in GDP. However, because of the increased role of market forces and the breakdown of socialist institutions, this additional wealth has been accompanied - to name only three out of many issues - by mass unemployment, inhumane and dangerous working conditions, and inadequate health care.
That there have been, since the mid-1990s, substantial numbers of people out of work in China is clear disproof of the notion that economic growth under market conditions is the cure for unemployment. In fact the rapid technological changes which are enabling China's economy to grow are resulting in workforce 'downsizing' in existing industries; and, in a competitive market, some companies always go bankrupt. New industries develop and new companies are started up; but in the absence of central planning there is no reason why these should require similar numbers of people as have been expelled from the workforce of other industries and firms, or that the new enterprises will be sited in places where unemployment is high, or that their skill requirements will match the skills of the unemployed.
Because there is not a universal benefits system, estimates of the number of unemployed in China are unlikely to be very accurate; another cause of uncertainty is the fact that workers laid off by SOEs continue for extended periods to receive a fraction of their former wage from their previous employer and are not counted in the official urban unemployment figures, which have been at around 4% in recent years. A paper published by the University of Michigan Population studies Center calculated that:

... for China as a whole, from January 1996 to September 2002, the unemployment rate of urban permanent residents increased from 6.1% to 11.1%, and that of all urban residents, including temporary residents (e.g., migrants), increased from 4.0% to 7.3%.

The CIA's estimate is roughly similar:

Unemployment- 9.8% in urban areas; [there is] substantial unemployment and underemployment in rural areas; an official Chinese journal estimated overall unemployment (including rural areas) for 2003 at 20% (2004 est.)

And further:

From 100 to 150 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time, low-paying jobs.

While exact numbers may be unclear, there is no doubt that dozens of millions of people have no regular job and are without a fixed abode, and scores of millions more no longer have job security. Thus many of those who do have employment have no choice but to work in appalling conditions. In August 2007, a survey was published which looked at eight toy factories, suppliers to transnational toy corporations including Disney and Hasbro. It found that:

All eight factories investigated in-depth violate Chinese labor law by failing to comply with contract details...
Among the factories investigated, compulsory overtime with inadequate, illegally low compensation is prevalent. Many workers say that they are penalized or would lose their jobs if they decline overtime work. At some of these factories, workers put in 10 to 14 hours daily during the peak season. Workers are often not provided with a legally mandated rest time, not even one day off per week or time off during holidays. In some cases, workers are not given a single day off for a month straight.
Factories fail to provide sufficient information and adequate training to workers using chemicals at work posts. Hundreds of workers worry that they are subjected to harmful chemical substances, and could be in danger of lead poisoning, plastic poisoning, or welding accidents. Many investigated factories have poor ventilation systems and issue face masks that have no purpose other than show. One worker explained that wearing a mask or any other safety equipments is only required when clients are present.
Workers are not offered insurance as mandated by the law. Surveys reveal that when workers are hospitalized they sometimes do not receive any salary and might be fired after injuries. 

Market socialism with a human face.

According to a bulletin published by the International Confederation of Trade Unions Hong Kong Liaison Office, the transition from socialism to the 'socialist market economy' has been accompanied by a worsening of health and safety standards:

As China achieves spectacular rates of economic growth during the last decades of the 20th century, its health and safety record has made nearly as sensational a leap, but in the opposite direction. Industrial and mining injuries, fatalities and occupational diseases have all risen at a rate surpassing the near double-digit annual growth rate in the economy. It is during the same period that China has become more deeply integrated into the international community and global economy. China at the start of the 21st century is the largest manufacturing center of the world. It is also the deadliest…  The International Labour Organization (ILO) estimates that annual workplace fatality rate in China is 11.1 per 100,000 workers, compared to the rate of 2.19 per 100,000 in the US…
Fewer than 30 percent of workers who are exposed to dusty environments received health checks for pneumoconiosis. Pneumoconiosis, chemical poisoning and leukaemia are the leading causes of early loss of working ability in China. The high-risk industries for occupational illnesses are coal production, metallurgy, building materials, non-ferrous metals, machinery and chemicals.

