Location: United States

I am a graduate student at the State University of New York at Binghamton studying education and history.

Wednesday, July 04, 2007

The United States of America and the People’s Republic of China: A Comparative Analysis of Economic Performance and Governmental Policy (1986-2006)


Politically, economically, socially, culturally and historically the discrepancies between the United States and China are immense, yet as of 2007 these disparate states have emerged as the world’s dominant economic powers. Tracking the changes in each respective nation’s economic performance over the past twenty-years (1986-2006), the role of the government and governmental policies, and the trends for the future is a daunting task. Indeed, the immense complexity inherent in a discussion of political-economic systems in an increasingly “globalized” world market presupposes the fact that that the author will be forced to resort to mild generalities. Nevertheless, in addition to an investigation of the political-economic trends over the past twenty-years, I hope to incorporate historical circumstance and the role of ideology in shaping governmental policy, as well as to frame the discussion within the context of what Professor and Chair of Development Sociology at Cornell University, Philip McMichael calls “the globalization project,” (1980-present). Thus, I will not neglect the ideology of Friedrich von Hayek and Milton Friedmen that gave birth to the “neoliberalism” which has shaped the current world economic framework and transformed the US and China from their respective Keynesian and centrally planned economic systems, into the economic backbone of a neoliberal capitalist world order.

I will begin with a brief historical sketch of the political economic development of China and the United States from the conclusion of the Second World War to the mid-1980s, in order to contextualize the discussion. Once a backdrop has been established, I will move to a more in-depth study of economic development and governmental policy in each respective nation over the past twenty-years, arguing that while the political-economic developments of the respective nations took starkly different forms, each served to fill a niche within a structurally cohesive world framework. Upon completing the aforementioned discussion, I will highlight the most dominant trends, and close with a discussion of what the future may entail for the political and economic evolutions of each respective state.

China: Brief Political-Economic History

The long and storied history of Chinese civilization, which dates back more than six millennia, is a strong source of pride for modern Chinese citizens.[1] By the mid-Nineteenth Century, however, the once great and prosperous imperial order came under siege from Western penetration and domestic unrest. In 1911 the Qing dynasty fell, and the next four decades were marred by civil war and imperial overtures by Japan which culminated in a full scale invasion with massacres bordering the qualification of genocide. With the capitulation of Imperial Japan in the summer of 1945 the fleeting and volatile alliance between Chinese communist and nationalist armies collapsed and the nation once again descended into civil war. By 1949 the nationalist forces under Chiang Kai-shek had retreated to Taiwan and the People’s Republic of China (PRC) was established under the leadership of Mao Zedong and the elite vanguard of the communist party-state.

In 1950 the PRC conducted a treaty of friendship with the Soviet Union and utilized the limited Soviet aid to develop heavy industry through planning agencies of the centralized bureaucracy.[2] In order to fund the project, Mao pressed China’s 600-million peasants to pool their land holdings into small cooperative farms, followed by full collectivization under government control.[3] In 1958 the process of collectivization was accelerated by the “great leap forward,” an ambitious plan to make China the industrial equal of the West within 15-years. The party set impossibly high quotas for agricultural output, leading lower-echelon officials to exaggerate output figures, and culminating in a false belief of high agricultural production.[4] An overestimation of surplus, an exhausted and under-compensated agricultural workforce and extreme weather (drought in some areas, flooding in others) begot one of the worst manmade famines in history. From 1959-62, the devastating famine cost an estimated 27-million lives.[5] In the wake of the disastrous famine, Mao retreated from public view (though he remained party chairman) and many of his radical policies were eased as the government shifted industrial policy toward the production of consumer goods and allowed farmers to market portions of their crop yields.[6] The period of moderate government policies was short-lived, as Chairman Mao reemerged from isolation in the mid-1960s and launched the Great Proletarian Cultural Revolution – targeting moderate party-members such as Deng Xiaoping; attacking traditional values of Chinese culture; and creating an atmosphere of intense factional fighting. By 1967 the government had all but ceased to function and the country was fraught by a state of near-anarchy.[7] Mao, unable to control the chaos, disbursed the army to restore order and reinstated many of the party-moderates who had been purged during the Cultural Revolution.

