China, Brazil, Indonesia: Capital is a fickle lover

By Walden Bello

June 22, 2011 – Foreign Policy In Focus – "China is today the ideal capitalist state: freedom for capital, with the state doing the 'dirty job' of controlling the workers”, writes the prominent Slovenian philosopher Slavoj Zizek. “China as the emerging power of the twenty first century … seems to embody a new kind of capitalism: disregard for ecological consequences, disdain for workers' rights, everything subordinated to the ruthless drive to develop and become the new world force."

Capital, however, is a fickle lover.

Recently, a growing number of corporate leaders are having second thoughts about the “Chinese model” that has been so central in the globalisation of production and markets over the last three decades.

Labour rises

The relief in corporate circles that greeted the East Asian recovery, powered by the massive US$580 billion Chinese stimulus program in 2009, has been replaced by concern over the bursting of the real estate bubble, powerful inflationary pressures and massive overcapacity owing to uncontrolled investment. There is also a sense that China’s leadership is fighting a losing battle against entrenched interests and structures in its drive to move from a strategy of export-led growth to one that is domestic-market led — a move that many consider urgent as China’s traditional markets in the United States and Europe are in the vise of long-term stagnation.

But it is the worry that the key source of corporate profitability — Chinese labour — may no longer be docile and cheap for much longer that mainly nags at the country’s corporate guests as well as its rising capitalist class. And many fear that the very ruthlessness that Zizek talks about — the iron fist that the Chinese state has deployed over the last three decades in order to achieve the unbeatable "China price” — has become a central part of the problem.

The worry first became palpable last year, when workers at several transnational corporations based in south-eastern China, like Honda and Toyota, went on strike and succeeded in winning substantial wage increases. To the surprise of foreign investors, the government did not oppose the workers’ demands for higher wages, prompting some to speculate that the regime saw the strikes as complementary to its effort to reorient the economy from export-led growth to one based on rising domestic consumption.

The strike wave receded, but a second wave of protest since May  this year, this time taking a violent riot form, has both government and the capitalist elites worried. The mass base of the current protests is not the relatively educated, higher-paid workers at big Japanese subsidiaries, but the low-paid migrant workers who work for small and medium Chinese-owned enterprises that turn out goods for foreign buyers. Zengcheng, one of the centres of protest, is home to hundreds of subcontractors specialising in mass-producing brand blue jeans that end up, under different brand names, in retailers like Target and Wal-Mart in the United States.

Guangdong province, where most of the protests have occurred, accounts for about a third of China’s exports, prompting the authorities to respond in force. But police repression will not buy stability, says a report of a government think tank, the State Council Development Research Center. “Rural migrant workers are marginalized in the cities”, it says, “treated as mere cheap labor, not absorbed by the cities but even neglected, discriminated against and harmed“. The report warns: “If they are not absorbed into urban society, and do not enjoy the rights that are their due, many conflicts will accumulate… If mishandled, this will create a major destabilizing threat.”

But the problem is fundamental, and there seems no easy way out. The seemingly inexhaustible reserves of rural labour from China’s hinterland kept wages low and worker organisation minimal over the last three decades. Now the supply of labour to the export-oriented coastal provinces may be drying up, resulting in steadily rising wages, greater worker militancy and the end of the “China price.”

Brazil takes off?

“South-South cooperation” was what was on the mind of many observers when, at the conclusion of her trip to China in April, Brazil’s new president Dilma Rousseff announced that Foxconn International Holdings, the world’s largest electronics contract manufacturer, was shifting some of its operations from China to Brazil, and was expected to spend $12 billion building factories in her country. But there was apparently more to the move than BRIC [Brazil, Russia, India China] solidarity. Foxconn, the maker of iPhones and iPads for Apple, computers for Dell and many other devices for well-known high-tech customers around the world, reported a loss for 2010 because of higher labour costs in China.

It is not only Foxconn that is voting with its feet and going to Brazil. The key reason investors are flocking to Brazil seems to be that the country under former president Luiz Inácio Lula da Silva ("Lula") not only became friendly to capital, having attractive foreign investment laws and following conservative macroeconomic policies, but also had social policies that promoted stability. One of Brazil’s most enthusiastic boosters, The Economist, compared Brazil with China and other “emerging markets” for investment:

Unlike China, it is a democracy. Unlike India, it has no insurgents, no ethnic and religious conflicts nor hostile neighbours. Unlike Russia, it exports more than oil and arms, and treats foreign investors with respect. Under the presidency of Luiz Inácio Lula da Silva, a former trade-union leader born in poverty, its government has moved to reduce the searing inequalities that have long disfigured it. Indeed, when it comes to smart social policy and boosting consumption at home, the developing world has much more to learn from Brazil than from China.

Continuing its paean to Lula’s Brazil, the magazine says:

Foreign investment is pouring in, attracted by a market boosted by falling poverty and a swelling lower-middle class. The country has established some strong political institutions. A free and vigorous press uncovers corruption—though there is plenty of it, and it mostly goes unpunished.

It concludes:

Its take-off is all the more admirable because it has been achieved through reform and democratic consensus-building. If only China could say the same.

Lula seems to have squared the circle. Is this for real?