Increasing private ownership is part, but not all, of the problem:

In general SOEs are subject to relatively fewer commercial pressures and hence are under less pressure to skimp on H&S [health and safety] provisions and implement a mean and lean labour regime. Presence of the official machinery, such as the party organs (including the official union), is usually stronger in SOEs, which should help with H&S enforcement. Most workers are employed on a relatively more long-term contract basis and hence have more leverage on the enterprises. Despite all this, however, it is not a rosy picture at the SOEs. Numerous non-implementation, negligence and outright violation of regulations still plague their H&S records…
But the situation is many times worse in the private sector. Most enterprises are small and medium sized and are situated in towns, villages and suburban counties... Such factories form the back bone of the export-processing industries; many serve as sub-contractors and suppliers to the major MNCs [multi-national companies] around the world. The plants are set up with minimum planning and investment, for the pursuit of maximised, short-term returns. Nearly all the workers are employed on short-term contracts; many of them are very young migrants from nearby or from the remote countryside. An extremely exploitative and repressive, and often illegal, labour regime is imposed on the workforce. Workers commonly suffer from long working hours, forced overtime, deprivation of rest days and sick leave, low wages (nearly always on piece-rate), arbitrary penalties and dismissals, and denial of collective bargaining rights. H&S features very low in the investment and management priorities of these enterprises, if at all. The local law enforcement officials are usually willing to turn a blind eye to the situation, either because they are bought off or because they see it in their interests to keep the entrepreneurs and investors happy.
According to the government, about 74 per cent of serious accidents in industrial and mining enterprises occurred in the private sector.

Other aspects of public health are also being affected. Under socialism, China's universal healthcare system produced excellent results.  However, as a research paper presented to the American Public Health Association in November 2004 concluded:

Since the reforms of the past two decades, China’s medical and health care system has shifted from a highly bureaucratic controlled system to a market-based system…
The major findings suggest that China is undergoing two major changes: 1) the organization and financing of health care is moving away from government controlled and funded systems to privatized medical practice and a market-based system; 2) the focus and resources of health care is being steered away from low-cost prevention to expensive high-tech equipment and medical procedures.
The impact: In rural areas, where 70% of Chinese live and most are poor, basic medical care becomes an expensive commercial product that is beyond the reach of many. In urban areas, the high-tech and advanced medical procedures are almost exclusively utilized by the wealthy and the big urban hospitals. The high-tech medical equipment and procedures come with escalated medical costs that prevent more people from entering the system. These changes have further contributed to the rise of infectious diseases, such as hepatitis, TB, sexually transmitted diseases, and SARS.

Despite recent government recognition that lack of health care coverage is a serious issue, and the launch of an insurance scheme to address the problem, the situation is not yet improving. Reuters reported in November 2007:

Health in parts of rural China is deteriorating despite rising incomes, and commercialised care has ratcheted up costs for those who can least afford them, the head of the World Health Organisation said on Thursday.
Hong Kong-born Margaret Chan said the cost of health care in China was outstripping income growth and that poor health was a major cause of poverty among China's hundreds of millions of rural residents.
"The payment of providers and fees charged for services has commercialised health care, compelling providers of care to focus on profit rather than the most efficient health services," she told a conference in Beijing.
"Health education and preventive services are neglected. Why? Because these activities do not guarantee income. As a result, simple conditions are often treated at very high cost."
The costs of seeing a doctor or staying in hospital are out of reach for many in the world's fourth-largest economy, and the lack of access combined with corruption has made the issue a source of social unrest...
"When ability to pay determines access, many rural residents will not seek care until a disease has reached an advanced stage when treatment is more complex and costly, if not impossible," she said...
That could undermine China's efforts to expand care through its Rural Cooperative Medical Scheme, a plan under which subscribers are funded at a level of 50 yuan per person -- 20 yuan from the central government, 20 from the local government and a 10 yuan contribution from the individual.
Chinese Vice-Minister of Health Chen Xiaohong said nearly 85 percent of counties in China were participating in the plan but the funding level paled to that of wealthy coastal cities.

