Is China already part of the industrial core?

My occasional forays into economic theory have led me to the intriguing work of Adolph Löwe, in particular his 1976 book The Path of Economic Growth (Cambridge University Press). Being a sociologist, I have very little knowledge of how Löwe’s work is currently received in the economics field, though I believe many theoretically and historically sensible economists consider it a classic work on the issue of economic growth. (Ironically, in 1935 Löwe published Economics and Sociology: A plea for cooperation in the social sciences, which called for greater incorporation of insights from sociology by economists, and vice versa.) In The Path of Economic Growth, Löwe is interested in developing a model of economic growth, which for Löwe, a “classic” neoclassical economist (along the lines of Walras, Marshal, Keynes, Schumpeter, Kalecki, Kuznets, Minsky, and others economists today considered “unorthodox” by the dominant neoliberal orthodoxy) is defined as the process of ever-growing industrialization, or the ever growing mass of fixed capital.

For Löwe, as modern industry expands, so does consumption, and with it so does the scale of the economy. He develops a model of industrial development which draws from Marx (whom Löwe credits for developing the two-sectoral model of the economy) by proposing an economic industrial model consisting of Marx’s classic sectors, production and consumption, but further subdividing the productive sector into that producing consumables and that producing industrial goods, or what Marx once called “the means of production of the means of production.” Industrial production is therefore divided into consumer-good (CG) and equipment-good (EG) industries (the acronyms are mine, not Löwe’s).

For Löwe, an industrial subsector producing and reproducing the stock of fixed capital (tools, machinery, equipment required for the industrial process) – what is sometimes also referred to as capital goods – is central in any process of growth, because it conditions the expansion of the other sectors. A closed economy which contains EG and CG industries, secures the constant flows of inputs and labor, is a system capable of its own reproduction, because it can fulfill both its needs of consumption and of the replenishment of its industrial goods. Such a hypothetical system is, in Löwe’s terms, a system in stationary equilibrium. One can, in formal terms, define the necessary cycles of inputs and outputs to develop a formal model of self-perpetuating industrial economy in stationary equilibrium, and, by building on this basic model, deduct the terms of (national) industrial growth. For Löwe, the economy in this model need not necessarily be a competitive/market-based one. A centrally planned system would behave in the very same way, given that the basic sectoral subdivisions apply equally in a planned industrial economy as they do in a competitive/marked-based one.

I will not go any further into Löwe’s interesting model – one of the reasons being that I am still working through his book. Of course, there is an underlying problem in Löwe’s assumption of a closed (national) economic model. We know, both from current processes as well as history that industrial capitalism never developed as a closed (national) system. There might be question about the extent to which Löwe considers the disruptive effects of technological (production process) innovation, not to mention that the formal model, while a useful theoretical exercise, leaves us with few tools to understand the growth of empirical economic systems, especially of industrial capitalism, which is perpetually crisis-prone.

In any event, the conceptual division between CG and EG industries is an interesting and perhaps useful one. In particular, a long-standing theoretical problem in world-systems theory is the division of world regions into core, periphery and semi-periphery. For Wallerstein (1979), the division involved the distribution of whole units, which were nation-states. For Arrighi (1990), the division involved distinguishing between “core-like” and “periphery-like” economic activities. While Arrighi’s approach is better suited for an increasingly globalized economy where “deterritorialized” systems of production have emerged worldwide, Arrighi never quite specifies what are the “core-like” and “periphery-like” activities.

Enter Löwe. His simple division of industrial sectors into CG and EG industries provides a simple but effective way of measuring the industrial hierarchy of the world economy. Hence the title of this posting, and hence China.

In trying to figure out a way to measure world industrial output in terms of EG industries, I went into the UN COMTRADE database and pulled out time-series data on exports, and in particular examined exports of industrial machinery, based on HS category 82 (“Nuclear reactors, boilers, machinery, etc.”). I believe this category covers most exports of industrial machinery used in production processes, though there may be some items included which do not quite fit the criteria. In any event, this is a useful rough measure. These numbers, of course, do not reflect total world output since they are a measure of exports only, but they indicate the economies which serve as industrial suppliers to the world. Since the majority of the countries of the world are reliant on imports of industrial equipment to industrialize their economies (as well as replenish the stock of industrial machinery which depreciates or becomes outdated as new technologies are introduced), those who supply the machinery necessary for industrial growth clearly enjoy a dominance in the process of global industrialization.

