The Third International after Lenin

Thursday, November 25, 2010

.China: Has there been a Counter-revolution?

The Chinese Economic Miracle – Triumph for Capitalism or the Planned Economy?

“At what point can one say that a qualitative transformation [to capitalism] has occurred? If the majority of the economy, including all the decisive sectors, were firmly in the hands of private owners, this would represent a fundamental change. The law of motion of a planned economy would be replaced by those of the market.”

Ted Grant: Russia: From Revolution to Counter-revolution, 1997

“The Marxist thesis relating to the catastrophic character of the transfer of power from the hands of one class into the hands of another applies not only to revolutionary periods, when history sweeps madly ahead, but also to the periods of counterrevolution, when society rolls backwards. He who asserts that the Soviet government has been gradually changed from proletarian to bourgeois is only, so to speak, running backwards the film of reformism.”

Leon Trotsky: The Class Nature of the Soviet State, 1933


1. Theory of the Permanent Revolution

2. China’s Economic Structure

State Owned Enterprises

Private Sector

Township and Village Enterprises

The full picture

3. What is a Transitional Economy?

Autarchy vs. World Market

State Control over Prices vs. Law of Value

Complete Nationalisation vs. Commanding Heights

China vs. Soviet Union

4. More about the Laws of Motion of a Transitional Economy

Primitive Socialist Accumulation



The Command Economy

5. The Class Character of the Chinese State

Has there been a Counter-revolution?

6. Grounds for Claiming China is Capitalist

South Korea, Japan, Italy, Russia, India, and others

Luxury and Misery


7. Perspectives


5. The Class Character of the Chinese State

In The Revolution Betrayed Trotsky, leaning on Marx and Lenin, develops the contradictory character of the state apparatus in a transitional society.

“A socialized state even in America, on the basis of the most advanced capitalism, could not immediately provide everyone with as much as he needs, and would therefore be compelled to spur everyone to produce as much as possible. The duty of the stimulator in these circumstances naturally falls to the state, which in its turn cannot but resort, with various changes and mitigations, to the method of labour payment worked out by capitalism. It was in this sense that Marx wrote in 1875:

’Bourgeois law … is inevitable in the first phase of the communist society, in that form in which it issues after long labour pains from capitalist society. Law can never be higher than the economic structure and the cultural development of society conditioned by that structure.’

In explaining this remarkable line, Lenin adds: ‘Bourgeois law in relation to the distribution of the objects of consumption assumes, of course, inevitably a bourgeois state, for law is nothing without an apparatus capable of compelling observance of its norms. It follows (we are still quoting Lenin) that under Communism not only will bourgeois law survive for a certain time, but also even a bourgeois state without the bourgeoisie!’

This highly significant conclusion, completely ignored by the present official theoreticians, has a decisive significance for the understanding of the nature of the Soviet state – or more accurately, for a first approach to such understanding. Insofar as the state which assumes the task of socialist transformation is compelled to defend inequality – that is, the material privileges of a minority – by methods of compulsion, insofar does it also remain a ‘bourgeois’ state, even though without a bourgeoisie. These words contain neither praise nor blame; they name things with their real name.

The bourgeois norms of distribution, by hastening the growth of material power, ought to serve socialist aims – but only in the last analysis. The state assumes directly and from the very beginning a dual character: socialistic, insofar as it defends social property in the means of production; bourgeois, insofar as the distribution of life’s goods is carried out with a capitalistic measure of value and all the consequences ensuing there from. Such a contradictory characterization may horrify the dogmatists and scholastics; we can only offer them our condolences.”

Traditionally the old Stalinist States were described as “deformed workers states”. This is an apt description, but it is easy to confuse a description with an analysis. There are not three categories of states: workers states, bourgeois states, and deformed workers states. There are only two categories – workers states and bourgeois states – both which contain various amounts of each other. Before the revolution the state will be bourgeois with certain elements of a workers state, for example nationalized industries, national health service, state nurseries; and after the revolution there will be a workers state with elements of the bourgeois state such as bourgeois distribution, bourgeois law and bureaucracy.