The progressive analyst Perry Anderson believes it is. In a long, illuminating article in the London Review of Books, he says that Lula’s innovation was to combine conservative macroeconomic policy and foreign-investment-friendly policies with an anti-poverty program, the Bolsa de Familia, that cost relatively little in terms of government outlays but produced socially and politically significant impacts. Bolsa, a program of cash transfers conditioned on parents keeping the children in school and subjecting them to periodic health checkups, by some estimates, has contributed to the reduction in the number of poor people from 50 million to 30 million — and made Lula one of the few contemporary political leaders who is more popular at the end of his reign rather than at the beginning.

As for organized labour, which accounts for 17 per cent of the Brazilian workforce, it has largely been content to follow the leadership of Lula, who rose from the ranks to become the country’s top union leader before he launched his political career.

Indonesia’s moment?

Much the same boosterism now marks the business press’ commentaries on Indonesia. Brazil and Indonesia are roughly comparable population-wise and in terms of geographic spread. While Brazil is the world’s eighth-largest economy, Indonesia is the 18th largest. Both were barely touched by the global economic crisis, being primarily domestic-market driven instead of export driven, though they have strong export sectors. While the rest of its export-oriented neighbours in South-East Asia suffered significant declines in economic growth at the height of the global economic crisis in 2009, Indonesia managed an impressive 4.6 per cent.

In recent years, according to Mari Pangestu, the minister of trade, the country has been the recipient of “a lot of displacements” from China, brought about by “the [appreciating] yuan, the increase in salaries, the strict regulation of work and all the problems China had to face“. With average wages now lower in Indonesia than in China in many sectors, such as information technology, the country is becoming a choice relocation site for firms worried about double-digit wage increases in China and Vietnam. Foreign investment was approximately $15 billion in 2008, fell to $10 billion in 2009, recovered to $12.5 billion in 2011, and is expected to hit $14.5 billion in 2011.

This year’s site for the World Economic Forum for East Asia on June 12-13 was Jakarta, and with it came a glowing endorsement from global capital’s chief promotions agency. In its report on Indonesia’s “competitiveness”, the WEF noted, “Among Indonesia’s strengths, the macroeconomic environment stands out… Fast growth and sound fiscal management have put the country on a strong fiscal footing. The debt burden has been drastically reduced, and Indonesia’s credit rating has been upgraded.” It pointed out that “as one of the world’s 20 largest economies, Indonesia boasts a large pool of potential consumers, as well as a rapidly growing middle class, of great interest to both local and foreign investors”. Infrastructure is still insufficient, but providing it is also what makes foreign capital salivate, with the Wall Street Journal in an otherwise laudatory editorial warning the government to surrender infrastructure provision to the private sector and foreign capital.

But it is Indonesia’s governance that makes it most attractive to foreign capital. Corruption is still a pervasive problem and some foreign capital investors complain that the revised labour code is more favourable to labour than to capital. But Indonesia is said to have traversed the fall of the Suharto dictatorship, the Asian financial crisis and a chaotic period of democratic experimentation with flying colours. Thirteen years after the overthrow of Suharto, the country’s unique advantage is said to be its offering global capital “rapid growth with democratic stability”. While there is no one program like the Bolsa in Brazil, Indonesia’s poverty reduction is trumpeted by the United Nations and the World Bank as being among the most impressive in the world, with the number of those living in poverty estimated at 13 per cent of the population. Contributing to this has been what many regard as one of the Suharto regime’s few enduring positive legacies: a successful population management program.

Lula’s Indonesian counterpart is President Susilo Bambang Yudhoyono, a former general under Suharto who is credited with stabilising the economy while consolidating democratic governance during his first term in office from 2004 and 2009. Like Lula, Yudhoyono is popular not only with global capital, but with the people: In his run for a second term in 2009, he coasted to a commanding victory. And like Lula, who did not behave as labour’s representative in power, Yudhoyono — “SBY” to most Indonesians — has not ruled in the top-down fashion expected from an ex-military man.

For many on the left in both countries, however, the social situation is far from ideal, and they see Lula and SBY’s formula of friendship with capital cum poverty mitigation as the wrong formula to address their countries’ massive problems. Their scepticism is not unjustified: according to the Institute for Applied Economic Research, social inequality has not changed in 25 years. Half the total income in Brazil is held by the richest 10 per cent, and only 10 per cent of the national wealth is shared by the poorest 50 per cent. Owing to continuing plunder by powerful logging interests with friends in high places, Indonesia’s rate of deforestation is among the 10 quickest on Earth, the main reason it has become the third-largest emitter of greenhouse gases. For the moment, however, these dissenters are a subdued minority.

Does global capital need liberal regimes?

It will take some time before China is displaced from its premier position as global capital’s preferred investment site, but the latter’s fears are increasingly coming to the fore. Zizek is right, and wrong: it seems that while iron-fisted authoritarian rule served global capital’s interests well for the last two decades, it also — in the view of China’s corporate guests — produced a polity with deep fissures that now regularly erupt. Their great worry about China is that it is becoming a pressure cooker with few safety valves, as the Communist Party comes down harder on labour and becomes even more resistant to democratic initiatives.

It seems that for the stable reproduction of capitalist relations during the current phase of the global economy, more open political systems that allow conflicts to be settled via elections and possess more liberal labour regimes are a better bet, from the perspective of capital. 

The irony of the situation is that even Chinese corporations may eventually find the social regimes of Brazil and Indonesia more favourable for their profitability and stable growth than China itself.

[Recommended citation: Walden Bello, "Capital is a fickle lover" (Washington, DC: Foreign Policy In Focus, June 22, 2011). This work by Institute for Policy Studies is licensed under a Creative Commons Attribution 3.0 United States License. Based on a work at www.ips-dc.org.]