Thanks to Kui-Wai Li’s historical reconstruction of China’s capital stock, it’s possible to compare that country’s capital formation (red line) and workforce growth (blue line) over the past 50 years.
As mentioned before, these are the key factors governing an economy’s profit-rate trajectory.
Note the respective slopes of the curves. The past decade, for which data aren’t included, would show accumulation proceeding at an even faster rate.
If a country’s capital stock grows faster than its working population, we’d expect average profitability to fall.
But China’s rapid accumulation has been possible, without lowering the rate of return on capital, by migration to the city, and absorption of the peasant population into the labour force of the urban capitalist sector.
The proportion of the workforce not engaged in rural (e.g. family agriculture or village enterprise) production may serve as a proxy for the amount of labour available for waged employment by firms.
The pace of urbanization over the same fifty-year period is shown below using figures from the Chinese Statistical Yearbook.
As expected, this plot is beginning to approximate a sort of logistic (S-shaped) curve. After accelerating in the last quarter of the 20th century, the rate of urbanization is beginning to level off.
This is for two reasons: (1) the supply of peasant labour is being exhausted (2) the one-child policy and induced demographic transition.
According to projections in the UN’s World Population Prospects (2008 revision), China’s working-age population (aged 15-59) will peak during the next decade.
Once China’s labour reserves are exhausted and the workforce stabilizes, ongoing growth of the capital stock will depress average rates of return.
Then we can expect a process familiar elsewhere to commence. As in other advanced economies during recent decades, the non-financial sector’s demand for investment funds will be insufficient to absorb the savings of the financial sector. This surplus must then be balanced by deficits in one or all of the remaining sectors (household, government and rest of the world).
Here the advanced economies polarize into two basic types, according to how they balance high rentier savings with low investment:
- Those with persistent trade deficits, including the US, much of Europe and Australia. Effective demand is maintained through household sector borrowing; when this reached its limits after 2007, the shortfall was met by government expenditure.
- A small group, including Japan, Germany and China, whose productive capacity and international competitiveness provide net export demand.
Thus China’s large trade surplus puts it in a position to be a substantial capital exporter. When, in the coming decades, its labour reserves dry up and further domestic accumulation slows down, China can be expected to increase its FDI and overseas assets, converting some of its dollar holdings into equity capital.
Japan, whose capital outflow increased from $US3 billion in 1975 to $US81 billion in 1985, shows how firms faced by falling domestic rates of return will look abroad for investment.
Starting from a low base, Chinese capital export has already spiked over the past decade.
A disproportionate number of these acquisitions and joint ventures are related to energy resources and strategic raw materials: particularly oil and natural gas in Africa, Central Asia and South America.
This is no surprise: the world’s supply of cheaply-produced conventional oil is likely to fall short of demand around the same time as China’s working population peaks. Meanwhile the US state elite has committed itself to territorial seizure throughout West and Central Asia.
The PRC leadership has accordingly attempted to secure the “energy security” of its firms (and its armed forces) by acquiring capital ships, and developing a series of ports, airfields and naval bases along the maritime routes between the South China Sea, the Persian Gulf and East Africa. US geostrategists call this China’s “string of pearls“.
This is a much-discussed matter among the layer of academics and journalists swathed around the Council on Foreign Relations and similar US policy thinktanks. Must the geography of Chinese power conflict with US interests, or can both parties be accommodated somehow, in a mutually satisfactory deal? The international-relations theorist John Mearsheimer predicts the usual Great-Power competition. Others are more optimistic about a “peaceful ascent”, but advise a “military hedge” to manage downside risk; Robert Kaplan has taken it upon himself to explain “How We Would Fight China”.
These are dilemmas, too, for the state managers of countries — among them Australia — tied by diplomatic and military threads to US Pacific Command but with trade and investment links to China. In 2004 the Australian foreign minister notoriously denied that the US Seventh Fleet was covered under the mutual-assistance terms of the ANZUS treaty.
But suppose that US, Chinese and allied elites manage, somehow, to peacefully share the world’s markets, sea lanes and raw materials, amid global warming and shortages of low-cost energy.
More intractable problems still remain.
The weight of China’s market within the world economy ensures that its domestic issues are immediately international ones. The opening of Chinese labour reserves to the international market in the late 1970s made labour abundant relative to capital, changing the global balance of class forces, and destroying social democracy as a political force.
Li’s figures show the enormous mass of capital accumulated in the following 20 years. By the time China’s labour reserves are depleted, this stock will roughly have tripled its 1998 level.
But the labour reserves of zones remaining to be “opened” to investment — sub-Saharan Africa, eastern Russia — are of modest scale. Their workforces won’t absorb Chinese capital exports for long. (By comparison, south-east Asia — the destination of much Japanese FDI since the 1980s — is much larger relative to its donor.)
Thus the world economy will have a glut of capital relative to labour, reversing the balance of class forces, depressing rates of returns to investment, and laying the basis for wage inflation and labour militancy.