Even with a healthy workers state, the bourgeois parts of the state will wither away only on the basis of the development of the productive forces. In fact, the state as such withers away. As Engels put it, “State interference in social relations becomes, in one domain after another, superfluous, and then dies down of itself. The government of persons is replaced by the administration of things, and by the conduct of processes of production. The state is not ‘abolished’. It withers away.”[64]

However, if the revolution is isolated in a backward country the elements of the “bourgeois state without a bourgeoisie” within the workers state can acquire such a scope that they form a hardened crust on the workers state that can only be blown away by a political revolution. That is the difference between a deformed workers state (a description that was not formulated until after Trotsky’s death) and a healthy workers state. Politically it is a decisive difference.

What then is the ‘workers’ part of the ‘deformed workers state’? Simply, that despite everything else being bourgeois, the state is based on a mode of production where the public ownership of the means of production is dominant. That is all. Not the symbols of the state, not the speeches and intentions of the leaders, not equality, not justice. And in China state ownership and the planned economy is still decisive. Even if all the leading layers of the bureaucrat wants to be a capitalist that will not transform the character of the state.

In a discussion at the 11th congress of the Bolsheviks in March 1922 about the results of the first year of the New Economic Policy, NEP, Lenin made it clear that intentions and wishes do not decide historical developments.

“History knows all sorts of metamorphoses. Relying on firmness of convictions, loyalty, and other splendid moral qualities is anything but a serious attitude in politics. A few people may be endowed with splendid moral qualities, but historical issues are decided by vast masses, which, if the few do not suit them, may at times treat them none too politely.”[65]

One could just as well replace “splendid moral qualities” with “despicable moral qualities” or “counter-revolutionary intentions”. Wishes do not decide historical issues.

The background to the discussion was that in 1921, after two years of civil war, the economy of the young Soviet Republic was in tatters. The Bolshevik government was forced to retreat in order to get the economy started again. The NEP made all kinds of concession to the market and to foreign and domestic capitalists. By 1922 the NEP had resulted in some successes, but problems had also begun to arise. The forces of counter-revolution had been strengthened. Even some reactionaries began to support the government, thinking that the NEP would lead to restoration. One of them was Nikolay Ustryalov who had been a Constitutional-Democrat, a bourgeois, and supported the intervention of imperialist armies during the civil war. He said: “I am in favour of supporting the Soviet government. I am in favour of supporting Soviet power because it has taken the road that will lead it to the ordinary bourgeois state.”[66]

Lenin, by pointing out that history knows all kinds of metamorphoses, accepted that Ustryalov could be right. By allowing capitalism to develop, the workers state could end up fostering the very forces that would end up destroying it. However, his recipe for dealing with this possibility was not new restrictions on the market, but that the state sector should learn to successfully compete and trade with the private sector. He said that it was not enough for communists in administrative positions to have the right intentions. They had to learn how to run state businesses, how to buy and sell on the domestic and the world market. Lenin declared that that should be the main task that the congress should decide upon. Only in that way could the state sector be strengthened and survive and eventually destroy the capitalists in Russia.

The Chinese bureaucracy appears to have taken Lenin’s advice seriously. They are busily developing the state sector so that it can compete. Since the seventies the state sector in China has undergone an expansion in absolute terms unprecedented in history. But it has also risen in proportionate terms. In 1978 the SOEs created about one tenth of GDP. Thirty years later that has risen to a third. And today many are equipped to face international competition.

We cannot look into their brains and discover what their real intentions are, but at the present time it is far from likely that the millions of members of the Chinese Communist Party want to go over to capitalism. Why should they? Most likely there are even less bureaucrats that want capitalism than want to return to the old command economy. Those that have lost out on the changes over the past decades logically would prefer to go back, rather than advance into the unknown.