In the early 1970s a debate ensued regarding succession of the ailing party-chairman. The heightening of tensions with the Soviet Union over border disputes and the historic visit by American President Richard Nixon in 1972 (one of the first steps toward the normalization of Sino-American relations) might have signaled the direction China would ultimately take, yet at the time of Mao’s death in 1976 the struggle for power between party radicals and economic modernizers had not been resolved. By 1978 a rehabilitated party-leader and proponent of economic modernization, Deng Xiaoping emerged as China’s paramount leader and the government initiated an incremental process of economic reform, creating a system which would later be referred to as a “socialist market economy,” or “socialism with Chinese characteristics.” The rise of Deng Xiaoping and the economic modernizers constituted a fundamental shift in China’s political economic development, and is crucial to our discussion of Chinese economic performance from 1986-2006.

The fundamental priority shift in 1978 was based on 2 key tenets, first, economic growth was to be the vehicle in constructing Chinese socialism; and second, stability and the maintenance of domestic order would be necessary to achieve economic growth. From 1978-1984 Deng’s economic policies can broadly be described as economic “liberalization.” The government dismantled the commune system and allowed peasants to produce food for the market; established an “open-door” policy for trade and investment, particularly through the establishment of “Special Economic Zones” (SEZs); and inaugurated massive construction projects to develop infrastructure.[8] The process of economic reform was coupled with political liberalization, including the reversal and rehabilitation of the victims of Mao’s Cultural Revolution; the introduction of legal procedure and equality before the law; the end of hostilities toward intellectuals and private entrepreneurs; a redesigned education system; the removal of all class and political designations; and the articulation of “officially acceptable” forms of political participation, (while still cracking down on “officially unacceptable” forms, which might undermine the tenet of promoting stability).[9] I should add that while these policies were a radical divergence from those pursued under Mao, they were implemented (and continue to be implemented) incrementally. Understanding the historical evolution of the Chinese political economic system is fundamental to our discussion of Chinese economic performance from 1986-2006.

Having established the context for our discussion of Chinese economic performance, I will now turn to a discussion of the political economic history of the United States from the Second World War to the onset of the period in question. Through this exercise in comparative history, I hope to instill a sense of the vast disparities between post-war American and Chinese development, as well as to articulate the period in which American and Chinese political economic development began to converge.

The United States: Brief Political-Economic History

The United States of America was founded in 1776, after the break-away British colony fought a successful war of independence. Throughout the 19th century the United States expanded across the continent and extended its imperial influence throughout much of Latin America and the Pacific. Fueled by imperial acquisitions, a massive industrial revolution and victories in the First and Second World Wars, the United States emerged in 1945 as one of two world superpowers alongside the Soviet Union.

Following the conclusion of hostilities, the war-economy made a transition to a Keynesian-based economic system featuring deficit spending and near full employment, as well as traditional Keynesian social spending measures including an increased minimum wage, health and housing initiatives and an expansion of social security benefits.[10] One of the major undertakings of the Keynesian period was the government funded construction of the interstate highway system (following the 1956 Highway Act), which provided massive employment as well as a substantial boost to commercial development.[11] Prosperity and economic growth continued through the mid-1960s and President Lyndon B. Johnson called for the establishment of a “Great Society,” passing a torrent of Keynesian-based social welfare measures including the establishment of Medicare, and increased government spending on education, welfare and housing. By the late 1960s, however, growth and prosperity had reached a crest and inflation began to plague the prospects of sustained economic progress.

In 1969 Richard Nixon was elected President amid rising inflation. Despite his conservative rhetoric, Nixon continued to implement Keynesian measures, but to little avail. In 1973 the problem of inflation was coupled with a rise in industrial costs (triggered by the “oil shock”), sparking high levels of unemployment. The result was a period of stagflation (high unemployment coupled with inflation) a policy bind whereby ameliorating the effects of one problem results in aggravation of the other. Accordingly, the growth of the economy (measured by GDP) dropped from 5.9% in 1973 to -0.5% in 1974 and -0.2% in 1975.[12] Neither Ford nor Carter proved able to curb stagflation, and in 1981 the newly elected President Ronald Reagan implemented a revolutionary economic policy, permanently shifting American political economic development away from the Keynesianism of the previous three decades.