According to the data, China has already overtaken the US, Japan and Germany as the largest exporter of industrial machinery (see graph). And this from quite a low position as late as 2001.

industrial machinery exports graph

China’s rise as an exporter of industrial machinery is dramatic. In 1992, China’s exports of industrial machinery were around $3 billion, a meager 3% of the $84 billion each exported by leading exporters, the US and Germany (with Japan not far behind). By 2004, China had already overtaken Japan, by 2006 surpassed the US, and in 2008 overtook Germany as the world’s leading exporter of industrial machinery. After the market collapses of 2008 caused by the global financial crisis, China’s exports recovered rapidly and in 2011 amounted to $353 billion, that is, nearly $100 billion more than Germany and $150 billion more than the US.

This entails several things. First, to ask whether China is “core” or “semiperipheral” seems like the wrong question. Clearly, a number of core industrial activities have emerged in China (in case the reader is curious, China also dominates the list of electronics exporters), making China the world’s largest supplier of industrial equipment. In the industrial sense, during the course of the 2000s China clearly has moved to the core of the world economy, not only by its current dominance in low-cost CG, but also by the volume of EG it exports throughout the world.

One might retort that China lacks its Siemenses, Mitsubishis, and Caterpillars, and thus lacks both firms with the global brand recognition and the high value-added activities which characterize US, German and Japanese firms. That may be true, but that may also indicate the limitations of the data used here, which provides information about total volume of trade but not of the structure of the industrial sectors which produce the goods. In these terms, an analysis of the market power of firms may be more pertinent to what we want to know than simple aggregates of exports (suggesting that “core-like” and “periphery-like” activities have firm- and market-level implications, and are not only state-based designations). To understand this, one might invoke Harrison White’s (1981) production schedule, which lays out firms in a production market in terms of price and revenue. In global supply markets, it may be that Chinese firms occupy a position that is low on the price axis, but also, on a firm by firm basis, low on the revenue axis of the schedule, while individual US, German and Japanese firms still command market power in terms of revenue even while charging higher prices for roughly equal goods. In these terms, one could expect Chinese producers to export more volume and, in the aggregate, earn more total revenue, but that does not translate into market dominance of specific industrial sectors. It is clear, however – and one gets the impression simply by reading the business pages of any newspaper – that the low cost/low price formula that Chinese firms have introduced have disrupted global markets in fundamental ways. The data shows that over the last decade this transformation has crept into the heart of industrial production, that of the tools and machinery required for industry.

A second implication is that, during the 2000s, the world economy entered a phase of what can be termed “industrialization with Chinese characteristics.” That is, Chinese manufacturing is no longer industrializing China alone, but provides the means for industrializing other parts of the world. For most of the twentieth century, if a developing state wished to industrialize, it had to rely almost solely on US, west European or (after the 1960s) Japanese equipment and technology (not to mention financing, training, logistics, etc.). Even industrialization in the Soviet Union in the 1930s would not have been possible without German machinery. In the postwar era until about the 1980s, the Soviet Union and the industrialized states of eastern Europe provided an alternative to Third World countries seeking to industrialize while avoiding dependence on the West – though Soviet technology in many sectors could not compete with that of the West. The rise of Chinese “industries of the means of production” now offer an alternative – and evidently one chosen by many countries – for states seeking to industrialize or business owners seeking to equip or upgrade production facilities. This also ties in many ways to the politics of foreign aid. Typically, foreign aid, while helping to “develop” a poor or developing society, is also an instrument of expanding potential markets for the domestic firms of the aid provider. For example, the US development agency, USAID, may provide assistance for agricultural development to a poor country, but the “catch” is that, in, say, supplying fertilizers, USAID will contract a US producer. Thus, while seemingly aiding a poor country with developing its agriculture, USAID also helps create a potential new market for US fertilizer producers which persists long after USAID has completed its aid program. EU aid rules similarly privilege EU-based firms and organizations in supplying goods or providing services for its aid projects around the world.

A similar process could take place with Chinese foreign aid – and is probably already happening in places like Africa, where Chinese firms are aggressively expanding their presence. Possessing the financial means, the market for goods, and the equipment goods industries that will supply the machinery for industries of many types, China may provide a new boost to industrialization in places far from its shores. That means that, put in Löwe’s terms, a new, China-driven cycle of world growth may be in the making – indeed, already taking place.

References

Arrighi, Giovanni. 1990. “The Developmentalist Illusion: A Reconceptualization of the Semiperiphery.” in Semiperipheral States in the World Economy, edited by William G. Martin. New York: Greenwood Press.

Wallerstein, Immanuel. 1979. “Dependence in an Interdependent World: The Limited Possibilities of Transformation within the Capitalist World-Economy.” in The Capitalist World Economy, edited by Immanuel Wallerstein. Cambridge: Cambridge University Press.

White, Harrison. 1981. “Where Do Markets Come From?” American Journal of Sociology 87(3):517-47.

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About Besnik Pula

Assistant Professor at the Department of Political Science at Virginia Tech. Specializes in political economy, comparative development and postsocialist transformations. All views expressed here are strictly my own.

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