Chinese whispers
While the hopes of the Chinese Communist Party under General Secretary Hu Jintau to achieve a more harmonious society do not yet appear to be yielding results within the country, the Chinese leadership's international posture must be evaluated as highly successful thus far in terms of its stated objectives. Professor Sujian Guo, Director of the Center for US-China Policy Studies at San Francisco State University, explains Hu Jintau's slogan of 'peaceful development' as follows:

The adoption of 'peaceful development' foreign policy strategy is a continuity of Deng Xiaoping’s concept 'taoguang yanghui' (keep a low profile and never take the lead) but a break away from Jiang Zemin’s 'duoji shijie' (multipolar world). Under Jiang, building a multipolar world implies to 'multipolarize' the American unipolarity and counterbalance the U.S. hegemony. This 'peaceful development' foreign policy strategy is, in fact, to accept the unipolar structure of international system and that the U.S. will continue to be the hegemonic power in the long term. It proposes that China must avoid direct confrontation with the U.S. in order to secure a favorable external environment for its rise, although China can adopt a multilateral and bilateral diplomatic approach in the unipolar world dominated by a single hegemony.
'Peaceful development' thus seeks to reassure the U.S. and other countries that China’s rise will not be a threat to peace and stability in the region and the world and that the U.S. and other countries can benefit from China’s peaceful development.

While the Chinese leadership- like most people outside the USA- regards the present US domination of the world as a far from perfect situation, to mount any open challenge to this would threaten the global conditions which are enabling China to build up its economic strength and, consequent on this, its potential to become, in the not so distant future, a great power in a non-unipolar world. Sujian Guo recognises this:

If China were to find its access to U.S. and its Western allies’ markets, capital, and technology, worsened Sino-U.S. relations would have a negative effect on China’s economic and military modernization.

China was the victim of US-imposed trade and technology sanctions for thirty years, and was not permitted full access to the world trading and investment system until after another two decades, when it was allowed into the WTO. A lesson has been well-learned. Deng Xiaoping’s concept: 'keep a low profile and never take the lead' was illustrated as the US invasion of Iraq loomed in early 2003. China dared not use its UN Security Council veto against the USA unless it could shelter in the shadow of France, a country 20 times smaller in population.

The 'peaceful development' strategy of the People's Republic of China puts the USA into a dilemma. In 2004, a discussion in the pages of the elite US journal Foreign Affairs illustrated the contradiction which the rise of China poses for the United States of America. George J. Gilboy, an optimist, pointed out that the profitability of US firms, for instance Boeing, Ford, General Motors, IBM, Intel, and Motorola, has been increased by using China as a base for the manufacture of components which are labour rather than technology-intensive.  He argued against:

…fears that the country will inevitably tilt global trade and technology balances in its favor, ultimately becoming an economic, technological, and military threat to the United States. These reactions, however, are... mistaken: they overlook both important weaknesses in China's economic ‘miracle’ and the strategic benefits the United States is reaping from the particular way in which China has joined the global economy.

Gilboy emphasised the usefulness of China's path of development for the continuation of US global dominance:

In fact, the United States and China are developing precisely the type of economic relationship that U.S. strategy has long sought to create. China now has a stake in the liberal, rules-based global economic system that the United States worked to establish over the past half-century. Beijing has opened its economy to foreign direct investment (FDI), welcomed large-scale imports, and joined the World Trade Organization (WTO), spurring prosperity and liberalization within China and across the region.
China's own choices along the road to global economic integration have reinforced trends that favor the continued industrial and technological preeminence of the United States and other advanced industrialized democracies. “

All well and fine, although George J. Gilboy did not assist his case by relying on a theory which is rarely heard any more, precisely because China has so thoroughly disproved it - the idea that sustained economic growth is only possible within 'pluralist democracies' modelled on Western systems:

The paradox of China's technological and economic power is that China must implement structural political reforms, not simply freer markets or greater investment, before it can unlock its potential as a global competitor.