From 1980-1982 the economic growth rate plunged (-0.2% in 1980; 2.5% in 1981; -2% in 1982).[13] The new economic policies introduced by Reagan included tight monetary policy, a massive tax-cut (especially on capital gains), a substantial decrease in social spending, governmental deregulation and increased privatization. These policies have taken on various definitions, including “neoliberalism,” “supply-side economics,” “Reaganomics,” and “trickle-down economics.” Regardless of the terminology, the basic tenets of Reagan’s political economic policies remain in tact to this day, and have become the hegemonic model for political economic development throughout the world. Under Reagan, the economic growth rate (GDP growth rate) did recover: 4.5% in 1983, 7.2% in 1984; 4.1% in 1985 and 3.4% in 1986.[14] The death of Keynesian social spending, however, was not the only cost of Reagan’s economic recovery, as the national debt soared during Reagan’s tenure in office. At the conclusion of the 1981 Fiscal Year (Reagan’s first year in office) the Gross Federal Debt stood at 994,828 (million US dollars) – 32.6% of the GDP.[15] By the end of the 1988 Fiscal Year (Reagan’s final year in office) the Gross Federal Debt had risen to 2,867,800 (million US dollars) – 53.1% of the GDP.[16] Understanding the historical context of the United States’ political economic evolution will likewise prove crucial to our discussion of US economic performance from 1986-2006.

Finally, before we begin the discussion of economic performance in China and the United States, I would like to briefly frame the economic liberalization pursued by the Chinese government in the early 1980s and Reagan’s policies of neoliberalism during the same time period, within the framework of what sociologist Philip McMichael describes as “the globalization project” (1980-present). It was in this same period (late 1970s-early 1980s) that many developing nations in the “3rd World” fell into a debt trap whereby they were unable to repay loans from foreign banks. Faced with the prospect of defaulting on their loans, the governments were rescued by the Bretton Woods institutions (the IMF and the World Bank) via debt rescheduling. In return however the governments of the debtor nations were forced to implement structural adjustment programs (austerity measures – cuts on social spending, opening borders to trade and investment, allowing the privatization of national industries etc). These “new disciplines,” argues McMichael, represent a “fundamental shift in the world order,” a world order dominated by banks, international financial institutions (IMF, World Bank, WTO, G-8), and powerful transnational corporations (TNCs) – which control two-thirds of all world trade.[17] Having contextualized the history of political economic development in both China and the United States, as well as the global shift to a world market system governed by neoliberal tenets, I will begin the discussion of China’s economic performance from 1986-2006 and the role of the government and governmental policies.

China: 1986-Present

While the political economic reforms in China are multifaceted and extremely complex, there are several major issues that have dominated the path toward liberal market reform in the PRC. In addition, there is a dominant trend of gradual reform that has emerged, and in order to understand the dynamics of Chinese economic reform, it is important to understand why reform in China has remained gradual. For example, a major issue in China’s path toward liberal market reform has been the gradual decline of state-owned enterprises (SOEs) which have proven increasingly burdensome. Many of the SOEs are no longer turning a profit and survive only by means of government subsidies. If the PRC were to allow all of the loss-making enterprises to go bankrupt, however, the social safety net would not be able to support the millions of unemployed workers, which may in turn spark domestic unrest.[18] Such a development would undermine the social order and stability, which is held as the prerequisite to China’s economic growth. Thus, we must remember this important trend of gradual reform as we explore the PRC’s political economic development.

In Fiscal Year 1986 the GDP of the PRC stood at 293,467 (million USD, current prices) with a per-capita GDP of 275 (USD), following two years of extraordinary growth (15.2% GDP growth rate – 1984; 13.5% GDP growth rate – 1985).[19] From 1986-1988 the PRC government embarked on an ambitious reform package including the introduction of a contract labor system, the enactment of an enterprise law, the legalization of land sales, the opening of the nation’s first mergers and acquisitions market, the decentralization of control over foreign exchange transactions and an overly ambitious attempt at price reform.[20] The introduction of a contract labor system – whereby new workers sign contracts for short-term employment rather than the traditional “iron rice bowl,” and the opening of the nation’s first mergers and acquisitions market in Wuhan, were clearly targeted at reforming the deteriorating SOEs. Indeed, as of August 1988 about 17% of the 6,000 major state-owned enterprises were unprofitable (losing 1-billion USD in the first 6 months of 1988) and the growth rates lagged far behind both the private industrial and the collective sectors.[21] The demise of SOEs provided a paradox, however, for of China’s 120-million urban workers, 85% were concentrated in state-run enterprises and very few of them were willing to risk entering the private sphere.[22] Still, the establishment of the mergers and acquisitions market in Wuhan set the precedent for the failing SOEs to merge, a tactic that would prove useful in the transition toward economic liberalization.

