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This book vividly describes how China’s rise in the early 2000s led to rising profits and declining labor income everywhere, ultimately resulting in the global financial crisis. Under Deng Xiaoping’s policy of ‘reform and opening up’ in the 1980s, China quickly became the world’s factory floor...but powerful political leaders envisioned a world in which the market economy would be trapped within the confines of a planned economy. With China’s admission into the World Trade Organization in 2001, almost a billion people joined the global workforce, driving down the real wages of blue- and white-collar workers in the US and Europe while also lowering interest rates, which fueled housing bubbles and destabilized the financial sector. This book explores China’s significant influence on western economies by focusing on the links between the labor market, corporate profits, and interest rates, using Arthur Lewis's framework for economic growth with unlimited supplies of labor to argue that by 2010 the world economy – and political situations – had been set back almost one hundred years.



Chapter 1. The Chinese Birdcage

Under the leadership of Deng Xiaoping, China in 1978 started to open up to the outside world. It did so without abandoning the centrally planned economy, gradually introducing market elements instead. According to Zhao Ziyang, who was premier under Deng Xiaoping and was banned from public life after 1989 for being too sympathetic to the students in Tiananmen Square, the Chinese leadership envisioned a birdcage economy in which the centrally planned economy was the cage and the birds were the market economy. The three key elements that contributed to the success of China’s economic transformation are gradualism, decentralism, and experimentation. Given the dismal state of China’s economy after Mao’s ruinous reign, there was widespread support among the elite for economic reforms.
Heleen Mees

Chapter 2. Western Triumphalism

In 1980, Thatcher and Reagan both won the election on a platform of lower taxation, smaller government, and breaking the trade unions. Their brand of neoliberalism quickly became highly influential throughout the 1980s. The fall of the Berlin Wall, less than ten years later, was widely seen as an affirmation of free market ideology, which, in the words of Fukuyama, would inevitably lead to democratization. His bestseller The End of History and the Last Man in 1992 was the perfect pretext to put China on the fast track to becoming a member of the World Trade Organization. While many politicians and business leaders at the time saw China as the one-billion-people market, few fathomed that China would prove first and foremost a competitor.
Heleen Mees

Chapter 3. China as the World’s Factory

Within a year of China’s accession to the World Trade Organization, the World Bank published an article under the headline “China Is Becoming the World’s Manufacturing Powerhouse.” Manufacturers ranging from General Electric to Samsung found out that it was often more profitable—and almost always far easier—to use China as an export base than selling goods inside the world’s most populous nation. Because of the combination of minuscule wages and the central planner’s deft hand, China in no time became the world's factory. China also began to build up massive foreign reserves, initially seen as a response to the 1997 Asian financial crisis but soon deemed excessive and looked upon conspicuously in the West.
Heleen Mees

Chapter 4. Housing Bubbles Across the Western Hemisphere

In the early 2000s, advanced economies experienced a precipitous drop in interest rates. This was—in part—the result of central banks’ unseemly loose-fitting monetary policy but also because of the interest rate convergence in the countries making up the euro area, and global economic factors. The decline in interest rates set off housing booms that were accompanied by large run-ups in household debt. While workers in China saw their income grow exponentially, the middle class in rich countries saw wages fall or stagnate, while the global elite saw its income shoot up by more than 60 percent. No wonder that the losers of globalization started to revolt; the new millennium coincided with a sharp rise in populist parties on the left and right.
Heleen Mees

Chapter 5. The Global Financial Crisis

By 2007, the first cracks in the financial ceiling started to show. The US housing market was over its peak, oil prices were spiraling out of control, and consumer confidence sank. As people started to lose their jobs, default rates on mortgages started to creep up, affecting initially the subprime mortgages, but later on, prime mortgages as well. In June 2007, two Bear Stearns hedge funds collapsed. It would take another year for the fire to spread to other Wall Street banks. After the collapse of Lehman Brothers, governments on either side of the pond scrambled to rescue their banks as European banks had invested heavily in American toxic mortgages. Amid the financial panic, the huge imbalances within the euro area became apparent too.
Heleen Mees

