"The world [is] investing too little," according to one prominent
economist. "The current situation has its roots in a series of crises
over the last decade that were caused by excessive investment, such as
the Japanese asset bubble, the crises in Emerging Asia and Latin
America, and most recently, the IT bubble. Investment has fallen off
sharply since, with only very cautious recovery."

These are not the words of a Marxist economist describing the crisis of
overproduction but those of Raghuram Rajan, the new chief economist of
the International Monetary Fund (IMF). His analysis, though a year old,
continues to be on the mark. 1

Overproduction: the key trend in the global economy

Overcapacity has been the key link between the global economy in the
Clinton era and the Bush period. The crisis has been particularly
severe in the so-called core industries. At the beginning of the 21st
century, the US computer industry's computer capacity was rising at 40
per cent annually, far above projected increases in demand. The world
auto industry was selling just 74 per cent of the 70.1 million cars it
sold each year, creating a profitability crunch for the weakest
players, like former giant General Motors, which lost $10.6 billion in
2005, and Ford, which lost $7.24 billion in the first nine months of
2006. In steel, global excess capacity neared 20 per cent. It was
estimated, in volume terms, to be an astounding 200 million tons, so
that plans by steel producing countries to reduce capacity by 100
million tons by 2005 would still leave "a sizeable amount of capacity
which…would not be viable." In telecommunications, according to
Robert Brenner, overcapitalization has resulted in a "mountainous glut:
the utilization rate of telecom networks hovers today at a disastrously
low 2.5-3 per cent, that of undersea cable at just 13 per cent."

As former General Electric Chairman Jack Welch put it, there has been "excess capacity in almost every industry."

Global overcapacity has made further investment simply unprofitable,
which significantly dampens global economic growth. In Europe, for
instance, GDP growth has averaged only 1.45 per cent in the last few
years. And if countries are not investing in their economic futures,
then growth will continue to stagnate and possibly lead to a global

China and the United States, however, appear to be bucking the trend,
though GDP growth in the US has flattened very recently. But rather
than signs of health, growth in these two economies–and their ever
more symbiotic relationship with each other–may actually be an
indicator of crisis. The centrality of the United States to both global
growth and global crisis is well known. What is new is China's critical
role. Once regarded as the greatest achievement of this era of
globalization, China's integration into the global economy is,
according to an excellent analysis by political economist Ho Fung Hung,
emerging as a central cause of global capitalism's crisis of
overproduction. 2

China and the crisis of overproduction

China's 8-10% annual growth rate has probably been the principal
stimulus of growth in the world economy in the last decade. Chinese
imports, for instance, helped to end Japan's decade-long stagnation in
2003. To satisfy China's thirst for capital and technology-intensive
goods, Japanese exports shot up by a record 44%, or $60 billion.
Indeed, China became the main destination for Asia's exports,
accounting for 31% while Japan's share dropped from 20 to 10%. As
Singapore's Straits Times pointed out, "In country-by-country profiles,
China is now the overwhelming driver of export growth in Taiwan and the
Philippines, and the majority buyer of products from Japan, South
Korea, Malaysia, and Australia"

At the same time, China became a central contributor to the crisis of
global overcapacity. Even as investment declined sharply in many
economies in response to the surfeit of productive capacity,
particularly in Japan and other East Asian economies, it increased at a
breakneck pace in China. Investment in China was not just the obverse
of disinvestment elsewhere, although the shutting down of facilities
and sloughing off of labor was significant not only in Japan and the
United States but in the countries on China's periphery like the
Philippines, Thailand, and Malaysia. China was significantly beefing up
its industrial capacity and not simply absorbing capacity eliminated
elsewhere. At the same time, the ability of the Chinese market to
absorb its own industrial output was limited.

Agents of overinvestment

A major actor in overinvestment was transnational capital. In the late
1980s and 1990s, transnational corporations (TNCs) saw China as the
last frontier, the unlimited market that could endlessly absorb
investment and endlessly throw off profitable returns. However, China's
restrictive rules on trade and investment forced TNCs to locate most of
their production processes in the country instead of outsourcing only
selected number of them. Analysts termed such TNC
production activities "excessive internalization." By playing according
to China's rules, TNCs ended up overinvesting in the country and
building up a manufacturing base that produced more than China or even
the rest of the world could consume.