Despite the increasing problems with SOEs, the Special Economic Zones (SEZs) have significantly bolstered the Chinese economy. While the PRC had experienced trade deficits in 1985-6, 1987 saw a trade surplus as exports surged.[23] The surge in exports came as the SEZs had their best year to date, with combined industrial output value increasing by 52%.[24] Accordingly, the SEZ model was extended to include more of the eastern coastal region in the spring of 1988 through the expansion of special tax and licensing benefits.[25]

While the reform plans regarding SOEs and SEZs were not insignificant, the most ambitious (as well as devastating) aspect of the 1986-88 reforms occurred in the realm of price reform. In the gradual transition from a command to a market economy, the PRC had shown restraint in decontrolling prices. In 1987, however, Deng Xiaoping called for an accelerated pace of price reform and by May almost 90% of products, excluding staple crops, had been decontrolled.[26] The price reform, coupled with the decentralization of control over foreign exchange transactions, had a devastating effect on the urban cost-of-living-index. Chinese consumers in urban settings already spent an average of 50-60% of their income on food, but following the dual reforms the price of foods increased by 10.1% with the price of meat, poultry and eggs rising 16.5%; by 1988 prices for non-staple foods were up by 24.2% and the costs of fresh vegetables were up 48.7%.[27] The massive inflation and price hikes led to bank-runs, stockpiling, a rise in crime and corruption, increased student protests and an uprising in Tibet - developments which forced the government to halt reform, freeze prices, recentralize economic policy and consolidate reforms, rather than continue expansion.[28] The failure of accelerated reform served as a reaffirmation of the principle of gradualism, which has been a tenet of political economic development since 1978.

As the 1990s began, the political economic policies of the PRC focused on opening the country to foreign investment, expanding export platforms and curtailing the role of SOEs in the economy. In 1990 foreign investment was modest in size, geographically concentrated, and focused almost exclusively on export industries.[29] In 1992 China began to offer unprecedented domestic market access to foreign investors, particularly those that could offer “advanced technology.”[30] Accordingly, from 1986-1991 the private sector employment growth had averaged 3.46 million new jobs per year, but 1991-1995 saw the annual average skyrocket to 10.85 million new jobs per year.[31] In addition, the PRC began to grant direct export and import rights to many private firms by substantially reducing non-tariff barriers (NTBs). In 1992 only a few hundred enterprises had obtained trade rights, by 1996 the number had rose to roughly 10,000.[32] Consequently, the nominal output by foreign-invested enterprises (FIEs), which totaled only 100-billion yuan in 1991, had risen to nearly 700-billion yuan by 1994.[33] The FIEs saw their share in total exports rise dramatically, from 1.9% in 1986, to 12.6% in 1990 and to an unprecedented 40.8% by 1996.[34]

The shift to FIEs was, of course, a dual-process, as the PRC continued the gradual reform on the increasingly burdensome state-owned industries. The SOEs, which accounted for 78% of industrial output in 1978, continued to be overshadowed by collectives and private enterprises.[35] In mid-1993 austerity measures were adopted to substantially curtail the access of SOEs to guaranteed credit, forcing the SOEs to cut costs and reduce employment levels.[36] Subsidies for SOEs, accounting for nearly 8% of GDP in the early 1980s had been reduced to only 1.2% by 1995.[37] That same year, the industrial output of the SOEs fell further, accounting for only 31% of industrial output.[38]

Having weathered the Asian financial crises despite a massive investment flight, the PRC under newly instated Prime Minister Zhu Rongji laid out an ambitious reform agenda in the spring of 1998. Zhu’s program included the privatization of public housing, halving the bureaucracy, extending unemployment insurance, expanding the private sector, restructuring the SOEs and improving relations with foreign investors – all of which served as a precursor for China’s entry into the WTO.[39] The bureaucratic cuts were met with resistance, yet by 1999 over 4-million officials had lost their jobs and many of the former industrial bureaus were transformed into non-governmental industrial associations.[40] Since tariffs and quotas are not permissible by the WTO, rapid SOE reform became necessary. Many SOEs were converted to mixed public-private ownership (still permissible under the constitution as long as 51% remained state-owned) while others underwent a wave of merges and acquisitions in order to “marry the strong with the powerful,” so that they might compete with the inevitable onslaught of foreign competition.[41] While the large-scale SOEs converted to mixed ownership, many small and medium enterprises were privatized outright, in fact, by 1999 90% had been privatized.[42] That same year private sector growth accounted for a stunning 90% of new jobs and 80% of value added growth.[43] Having implemented sufficient reforms, the PRC was admitted into the WTO in December, 2001.