But whatever goes on in their minds, it is not decisive in any way, for determining the present class character of the state, nor where it is heading.

Has there been a Counter-revolution?

The preceding chapters show that there is nothing in principal which excludes the changes in the Chinese economy in the past three decades from being compatible with a planned economy. On the contrary, participating in the world economy, market prices and denationalisation of small businesses, the strengthening of the most important SOEs were necessary reforms to turn a command economy into something that begins to resemble the transitional economy as the old teachers of Marxism described it (without the essential ingredient – workers control and management). The historical, economic, and political reasons for reforms are also explained.

However, could it be that the spread of private property has converted more and more bureaucrats in the state apparatus to capitalism? That they in turn have developed capitalism in a mutually re-enforcing process? Until the point was reached where capitalism became the dominant mode of production and the deformed workers state turned into a bourgeois state?

The same perspective was raised in the thirties vis-à-vis the Soviet Union. Then it was also argued that the development of the bourgeois state went hand in hand with the development of (state) capitalism. (The adding of the word ‘state’ makes no difference, in essence, the argument is the same). Trotsky’s answer to this line of reasoning was clear.

“Against the assertion that the workers’ state is apparently already liquidated there arises, first and foremost, the important methodological position of Marxism. The dictatorship of the proletariat was established by means of a political overturn and a civil war of three years. The class theory of society and historical experience equally testify to the impossibility of the victory of the proletariat through peaceful methods, that is, without grandiose class battles, weapons in hand. How, in that case, is the imperceptible, ‘gradual,’ bourgeois counterrevolution conceivable? Until now, in any case, feudal as well as bourgeois counterrevolutions have never taken place ‘organically,’ but they have invariably required the intervention of military surgery. In the last analysis, the theories of reformism, insofar as reformism generally has attained to theory, are always based upon the inability to understand that class antagonisms are profound and irreconcilable; hence, the perspective of a peaceful transformation of capitalism into socialism. The Marxist thesis relating to the catastrophic character of the transfer of power from the hands of one class into the hands of another applies not only to revolutionary periods, when history sweeps madly ahead, but also to the periods of counterrevolution, when society rolls backwards. He who asserts that the Soviet government has been gradually changed from proletarian to bourgeois is only, so to speak, running backwards the film of reformism.

Our opponents may deny that this is a general methodological proposition and declare that no matter how important in itself it is nevertheless too abstract to solve the question. Truth is always concrete. The thesis of the irreconcilability of class contradictions should and must direct us in our analysis but cannot replace its results. One must probe deeply into the material content of the historical process itself.

We reply, it is true that a methodological argument does not exhaust the problem. But, in any case, it transfers the burden of proof to the opposing side. Critics who consider themselves Marxists must demonstrate in what manner the bourgeoisie that had lost power in a three-years’ struggle could resume this power without any battles.”[67]

As Trotsky points out the methodological argument does not exhaust the question. But, as he also says, there must be very strong arguments and an absolutely sound factual base to claim that China has undergone a “cold transition”, an expression that is not found in the Marxist classics.

From the point of view of the bureaucracy: yes! There can be a cold transition. That much is clear. The bureaucracy lives off the surplus produced by the working class. For them it is fairly irrelevant how that surplus is extracted – through the market mechanism or through the dictatorial powers of the state.

But from the standpoint of the workers a cold transition is excluded as they have to pay a very high price for the counter-revolution. Trotsky spelt it out in The Revolution Betrayed: “Without a planned economy the Soviet Union would be thrown back for decades”. Which is precisely what happened. The Chinese workers will resist that, if they have the means of doing so. Therefore the transition cannot be “cold”.

Stretching over a period of thirty years, there have been a series of peaceful reforms that have simultaneously strengthened the economy and the regime, with only minor and non-violent changes in the apparatus. That does not amount to either revolution or counter-revolution.

In 1997, Ted explained the dynamics of the Chinese situation.