Consider this from another aspect. The fact that China's Communist Party shows no sign of interest in reforming itself out of office is one of the main reasons why the US elite is worried that, unlike Japan, the EU and India, the People's Republic of China could within decades become a competitor for global power.

What can we learn from China's last several decades, and what can we expect in the future? While the complexities of the history defy straightforward conclusions, the ‘free’ world market cannot be comprehended without an understanding of the political and military dimension of domination by the USA.  The example of China also shows the importance for this supremacy of the continuing technology lag faced by poorer countries.
These first two phases of the development of the Chinese People’s Republic – the tremendous economic strides achieved when combining socialist planning with access to relatively modern technology and international trade; and then the continued improvements in farming, industry and especially in health and education, despite enforced isolation and political upheavals – suggest that socialism and planning have more power than capitalism and markets to solve social problems, and (other things being equal) at least as much power for rapid economic development. But other things are never equal.
In a world where up-to-date production technology is mainly the property of profit-hungry transnational corporations based in the rich countries, a developing country is faced with difficult choices.  Those who do not allow themselves to be exploited for profit will not get access to modern means of economic development. Those who do will only be permitted to develop in the capitalist way, enriching the rich and denying or greatly reducing the benefits of development to those who need it most. The United States acts as the guardian of this order, mobilising economic as well as political power to suppress dissidence and distribute rewards to allies.
While China's modern economic history proves this fact, it is a open question as to whether China's further development may change this fact. China thrives by refusing to make an open challenge to the economic and political structure of the world. But China's rise may subvert and weaken that structure.
Will China continue to rise? This mainly depends on whether wages in China remain significantly lower than in the West, whether China can continue to import technology, energy and raw materials, and whether it is allowed to continue to export manufactured products. As long as these basic conditions remain, possible scenarios such as a major recession affecting both the USA and Western Europe; or in China itself, uncontrollable inflation or the implosion of speculative stockmarket and property bubbles, may dent the graph of China's increasing GDP but would not alter the long term trend.
Skeptics point to the example of Japan, whose very rapid growth ground to a halt in the 1990s. But Japan had already by that time lost its main advantage in competitive world trade: the wages of its workers had caught up with Western levels. It will be many years before the pay of Chinese workers begins to approach that of workers in the USA, Western Europe and Japan.
China's growth is already having major global political effects. The resurgence of Russia and its renewed independence from the West has been largely consequent on the rise in world energy and mineral prices in the wake of Chinese industrial expansion. In Africa and Latin America, countries are discovering that it is no longer completely necessary to submit to orders written in Washington and Brussels in order to trade and attract investment. Thus, countries which seek to challenge the capitalist order, or merely wish to have an independent economic or political policy, have some possibilities of development.

Business is usual. Fidel Castro with Politburo member Wu Guanzheng, April  2007
The example of China's twentieth century history indicates that countries which opt for socialism can develop successfully if they can find adequate partners for trade and investment. China is becoming such a partner.  The survival of socialist Cuba and the success- so far- of the revolutions in Venezuela and other Latin American countries would have been inconceivable without China. Thus, although Hu Jintau rightly insists that China threatens nobody, US political hegemony is already being undermined by the consequences of China's rise.
Further, while Chinese leaders have so far skilfully avoided any direct confrontation with the USA, this is not a matter over which they have full control. While US capitalism is reliant on China economically, it is difficult to imagine that the USA will tolerate the emergence of a multi-polar or bi-polar future. As Professor John J. Mearsheimer, a leading figure within the 'realist school' of international relations, asserts:

The United States does not tolerate peer competitors. As it demonstrated in the 20th century, it is determined to remain the world’s only regional hegemon. Therefore, the United States will seek to contain China and ultimately weaken it to the point where it is no longer capable of dominating Asia. In essence, the United States is likely to behave toward China much the way it behaved toward the Soviet Union during the Cold War.