Since China’s ascension into the WTO, the size of the Chinese economy has nearly doubled with annual output surpassing 2-trillion (USD) in 2005.[44] China has famously helped to lift several-hundred-million people out of poverty, accounting for 75% of poverty reduction in the developing world over the last 20-years. GDP per-capita has risen from 275 (USD) in 1986 to 1,553 (USD) in 2005.[45] China’s human development index (HDI) has risen from just under .6 in 1986, to .768 as of 2004 (compared to .948 US).[46] The percentage of the population that is undernourished stands at 12%, down from 16% in 1990.[47] Life expectancy at birth has risen from 63.2 years in 1975 to 71.5 years in 2005; and infant mortality (per 1,000 live births) has fallen from 85 in 1970 to 26 in 2004.[48] The adult literacy rate has also shown significant progress, rising from 78.3% in 1990 to 90.9% in 2004.[49] These tangible gains in standard of living have served to compliment the continued strong economic growth – 10.1% GDP in 2004, 9.9% in 2005.[50]

Nevertheless, as China continues to dismantle SOEs, end protection for domestic firms and implement austerity measures, much of the social-welfare system has been dismantled, and the promise of the “iron rice bowl” has long passed. Millions of Chinese workers have been laid off over the past 5-years, a trend that will no doubt continue as China gradually dismantles state-control over the economy.[51] Due to imbalanced growth, more than 135-million people (heavily concentrated in the interior regions) continue to live off less than $1/day.[52] Economic liberalization has also brought the inevitable consequence of increased wealth disparity, as China’s overall Gini index has increased from 35 in 1990 to 45 in 2003.[53] To place this rating in perspective, the richest 20% of the population controls 50% of income and consumption, while the poorest 20% have only 4.7%.[54] Furthermore, China’s rapid growth has severely depleted natural resources and led to large scale environmental destruction - the inevitable byproduct of rapid industrial development, which will likely result in major health crises down the road.[55]

China’s 11th Five Year Plan (2006-2010) aims to achieve an annual GDP growth of 7.5%, with the goal of doubling the 2000 GDP by 2010, while reducing energy consumption per unit of GDP by 20%, and the total discharge of major pollutants by 10%.[56] The plan also includes rebalancing the pattern of growth, extending reforms and openness, constructing a “new socialist countryside,” promoting more balanced development and increasing the nation’s capacity for independent innovation.[57] Despite attempts to limit governmental involvement in economic development, it is likely that China’s government will be forced to play an integral role in assuring that economic reform can proceed without provoking a major social backlash or environmental disaster.

The United States: 1986-Present

Like that of the PRC, the economic system of the United States is extremely complex, as it is currently the largest and most advanced economy in the world. As mentioned, the crises of the Keynesian period which had monopolized US political economic development for more than three-decades was countered by Reagan’s shift in economic policy (cutting taxes, governmental deregulation, adopting austerity measures, tackling inflation via the Federal Reserve) which curbed inflation but led to a spike in the national debt and a rise in wealth disparities. Six years into Reagan’s presidency, in Fiscal Year 1986, the US GDP stood at 4,427,700 (million USD) with a growth rate of 3.4%.[58] While the economy had grown, so too had the national debt, which rose from 909,041 (million USD) – 33.3% GDP in 1980, to 2,120,501 (million USD) – 48.1% GDP, in 1986.[59] While the period in question was presided over by four different presidents, the fundamental tenets established by Reagan - governmental non-interference, open markets, tax-cuts, austerity and private enterprise - has continued to dominate the nation’s political economic development.

Though growth remained steady through the conclusion of Reagan’s tenure in office, the onset of the 1990s brought growth to an abrupt halt, as growth rates fell from 3.5% in 1989, to 1.9% in 1990 and -0.2% in 1991.[60] As corporate stocks began to plummet, “corporate raiders” emerged to buy-up failing companies, restructuring them or dismantling them outright.[61] Poorly managed companies were restructured to regain profitability and others were sold off so that investors could redirect funds, however the economic boost came at the price of a significant loss of jobs.[62] In addition, savings and loan scandals placed many financial institutions in jeopardy, and the subsequent bailout cost American taxpayers billions of dollars. The economy staggered in the latter half of 1991 and continued to decline in 1992.