By the turn of the millennium, the dream of exploiting a limitless
market had vanished. Foreign companies headed for China not so much to
sell to millions of newly prosperous Chinese customers but rather to
make China a manufacturing base for global markets and take advantage
of its inexhaustible supply of cheap labor. Typical of companies that
found themselves in this quandary was Philips, the Dutch electronics
manufacturer. Philips operates 23 factories in China and produces about
$5 billion worth of goods, but two thirds of their production is
exported to other countries.

The other set of actors promoting overcapacity were local governments
which invested in and built up key industries. While these efforts are
often "well planned and executed at the local level," notes Ho-fung
Hung, "the totality of these efforts combined…entail anarchic
competition among localities, resulting in uncoordinated construction
of redundant production capacity and infrastructure."

As a result, idle capacity in such key sectors as steel, automobile,
cement, aluminum, and real estate has been soaring since the mid-1990s,
with estimates that over 75% of China's industries are currently
plagued by overcapacity and that fixed asset investments in industries
already experiencing overinvestment account for 40-50% of China's GDP
growth in 2005. China's State Development and Reform Commission
projects that the automobile industry will produce double what the
market can absorb by 2010. The impact on profitability is not to be
underestimated if we are to believe government statistics: at the end
of 2005, Hung points out, the average annual profit growth rate of all
major enterprises had plunged by half and the total deficit of losing
enterprises had increased sharply by 57.6%.

The low-wage strategy

The Chinese government can mitigate excess capacity by expanding
people's purchasing power via a policy of income and asset
redistribution. Doing so would probably mean slower growth but more
domestic and global stability. This is what China's so-called "New
Left" intellectuals and policy analysts have been advising. China's
authorities, however, have apparently chosen to continue the old
strategy of dominating world markets by exploiting the country's cheap
labor. Although China's population is 1.3 billion, 700 million people
— or over half — live in the countryside and earn an average of just
$285 a year, according to some estimates. This reserve army of rural
poor has enabled manufacturers, both foreign and local, to keep wages

Aside from the potentially destabilizing political effects of
regressive income distribution, the low-wage strategy, as Hung points
out, "impedes the growth of consumption relative to the phenomenal
economic expansion and great leap of investment." In other words, the
global crisis of overproduction will worsen as China continues to dump
its industrial production on global markets constrained by slow growth.

Chain-gang economics

Chinese production and American consumption are like the proverbial
prisoners who seek to break free from one another but can't because
they're chained together. This relationship is increasingly taking the
form of a vicious cycle. On the one hand, China's breakneck growth has
increasingly depended on the ability of American consumers to continue
their consumption of much of the output of China's production brought
about by excessive investment. On the other hand, America's high
consumption rate depends on Beijing's lending the US private and public
sectors a significant portion of the trillion-plus dollars it has
accumulated from its yawning trade surplus with Washington.

This chain-gang relationship, says the IMF's Rajan, is "unsustainable."
Both the United States and the IMF have decried what they call "global
macroeconomic imbalances" and called on China to revalue the renminbi
to reduce its trade surplus with the United States. Yet China can't
really abandon its cheap currency policy. Along with cheap labor, cheap
currency is part of China's successful formula of export-oriented
production. And the United States really can't afford to be too tough
on China since it depends on that open line of credit to Beijing to
continue feeding the middle-class spending that sustains its own
economic growth.

The IMF ascribes this state of affairs to "macroeconomic imbalances."
But it's really a crisis of overproduction. Thanks to Chinese factories
and American consumers, the crisis is likely to get worse.


1 Raghuram Rajan, Global Imbalances: An Assessment International Monetary Fund, Washington, DC, October 2005,

2 Ho-Fung Hung, "The Rise of China and the Global
Overaccumulation Crisis," Paper presented at the Global Division of the
Annual Meeting of the Society for the Study of Social Problems," August
10-12, 2005, Montreal, Canada.