In the same issue of Foreign Affairs in which George J. Gilboy sought to accentuate the positive and eliminate the negative in US-China relations, James F. Hoge, the editor of the magazine, noted that:

…some Bush officials remain convinced that the United States and China will ultimately end up rivals. For them, the strategic reality is one of incompatible vital interests.

'Hedging its bets' against this likelihood, the USA is currently pursuing a double-edged strategy for the containment of China.  One aspect is to seek to manipulate India as a pawn against China:

Washington is thus eager to use India, which appears set to grow in economic and military strength, as a counterbalance to China as well as a strong proponent of democracy in its own right.

In addition there is the direct military threat:

… with the most extensive realignment of U.S. power in half a century. Part of this realignment is the opening of a second front in Asia. No longer is the United States poised with several large, toehold bases on the Pacific rim of the Asian continent; today, it has made significant moves into the heart of Asia itself, building a network of smaller, jumping-off bases in Central Asia. The ostensible rationale for these bases is the war on terrorism. But Chinese analysts suspect that the unannounced intention behind these new U.S. positions, particularly when coupled with Washington's newly intensified military cooperation with India, is the soft containment of China.

For its part, China is modernizing its military forces, both to improve its ability to win a conflict over Taiwan and to deter U.S. aggression. Chinese military doctrine now focuses on countering U.S. high-tech capabilities -- information networks, stealth aircraft, cruise missiles, and precision-guided bombs.

And then there is the USA's post-star wars National Missile Defense programme; nobody except the public believes the cover story that the main purpose of NMD is to protect against Iran and North Korea.
Chinese diplomacy has been highly successful in countering 'soft containment': improving its relationship with India, and developing its political and military co-operation with Russia and the Central Asian republics through a regional security body called the Shanghai Co-operation Organisation. The SCO has refused the USA's application to become a member.
In March 2007, China announced an annual increase of 17% in military spending.
One prediction can be made with absolute certainty: do not expect events as the 21st Century unfolds to follow the path of harmonious development.

Non-web sources:

Peter Nolan, Transforming China, Anthem Press 2004 
Heilig, G.K. (1999): ChinaFood. Can China Feed Itself? IIASA, Laxenburg (CD-ROM Vers. 1.1)  From Wang, Q. / Halbrendt, C. / Johnson, S.R. (1995): Grain Production and Environmental Management in China's Fertilizer Economy. In: Journal of Environmental Management, Vol. 47, 283-296. And: China Statistical Yearbook, 1998. State Statistical Bureau, People's Republic of China, Beijing. p.393
Joseph E. Stiglitz and Shahid Yusuf (eds), Rethinking the East Asian Miracle, World Bank / OUP, 2001
Li Rongrong, Joint Development of China’s Public and Non-Public Enterprises, China News and Report, July 2003
Daniel Yergin and Joseph Stanislaw, The Commanding Heights, Simon and Shuster 2002
Shu Gang Zhang, Economic Cold War, Woodrow Wilson Center Press, Stanford University Press, 2001
Michel Oksenburg, A Decade of US-China Relations, Foreign Affairs, Fall 1982

Jeffrey T. Richelson, China and the United States, From Hostility to Engagement 1960-1998, National Security Archive
George J. Gilboy, The Myth Behind China’s Miracle, Foreign Affairs, July/August 2004
James F. Hoge , A Global Power Shift in the Making, Foreign Affairs, July/August 2004

By Alex Callinicos

The Guardian, UK, July 1, 2010

Slavoj Žižek: one of the speakers at the Marxism 2010 festival. Photograph: Graeme Robertson

The death of Ken Coates last weekend silenced yet another strong and distinguished voice on the radical left. The past year or so has taken from us some of the most outstanding Marxist intellectuals of the 1968 generation – Giovanni Arrighi, Jerry Cohen, Peter Gowan, and, particularly painful for me, Chris Harman and Daniel Bensaïd. In the supposedly ideology-free world of the Con-Lib coalition, it would be tempting to conclude that these individual disappearances are representative of a much broader decline of Marxism as an intellectual and political tradition.