From this point, I would like to shift focus to 3 key themes which I have found to be the most significant political economic developments within the United States. The first is the launching of NAFTA and the implications of bilateral economic agreements for the US economy. Second, I would like to discuss the maintenance of neoliberal economic policies and the implications for the future. Finally, I will discuss the economic boom from 1995-2000 and the subsequent recession, as well as the lessons we might draw for future political economic development. I will conclude the discussion with a summation of current trends and what the future may entail for the development of the US economy.

The establishment of the North American Free Trade Association (NAFTA), an initiative of former president George H. W. Bush, was launched on 1 January, 1994. NAFTA is only one of many regional trade agreements that the US is party to. The onset of NAFTA promised more accessible investment for US corporations and a supplement for Mexican economic development via the mutually beneficial aspects of free trade. NAFTA, however, does not necessarily adhere to the principles of free trade, for example: the US pressured Mexico to end its shipments of low-priced tomatoes to the United States, costing Mexico an estimated $800-million annually, but protecting domestic growers in Florida.[63] In addition to serving as a protectionist measure for US business interests, Cornell University Labor economist Kate Bronfenbrenner revealed another feature of NAFTA in a study commissioned by the NAFTA Labor Secretariat. The agreement serves as a tool for strike-breaking, as about half of union organizing efforts came to be disrupted by threats to shift production to Mexico.[64] Of the drives that nevertheless succeed, employers closed the plants (in whole or in part) at roughly three-times the pre-NAFTA rate (roughly 15% of the time).[65] Indeed, early in 1995 a study conducted by two economists for the Institute of Policy Studies found that NAFTA had led to a net-loss of some 10,000 US jobs.[66] These developments were lauded in the 1997 Economic Report of the President, which stated that “changes in labor market institutions and practices” are a factor in the “significant wage restraint” that bolsters the health of the economy.[67] In this light, NAFTA and similar trade agreements have served as a catalyst for the massive out-flow of US jobs to areas of lower production costs, bolstering the economy at the expense of domestic labor.

Shifting gears slightly, I will now discuss the continuity of neoliberal policy implementation, as the fundamental tenets established by Reagan continued to dominate the political economic policies of the Clinton administration despite his Democratic Party affiliation. According to the Clinton Doctrine, the victory over the Soviet Union had led to a new mission, to “consolidate the victory of democracy and open markets.”[68] While Clinton’s introduction of a health care reform plan in 1993 indicated that he might be moving away from the Reaganesque “small government” austerity programs, the death of the plan in 1994 marked the end of Clinton’s push for increased social spending. Following the 1994 “Republican revolution” - whereby Republicans led by Newt Gingrich and his “Contract with America” gained control of both the House of Representative and the Senate - Clinton’s stance on social spending seemed to undergo a fundamental shift. After reaching a compromise with the legislature following two partial closures of the federal government, Clinton passed the Republican measure for “welfare reform,” ending the government’s guarantee of financial help for poor families which dated back to the New Deal era.[69] The measure, ostensibly entitled the “Personal Responsibility and Work Opportunity Reconciliation Act of 1996” stipulated that welfare benefits be cut off after two-years, limited lifetime benefits to five-years and limited the allotment of food stamps for people without children to a maximum of three-months within a three-year period.[70] The goal of the legislation was to save $50-billion over a five-year period (less than the cost of a new generation of fighter planes).[71] As if to cement his adherence to neoliberal doctrine Clinton, during his 1996 campaign, proclaimed “the era of big government is over.”[72] In the spring of 1997, Clinton scrapped a major component of his education plan ($5-billion to repair crumbling schools), and rejected a proposal to extend health insurance to the nation’s 10.5-million uninsured children.[73] Nevertheless, true to Reagan-era doctrine, the government continued to spend at least $250-billion per year on defense.[74]

Despite Clinton’s assault on social spending, he was lauded for presiding over a period of strong economic growth, as well as wiping out the budget deficit by 1998. Although Clinton had expressed disdain for “big government” he, like Reagan, relied heavily on the Federal Reserve to regulate the overall pace of economic activity. I would now like to turn to the economic boom from 1995-2000 and some of the factors that contributed to this period of growth. I will also discuss the end of the boom, the subsequent recession, and some possible undertakings for the US economy to achieve a sustainable growth pattern for the future. The discussion will focus on two integral components of the economic boom - productivity growth and consumption growth.
Productivity growth is an increase in productive capacities via improved technologies, production facilities and workforce quality. Consumption growth is an increase in the amount of goods and services consumed through the market.