“For the time being, the rapid growth of production is the explanation of the relative stability of the Chinese bureaucracy in contrast to the situation in Russia and Eastern Europe. The ruling elite feel confident in its historic mission. It is motivated, in part of course by the desire to preserve and augment its power, income and privileges, but also by the aim of creating a modern and powerful China (under its control, naturally). The successes of the Beijing regime gives some hope to the rulers of North Korea, Cuba and even perhaps Vietnam, where there has been little or no movement towards capitalism. China remains a point of reference for these regimes. If it were to go towards capitalism, these would also collapse. Yet, this seems unlikely as long as the “old men” remain in control. In common with all the ex-Stalinists, they are guided by purely empirical considerations. They have taken note of the disaster in Russia, and have no intention of going down that road.[68]

Eight years later the tendency’s position on China changed, but in reality there were no events of such a dramatic quality that the analysis needed to be revised. Because the economy continued to surge ahead the bureaucracy remained stable and its self-confidence did not diminish, if anything the opposite. There was no major power struggle when Deng died in 1997. De facto power passed over to Jiang Zemin, former party chief in Shanghai, who had been General Secretary of the Communist Party of China since 1989 and President since 1993. He was in turn replaced by Hu Jintao in 2002-2003 without much fuss and bother.

The only major power struggle in China in the past thirty years was in 1989 when Zhao Ziyang, general-secretary of the Communist Party, was deposed. Hailed in the west for his “support” to students during the Tiananmen Square protests, he was the most pro-capitalist of all the Chinese leaders. When he was party secretary in Sichuan he advocated privatising SOEs that were making huge profits. After losing power in 1989, he spent fifteen years in house arrest before dying in 2005.

In fact, the only major confrontation was eight years before Ted wrote the above lines about China: The Tiananmen Square protests in 1989. But in the main that was not between pro-capitalists and anti-capitalists, but between on the one side workers and students fighting for better living standards and democratic rights and a leading group of the bureaucracy on the other side. If there were pro-capitalist forces involved in that conflict, as there is some evidence for claiming, they were out there in the streets trying to capture the leadership of the movement and lead it towards capitalism, as pro-capitalist sources managed to do successfully in for example East Germany and the Soviet Union during and after 1989. The movement was heavily defeated by the bureaucracy, but that did not strengthen the capitalist counter-revolutionary forces. On the contrary.

Of course, not all processes undergo the transition from quantitative changes to qualitative changes with one big bang. Actually most don’t, especially not complex social processes.

This does not even happen in the classic example of boiling water. If you put a pot of water on to boil, the temperature of the water will gradually increase. When it reaches 100 degrees it will suddenly turn into steam. However, this will not happen all at once. Poof! And the pot is empty. No, as the water approaches 100 degrees, the first bubbles will appear at the bottom of the pot, which is closest to the source of heat. Then fairly rapidly the water will bit by bit be transformed into steam. This might not happen even at one-hundred degrees. If you add salt, this will raise the boiling temperature a degree or two.

If the qualitative change in the case of such a simple process as boiling a pot of water can be drawn out to such an extent, how much truer is this not for social revolution, and counter-revolution, where there are infinitely more variables involved. Yet, that does not make the process “cold”. A great deal of resistance has to be overcome, even if the struggle stretches out over a longer period of time.

The transition from a feudal state to a capitalist state in Germany and Japan was not “cold”. Although the process stretched out over decades, and the feudal state also to a certain extent encouraged the development of capitalism, it still went through a number of violent confrontations – revolutions, wars, coups, uprisings, and restorations – both before and after capitalism became the dominant mode of production. Even in the classic country of bourgeois revolution, France, there was not just one revolution in 1789 that settled the issue. There was also the July revolution of 1830 and the revolution of 1848. All of them fairly violent.