Nothing could be further from the truth. Even the constitutionally myopic financial markets are beginning to wake up to the fact that capitalism is very badly broken. The Keynesian economist Paul Krugman wrote a few days ago: "We are now, I fear, in the early stages of a third depression," following those of the late 19th century and of the 1930s. Marx described his own intellectual project as the critique of political economy: Marxism therefore lives or dies by its ability to make sense of the dynamics of capitalism and to offer a way out of it.

And Marxist political economists have indeed been, in the forefront, analysing the causes and tracing the trajectory of the global crisis. Just over the past year Chris Harman's Zombie Capitalism, David Harvey'sThe Enigma of Capital, and my own Bonfire of Illusions have presented overviews. Costas Lapavitsas and the Research on Money and Finance group of young scholars based at the School of Oriental and African Studies in London have led the way in explaining the eurozone crisis and offering radical alternative policies for countries such as Greece.

This research activity has been accompanied by a renewal of interest in Marxism among the young that is now very visible in the English-speaking academy. When David Harvey visited London in April to launch his new book, he spoke to half a dozen meetings packed with audiences in their hundreds. One of them was at my own university, King's College London, hardly a traditional centre of revolution. The meeting was co-sponsored by the thriving King's group reading Marx's Capital, which also helped to organise last November a debate on the future of capitalismbetween Martin Wolf of the Financial Times and myself.

The journal Historical Materialism, set up by a group of young scholars in the mid-1990s, has been one of the main drivers of the academic revival of Marxism. Its annual conference in London every November now attracts more than 500 participants and has spun off North American counterparts in Toronto and New York.

But Marxism has, of course, always been about the effort not simply to develop better theories but to relate them to emancipatory political practice, as the lives of engaged intellectuals such as Coates, Harman, and Bensaïd bear witness. London, as it happens, provides an important venue for this effort. The five-day Marxism 2010 festival takes place in central London, starting today.

Organised by the Socialist Workers party, this forum for socialist ideas has been held every year since 1977 and expects to have more than 4,000 participants this year. There should be plenty of intellectual fireworks – Tariq Ali on Islamophobia, Slavoj Žižek, John Holloway and me on the idea of communism, Hester Eisenstein, Judith Orr, and Nina Power on the new sexism, along with a gallery of leftwing talent – Tony Benn, Eamonn McCann, Gareth Peirce, Steven Rose, Michael Rosen, Sheila Rowbotham, and the Guardian's Gary Younge.

But running through the sessions will be a more practical intent as well. As austerity sweeps through Europe, the Con-Lib coalition now seems intent on reinventing the sado-monetarism of the 1980s on a scale undreamt of even by Margaret Thatcher. The Marxist left is thriving intellectually. The real test it faces is political: can it help to develop effective resistance to the coalition's plans to devastate the public sector and the poor? Events in Greece show how neoliberal shock therapy can provoke social rebellion. The real future of Marxism depends on the scale on which these revolts develop and on the political direction they take.

Review: Shadow Elite

by Janine Wedel

The New 'Flexian'

Transnational Elites

By Ariana Huffington

Huffington Post

My first HuffPost Book Club selection of 2010 is Janine Wedel's Shadow Elite: How the World's New Power Brokers Undermine Democracy, Government, and the Free Market. It's a gripping, disquieting book that exposes and explains why it's been so hard to bring about any real change in our country -- why Washington no longer seems capable of addressing the problems our nation faces. Fingers have been pointed at everything from gerrymandering to partisan polarization to the misuse of the filibuster. But, according to Wedel, the real problem is much deeper -- and more disturbing -- than any of these.