The period from 1991-1995 was characterized by sluggish economic, employment and wage growth – prerequisites for low levels of consumption growth; whereas the period from 1996-2000 was marked by accelerated economic, employment and wage growth – prerequisites for high levels of consumption growth.[75] Accordingly, productivity growth had averaged 1.5% in the first period and increased to 2.5% in the second period.[76] The innovations in telecommunications, computer hardware and software, networking and so forth, which sparked the 1996-2000 economic boom fueled the increasingly high rates of consumption, which in turn fueled investment and led to further productivity growth. As consumption accelerated, so too did investment, however high rates of consumption became dependent on consumer debt, and by the end of 2000 households had reached historically high levels of debt service burdens.[77] With an increasing percentage of household income dedicated to servicing debt, consumption came to a relative halt.[78] As a measure of the importance of consumption to economic growth, consider that by 2000 consumption accounted for a striking 68% of GDP.[79] Consumption, as we have seen, can not be sustained for a long period by consumer debt, and thus requires sustained levels of income growth.[80] Perhaps the Federal Reserve’s anti-inflationary policies inherited from the Regan-era reforms should be revamped to consider full-employment on an equal par with controlling inflation, creating a situation whereby sustained consumption leads to sustained investment and productivity growth.

A second factor which should be considered regarding the economic boom is the role of public investment in expanding technology and productivity growth. While private investment was instrumental in accelerating productivity growth, it was public investment via government-funded research and development (R&D), defense contracts and university research that sparked the explosion of new technologies in the first place.[81] If government funding in education and R&D is expanded and properly utilized, perhaps new technologies and innovations can fuel increased productivity growth, which may in turn create high levels of employment, high wages and high levels of income growth giving rise to sustainable levels of consumption. If so, the United States may be able to embark on a sustained period of economic growth.

Unfortunately, the neoliberal trend against government participation in the economy has led to a situation whereby federal R&D spending has dipped below 1% of GDP.[82] Furthermore, despite the economic recovery (entering its 4th year in 2005), real median income among the working-age population fell by $600 (1.2%) in 2004 and real median income for non-elderly households declined by $275 (0.5%) in 2005.[83] In fact, as of 2005 real median income has fallen by $2,000 (3.7%) since 2001, while the percentage of the population living in poverty rose from 11.7% in 2001 to 12.7% in 2005.[84] Such conditions are, unfortunately, not conducive to high levels of consumption.


In concluding this broad survey on political economic development in the United States and China from 1986-2006, I would first like to express my regret for not engaging the dynamics and interplay between job-loss in the United States and exponential economic growth in China. There are numerous aspects of the utmost significance to this complex and multifaceted discussion for which time will not allow. Nevertheless, it is my hope that through this basic survey some important trends have become apparent. Since the early 1980s the United States, China and a vast majority of the world’s states have undergone an unprecedented transformation which has significantly curtailed the role of governments while strengthening the hand of massive transnational corporations and their clients in the growing network of international financial institutions. As this transition unfolds, the extent to which the national governments can combat the excesses of increasingly unrestrained capitalism will be a crucial factor in determining the future political economic development of each state as it establishes its place within the emerging world framework.

[1] Melanie Manion, Politics in China, in Longman Custom Comparative Politics ed. Gabriel A. Almond et al, comp. Ricardo Laremont (Boston: Pearson Custom Publishing, 2006), 254.
[2] Manion, 256
[3] Commanding Heights: The Battle for the World Economy – Overview: China, (2002), (accessed March 16, 2007)
[4] Manion, 256
[5] Manion, 257
[6] Commanding Heights – China: Overview
[7] Manion, 257
[8] Commanding Heights – China: Economy
[9] Manion, 269-278
[10] Commanding Heights – United States: Economic
[11] Ibid.
[12] United Nations Statistics Division: National Accounts Main Aggregates Database (January, 2007). (accessed March 16, 2007).
[13] Ibid.
[14] Ibid.
[15] “Historical Tables, Budget of the United States Government, Fiscal Year 2007.” Section 7 – Federal Debt. U.S. Government Printing Office, Washington (2006). (accessed March 18, 2007), 126.
[16] Ibid.