Chapter 6. The Economic Fallout

The global financial crisis hit advanced economies hard. Emerging economies, on the other hand, fared rather well, mainly because of the massive stimulus China’s leadership administered. While the stress in financial markets quickly abated, the stress in rich countries’ main street lasted and lasted. Although the unemployment rate in the USA fell, this was in no small part due to workers dropping out of the workforce. By 2014, economic growth was still so sluggish that Larry Summers raised the specter of secular stagnation. Tepid investment spending, together with subdued household consumption, prevents the attainment of full employment for many years. Secular stagnation is a demand-side concept but some have argued that the stagnant economic growth is the result of supply-side problems as well.
Heleen Mees

Chapter 7. Unlimited Supplies of LaborUnlimited Supplies of Labor

This chapter lays out Arthur Lewis’ framework for economic growth with unlimited supplies of labor to explain the development of the global economy. The implication of “unlimited” supplies of labor is that the capitalist sector can hire even more workers without the need to raise wages. All that employers have to pay is a wage slightly higher than the subsistence wage that keeps its workers alive. Any gains in labor productivity do not translate into higher wages, as the mainstream economic theory has it, but in higher profits instead. If the profits, in turn, are reinvested in productive capacity, profits will grow continuously as a share of national income. Although more workers are put to work in the capitalist sector, labor’s share of GDP declines.
Heleen Mees

Chapter 8. China’s Economic Development

Output per worker in China tripled within the span of a generation. Productivity gains came from the introduction of the household responsibility system, the restructuring of state-owned enterprises, and the influx of foreign direct investment. Just as Arthur Lewis predicts, China’s productivity growth came with a high savings rate, rising from 30 percent of GDP in 1980 to 53 percent of GDP in 2007. Most of these savings, predominantly from corporations and wealthy individuals, were invested in the Chinese economy. While many have criticized China for its build-up of foreign reserves, it seems to have been due to absorption constraints, that is, the inability to absorb a large influx of foreign exchange in its entirety, as often is the case for resource-rich countries.
Heleen Mees

Chapter 9. Corporate Cash Piles and Falling Interest Rates

Bernanke blamed the global savings glut for the relatively low yields on longer-term US Treasuries in 2004, singling out the savings of emerging economies. Bernanke omitted, however, that US corporate demand for US Treasuries was at least as large. It would be more apt to speak of a corporate savings glut, especially because emerging market’s savings consist also for a large part of corporate savings. Also, it is too simple to blame foreign capital inflows for the housing bubble as causality runs from rising house prices to the deterioration of the current account, not the other way around. More importantly, there is a long-term trend toward lower interest rates that is, foremost, the result of the shift in income from labor to capital.
Heleen Mees

Chapter 10. The Shortfall in Demand

In a globalized world, the effects of unlimited supplies of labor in China spill over to advanced economies as well. Between 1980 and 2013, labor’s share of GDP dropped 9 percentage points while profits after tax as a share of GDP increased by roughly the same amount. Globalization instead of technology has been the main driver of the fall in labor’s share. As investments in advanced economies do not keep up with rising profits, there is, in effect, a shortfall in demand. This shortfall is structural instead of cyclical as Keynesians tend to argue. The best way to redeem the shortfall in demand is by redistributing income from capital to labor in a way that reinforces labor, such as by investing in education and health care.
Heleen Mees

Chapter 11. Piketty Piketty Thomas Reconsidered

In Capital in the 21st Century, Thomas Piketty argues that the rate of return on capital historically has always exceeded the rate of economic growth, giving rise to ever expanding dynastic wealth. However, instead of focusing on capital, one must look at the position of labor. Through a combination of economic and political factors, workers were better able to assert themselves from 1920 on, resulting in a precipitous drop in the return on capital. With the Thatcher/Reagan revolution, the process went into reverse and capital gained ground again, a process that accelerated after China’s accession to the World Trade Organization. Although advanced economies are aging and China will run out of its unlimited supplies of labor, labor’s prospects remain bleak in case robots take over.
Heleen Mees

Chapter 12. What Lies Ahead?

The birdcage economy that Zhao Ziyang so abhorred has served China well. By ignoring much of the Washington consensus, China has been able to avoid the pitfalls that other communist countries encountered after the fall of the Berlin Wall. Deng Xiaoping’s call to let some people get rich first has created an economic growth model that can feed on itself. China went through the industrial revolution in the time it takes to change a light bulb and it may master the robot revolution just as quickly. For rich countries, the redistribution of income from capital to labor is most urgent. Rather than the infinite concentration of wealth in the hands of a few, the Western world seems to teeter on the brink of a revolution.
Heleen Mees


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