As she writes in Shadow Elite, a new "transnational" class of elites has taken over our country: "The mover and shaker who serves at one and the same time as business consultant, think-tanker, TV pundit, and government adviser glides in and around the organizations that enlist his services. It is not just his time that is divided. His loyalties, too, are often flexible."

Wedel dubs this new class of influencers "flexians," and the closed system they've created for themselves the "flex net." She attributes their power, among other factors, to the "embrace of 'truthiness,' which allows people to play with how they present themselves to the world, regardless of fact or track record."

2010-01-06-wedel.jpgWedel cites retired Gen. Barry McCaffrey as one example of this new international super-class -- a member of the shadow elite that serves in government posts, moves to the private sector, goes on TV, and collects a healthy paycheck from companies that benefit when the power broker's advice is taken. McCaffrey was one of the Pentagon-pundits-for-pay exposed by two Pulitzer-winning front-page stories in the New York Times last year. Yet even as I write this, he's on TV giving us his wisdom on how to fight terrorism. Because, as Wedel points out again and again, members of the shadow elite keep morphing into their next incarnation no matter how often their conflicts of interest and their undermining of the public interest are revealed.

Another key flexian, former Treasury Secretary Robert Rubin, is on full display right now in Newsweek's special "Issues 2010" edition, in which he pens a lengthy essay on "Getting the Economy Back on Track," failing, in a very flexian way, to explain or acknowledge -- let alone apologize for -- the key role he played in getting the economy off track in the first place.

Rubin's resume is the personification of the flex net in action, as he seamlessly moved between political positions (Director of the National Economic Council, Treasury Secretary), private positions (as a board member and senior counselor at Citigroup, he received over $126 million in cash and stock), advisory positions (including serving on the President's Advisory Committee for Trade Negotiations and the SEC's Market Oversight and Financial Services Advisory Committee), and stints on a World Bank task force on Growth and Development, work as an unofficial economic advisor to President Obama, and his current position as co-chairman of the Council on Foreign Relations.

You can read Rubin's 2,500+ word Newsweek piece here. But I was much more interested in the 28-word bio at the end of it: "Rubin is a former secretary of the Treasury (1995-99). He now serves as co-chairman of the Council on Foreign Relations and is a fellow of the Harvard Corporation." Given that the piece is about the economic meltdown, it's telling that the bio doesn't include his nearly ten years at Citibank -- during the very time that ended with the bank having to be saved by the American taxpayers.

But that's how the flex net works: you are able to wreak destruction, bank a tidy profit, then go along your merry way, pontificating about how "markets have an inherent and inevitable tendency -- probably rooted in human nature -- to go to excess, both on the upside and the downside." And how many people remember key details in Rubin's career like his vociferous opposition, during the Clinton years, to the regulation of derivatives -- a key factor in the meltdown? Or his lobbying the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron -- a debtor of Citigroup?

Last month, Janine Wedel came to HuffPost's D.C. office to talk about her book. Our team was riveted as she painted a portrait of our political culture not from the perspective of a political scientist but from that of a social anthropologist. As a professor of public policy and social anthropology at George Mason, Wedel spent years studying what happened in Eastern Europe after the fall of communism, and sees a similar co-mingling of state power and private power at work here.

Take the health care fight. Though Wedel completed her book before the most recent twists and turns in the legislative process, reading Shadow Elite you get the feeling you are being given a peek at the how-to manual the insurance and drug companies -- and their water-carriers in Congress -- used to ensure that what may well have started out as a push for real reform ended up as an industry windfall.

After all, the final Senate bill (which looks like it will be the base for the final bill sent to Obama), is essentially the same bill that was drawn up months ago in Max Baucus' office by Baucus staffers who used to be health care executives, and by health care lobbyists who used to be Baucus staffers.