However, Trotsky was bending the stick too far the other way when he writes about the need for “military surgery” to achieve revolution or counter-revolution. This is not strictly speaking true. Already Marx and Engels pointed this out in regard to Britain. When the working class is strong, well organised, and has a bold leadership, one does not need to count a certain amount of pints of blood on the streets before defining a shift of power from the bourgeoisie to the working class as a revolution. The point is that when it comes to Germany and Japan in the past, China in the present, or Britain in the future regime-change cannot be smooth and gradual but develops through a series of convulsions. That is a basic tenet of historical materialism. So far, there has been no evidence of such convulsions in China.

In the Soviet Union there really was a counter-revolution. That process was very different to what has been going on in China. In the Soviet Union there was a long period of economic stagnation. The bureaucracy was transformed from a relative into an absolute fetter on the development of the means of production. The counter-revolution was kick-started by an acute economic crisis. Then there were several violent conflicts between different wings of the bureaucracy – the attempted coup and the occupation of the parliament. But those conflicts pale in comparison to the attacks against the working class. Meat consumption fell from 61 kg in 1992 to 51 in 2002.[69] But that was the least of it. Mass sackings and the destruction of people’s living standards, social security and health were like a war. Average life expectancy fell dramatically. A comparison between the present size of the population and what could have been expected, if population growth had continued at the same rate as it had done under Stalinism, shows that the casualties amount to millions. That was the price for establishing capitalism in the Soviet Union. Truly a confirmation of “the Marxist thesis relating to the catastrophic character of the transfer of power from the hands of one class into the hands of another”. Just because it was a one-sided battle, the working class was too demoralized to offer any real resistance, does not make it “cold”. It is not less violent to get stabbed in the back than having a fistfight.

In the discussion about China the expression that the movement towards capitalism has passed “the point of no return” in China has been used to make clear that the counter-revolution has definitely won. “The point of no return” is not a traditional Marxist expression. According to the Oxford English Dictionary, the phrase originated in the forties as a technical term in air navigation to refer to the point on a flight at which, due to fuel consumption, a plane is no longer capable of returning to its airfield of origin. After passing the point of no return, the plane has no option but to continue to some other destination.

How is one to squeeze the Russian revolution into that phrase? Was the “point of no return”, that is the point when it was impossible to re-establish a capitalist state, passed in October 1917, at the end of the civil war, or when Stalin finally crushed the NEP-men and Kulaks? Trotsky thought not. In the Revolution Betrayed he outlined the possibility of capitalist restoration in the Soviet Union. And that is what actually happened many years later. But even then, when we analysed the process of counter-revolution in the Soviet Union in the nineties, we emphasized that the process could be reversed at any stage.

And what about the idea of “socialism or barbarism”? If the expression “point of no return” is to have any meaning in a Marxist analysis of history we would have to abandon Engels’ old idea altogether.

6. Grounds for Claiming China is Capitalist

To understand China one must get to the essence of the matter – who owns and controls the commanding heights – and not get caught up in apparitions. This becomes clear when one looks at some of the things that have been raised in the discussion.

South Korea, Japan, Italy, Russia in the nineties, India, and others

China’s development has been compared to a whole number of countries that have or have had a large degree of state interference in the economy. However, despite superficial similarities to workers’ states, the decisive sectors of the economy are and have been in private hands. And that makes them fundamentally different to China.

South Korea

When the military took power in 1961 they established The Economic Planning Board, whose task was to implement a series of five year plans. The banks were nationalised. But the task of the Board and the banks was not to support SOEs, but the Chaebols, large privately owned companies. In 1984 the 10 largest Chaebols accounted for 67 percent of GNP. US imperialism permitted and even encouraged South Korea to grow by centralising the economy and giving state assistance to private companies, because South Korea was in the frontline of imperialism’s struggle against Stalinist regimes. They also gave South Korea massive aid and extraordinarily favourable export conditions, at the same time as it was allowed to have extensive import controls. All this gave South Korea a unique possibility to leap from backwardness to becoming a modern industrial nation. But there were no SOEs.