[17] Philip McMichael, Development and Social Change: A Global Perspective 3rd ed. (Thousand Oaks: Pine Forge Press, 2004), 153-4.
[18] Manion, 253
[19] United Nations Statistics Division
[20] Lowell Dittmer, “China in 1988: The Continuing Dilemma of Socialist Reform,” Asian Survey, Vol. 29, No. 1, A Survey of Asia in 1988: Part I. (January 1989), (accessed March 21, 2007), 15-27.
[21] Dittmer, 15
[22] Ibid.
[23] Ibid.
[24] Ibid.
[25] Dittmer, 19
[26] Dittmer, 21
[27] Ibid.
[28] Dittmer, 23-4
[29] Nicholas R. Lardy and Barry Naughton, “China’s Emergence and Prospects as a Trading nation,” Brookings Papers on Economic Activity, Vol. 1996, No. 2. (1996), (accessed March 20, 2007), 279.
[30] Ibid.
[31] Lardy, 286
[32] Lardy, 297
[33] Lardy, 279
[34] Lardy, 298-9
[35] Lardy, 278
[36] Lardy, 294
[37] Lardy, 278
[38] Ibid.
[39] David Zweig, “China's Stalled "Fifth Wave": Zhu Rongji's Reform Package of 1998-2000,” Asian Survey, Vol. 41, No. 2. (March - April 2001), (accessed March 22, 2007), 233.
[40] Zweig, 237
[41] Zweig, 244-6
[42] Zweig, 244
[43] Zweig, 245
[44]“China's WTO Entry Sparks Rapid Economic Expansion: Report,” Xinhua News Agency (December, 2006), Available online at (accessed March 21, 2007).
[45] United Nations Statistics Division
[46] United Nations: World Development Indicators 2006.
[47] UN (United Nations). 2006c. Millennium Indicators Database. Department of Economic and Social Affairs, Statistics Division, New York.[http://]. Accessed July 2006. , based on data from the Food and Agriculture Organization (FAO).
[48] UN (United Nations). 2006c. Millennium Indicators Database. Department of Economic and Social Affairs, Statistics Division, New York.[http://]. Accessed July 2006. , based on data from a joint effort by the United Nations Children's Fund (UNICEF) and the World Health Organization (WHO).
[49] UNESCO (United Nations Educational, Scientific and Cultural Organization) Institute for Statistics. 2006a. Correspondence on adult and youth literacy rates. April. Montreal.
[50] United Nations Statistics Division
[51] World Bank. 2006. World Development Indicators 2006. CD-ROM. Washington, D.C.
[52] Ibid.
[53] Stephen Roach, “Globalization’s New Underclass,” (Republished with permission from Japan Focus), Asia Times Online, (April 26, 2006), (accessed, March 20, 2007).
[54] World Bank.
[55] Ibid.
[56] Ibid.
[57] Ibid.
[58] United Nations Statistics Division
[59] Historical Tables…
[60] United Nations Statistics Division
[61] “The US Economy: A Brief History,” U.S. Department of State's Bureau of International Information Programs. (accessed March 23, 2006).
[62] Ibid.
[63]Noam Chomsky, Profit Over People: Neoliberalism and Global Order, (New York: Seven Stories Press, 1999), 84.
[64] Chomsky, 104
[65] Ibid.
[66] Howard Zinn, A People’s History of the United States: 1492-Present, (New York: HarperCollins, 2005), 658.
[67] Chomsky, 104
[68] Chomsky, 92
[69] Zinn, 649
[70] Ibid.
[71] Ibid.
[72] Zinn, 650
[73] Zinn, 651
[74] Ibid.
[75] Christian Weller, “Learning Lessons from the 1990s: Long-Term Growth Prospects for the U.S.,” (originally published in The New Economy Vol. 9, No. 1, in March 2002) The Economic Policy Institute (2007) (accessed March 21, 2007).
[76] Ibid.
[77] Ibid.
[78] Ibid.
[79] Ibid.
[80] Ibid.
[81] Ibid.
[82] Ibid.
[83] “Economic Recovery Failed to Benefit Much of the Population in 2004,” Center on Budget and Policy Priorities, (August 30, 2005), (accessed March 22, 2007).
“Poverty Remains Higher, and Median Income for Non-Elderly is Lower Than When Recession Hit Bottom: Poor Performance Unprecedented for Four-Year Recovery Period,” Center on Budget and Policy Priorities, (revised September 1, 2006), (accessed March 22, 2007).

[84] “Economic Recovery…”


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