The shadow elite clearly knew that the months and months of so-called debate over the issue was nothing more than a charade -- the ultimate outcome never in doubt. The bill was created in the shadows. The public process since then has essentially been like a Hollywood adaptation -- complete with the requisite third act happy ending (or, in the words of our elected officials, a "historic" ending).

"The new breed of players," writes Wedel, "who operate at the nexus of official and private power, cannot only co-opt public policy agendas, crafting policy with their own purposes in mind. They test the time-honored principles of both the canons of accountability of the modern state and the codes of competition of the free market. In so doing, they reorganize relations between bureaucracy and business to their advantage, and challenge the walls erected to separate them. As these walls erode, players are better able to use official power and resources without public oversight."

That's a spot-on description of what happened with health care -- as well as a spot-on description of the totally-lacking-in-transparency bailout of the financial system. Remember how the bailout was supposed to take care of not just Wall Street but Main Street? Well, the former ended up with record profits and bonuses while the latter is looking at double-digit unemployment -- and millions of foreclosures and bankruptcies -- for the rest of the year.

As for the "embrace of truthiness" Wedel writes about, witness this exchange from This Week between Jake Tapper and White House spokesman Robert Gibbs. Tapper asked Gibbs about Obama's broken promise to televise health care negotiations on C-SPAN and whether Obama will at least push for transparency for the final reconciliation process. Gibbs' response:

Well, Jake, first of all, let's take a step back and understand that this is a process legislatively that has played out over the course of nine months. There have been a countless number of public hearings. The Senate did a lot of their voting at 1:00 and 2:00 in the morning on C-SPAN. A lot of this debate -- I think what the president promised and pledged was so that you could see who was fighting for their constituents and who was fighting for drug and insurance companies...

Talk about being flexible -- Gibbs is a world-class rhetorical yogi. So all that talk during the campaign about transparency now just comes down to Congressional votes being shown on C-SPAN -- as they've always been?

The worst part is that Gibbs' posturing about being on the side of constituents rather than the drug and insurance industries sounds so normal. Gibbs knows all too well that he's supposed to shake his fist at the insurance companies, just as Larry Summers and Tim Geithner -- who both feature prominently in Shadow Elite -- know they're supposed to talk tough to the banks and vow to end "too-big-to-fail." But, as Wedel writes, they've rigged the system so they can "institutionalize their subversion of it."

And in the same way that our regulatory structure was outmoded and unable to deal with the complex new financial instruments devised by Wall Street, the rhetoric we use today to describe what's happening to our system is not up to the task. According to Wedel, terms like "lobbyist," "interest group," "corruption," and "conflict of interest" no longer suffice.

The new flexians are, as HuffPost's Arthur Delaney dubbed them, "influence launderers." That's why a flexian like Tom Daschle never needed to bother registering as a lobbyist. He could do the same things, selling off the public trust to the highest bidder, and then go around bragging about how he's never sullied himself with actual lobbying.

With our capitalist version of what Wedel describes as the "merging of state and private power that characterized both communism and postcommunism," we're getting to the point where the only difference between senior congressional staffers and the lobbyists and influence launderers whose ranks they'll soon join is the size of their paychecks. They just have to do a few years in Congress before joining their former bosses. It's a kind of grad school: put in a few semesters getting your Masters of Influence and you won't have to worry about paying off those school loans.

So how can we wrest control of our government from the Shadow Elite?

As Wedel says, the first step is to understand. "Merely exposing certain activities is not enough," she writes, "framing them is essential." We need to reframe how we look at and think about and respond to what is being done in our name and with our resources.

Reading -- and talking about -- Shadow Elite is a great first step in that reframing process. And don't miss Janine Wedel's blog post about her book, coming tomorrow. Let's get the conversation going.

Get your copy of Janine Wedel's Shadow Elite at Amazon.com Posted: January 6, 2010