Japanese industrialisation was begun by the feudal state when it decided to create an arms industry in order to be able to withstand colonialist interventions. However, the real beginning of Japanese industry was the development of the textile industry by private owners at the end of the 19th century. A classic development. Yet, because the Japanese bourgeoisie arrived late on the scene it needed considerable help from the state, something that has persisted right up to the present day. But industry was completely dominated by private capital. It was organised in a similar manner to the Korean Chaebols. Originally the Japanese Chaebols were called Zaibatsu. When the Americans occupied Japan they tried to dismantle these powerful competitors, but they reformed and became known as Keiretsu. Six Keiretsu completely dominate the Japanese economy.


In 1936, Trotsky analysed the nature of Italian fascism in his book The Revolution betrayed.

“The words of Mussolini: ‘Three-fourths of Italian economy, industrial and agricultural, is in the hands of the state’ (May 26, 1934), are not to be taken literally. The fascist state is not an owner of enterprises, but only an intermediary between their owners. These two things are not identical. Popolo d’Italia says on this subject: ‘The corporative state directs and integrates the economy, but does not run it (‘dirige e porta alla unita l’economia, ma non fa l’economia, non gestisce’), which, with a monopoly of production, would be nothing but collectivism.’ (June 11, 1936) Toward the peasants and small proprietors in general, the fascist bureaucracy takes the attitude of a threatening lord and master. Toward the capitalist magnates, that of a first plenipotentiary. ‘The corporative state,’ correctly writes the Italian Marxist, Feroci, ‘is nothing but the sales clerk of monopoly capital … Mussolini takes upon the state the whole risk of the enterprises, leaving to the industrialists the profits of exploitation.’ And Hitler in this respect follows in the steps of Mussolini. The limits of the planning principle, as well as its real content, are determined by the class dependence of the fascist state. It is not a question of increasing the power of man over nature in the interests of society, but of exploiting society in the interests of the few. ‘If I desired,’ boasts Mussolini, ‘to establish in Italy – which really has not happened – state capitalism or state socialism, I should possess today all the necessary and adequate objective conditions.’ All except one: the expropriation of the class of capitalists. In order to realize this condition, fascism would have to go over to the other side of the barricades – ‘which really has not happened’ to quote the hasty assurance of Mussolini, and, of course, will not happen. To expropriate the capitalists would require other forces, other cadres and other leaders.”

This was the situation in the thirties, when Mussolini had nationalised many companies that went bust during the depression. In the late fifties and early seventies the proportion of state ownership for a short period slightly exceeded the proportion during Mussolini’s time, but the state’s share of publicly traded companies never strayed far from the 20/80 ratio, i.e. the complete opposite of China’s 80/20 ratio today.[70]

The following graph shows the state ownership in Italy over time and clearly paints a picture completely different from the situation in China:


After the collapse of the Soviet Union, privatisation proceeded at a rapid pace in Russia. By 2003 the Russian state only owned 20 percent of the shares on the stock market. But since then it has begun to rise again, opening up for the idea that the economies of Russia and China would soon be very similar. By 2006 the Russian state’s share had risen to 30 percent and under the impact of the financial crisis it may rise further.

However, a closer analysis of the state’s role reveals that this is in line with normal capitalist development. Above all the state has increased its stake in the energy sector. Its control over crude production has more than doubled from 16 to 32 percent. In addition, as part of the Putin’s attempt to re-establish Russia as a power to be reckoned with, the military has increased its interest in the auto and aviation industry.

These are hardly unfamiliar sectors for the state in capitalist countries to invest in. Britain nationalised the coal industry after the Second World War. Norway controls almost two-thirds of its energy sector. It is and has always been a means for the state of guaranteeing reasonably cheap and reliable energy to capitalists. And in a whole range of capitalist countries the state has, at one time or another, wanted to make sure it has a dependable source of military hardware.

In a number of cases (Mosenergo, Tambeyneftegaz, Selkupneftegaz, Werkhnechonskneftegaz,Silovny mashiny, Novatek, VSMPO-Avisma), the state has not bought a controlling interest, but simply shovelled capital into private companies to help them develop. This is the opposite of what the Chinese state does. They let private investors put money into state companies, but make sure the state continues to control the companies. In any case, the degree of Russian state ownership is still a far cry to being anything like China’s. And Russia has no five-year plan at all[71]


The bourgeois papers often lump China to India together when they try to prove that third world countries can develop by using capitalist methods. It is true that capitalist India has grown at a relatively fast rate. For the last four years growth has been 6.9 to 9.7 percent a year. The average for the past 25 years has also been a fairly impressive 6.1 percent.[72] But it is an entirely different kind of growth to that which has taken place in China. Poverty has increased in India, despite the high growth rates.

The Chinese state has undertaken huge investments in infrastructure. The building of super-fast magnetic trains and trains to Tibet that travel through the Himalayas with pressurized cabins has just been the tip of the iceberg. Despite India’s infrastructure in many regards being ahead of China’s in the eighties, very little has been done since then and for many years now it has been falling further and further behind China’s.[73]

India has the classic growth of a country dominated by imperialism. Foreign capital and a few native capitalists develop the outer edge of the country. With an endless supply of cheap labour, a small part of the country becomes part of the world economy. But those parts become divorced from the rest of the economy, which remains in dire straits. Thus, 87 percent of employment in Indian manufacturing is in companies with fewer than 10 employees, compared with only 5 percent in China.[74] Due to the different character of the economy income inequalities are also larger in India. In 2002, 70 percent of urban Chinese households earned between $2000 and $7500 per year. In India, 74 percent earned less than $2000. But 6 percent earned more than $7500. Whereas in China only 1 percent earned more than $7500.[75]

It should therefore come as no surprise that India’s response to the world financial crisis is very different to China’s. The heavily indebted Indian government plans of boosting India’s miserable infrastructure with the help of private capital will be shelved for the meanwhile. And in complete contrast to China, India’s exports have dropped like a stone – down 15 percent in October 2008 compared to a year earlier.[76]


During the sixties and seventies a number of other third world capitalist countries also had a high degree of state intervention in the economy and, for a period of time, relatively high growth rates. They were held up as alternative models to the Stalinist states. One such country was Tanzania. Under the rule of Julius Nyerere, Tanzania even called itself a socialist country, but the private share of GDP was nearly 90 percent. Another country was Brazil. There the private share of GDP was 94 percent. Growth in both countries faltered after a few years.[77]

Luxury and Misery

A transitional economy does not, even in a relatively underdeveloped country, have to have the grey appearance of the old Stalinist states. The availability of luxury goods, advertisements, colourful packaging and more than one type of toothpaste do not mean that capitalism has won. All that will continue to exist to a certain degree even in the healthiest transitional economies.

Nor do gross inequalities, bad working conditions, corruption and pollution signify the victory of capitalism. All that existed in the old Stalinist regimes (as did luxury goods, but only in special shops reserved for the bureaucracy). Many Stalinist regimes, although probably not the Chinese one, had greater income inequalities than for example Sweden, which certainly is completely dominated by the capitalist mode of production. This is how the situation in the Soviet Union is described after the Second World War:

“After the war, differentials continued to widen. Direct bribes were introduced called pakety (packets) in the higher state and party institutions. On a monthly basis higher officials received a packet containing a large sum over and above their salary. These were special payments paid through special channels, not subject to tax, and kept totally secret. ‘As for members of the Politburo and Stalin himself,’ relates Medvedev, ‘the cost of keeping them does not submit to calculation. The numerous dachas and apartments, the huge domestic staff, the expenses for their staff and guards rose to millions of roubles yearly. As for the cost of maintaining Stalin, that nearly defies calculation.’ (Medvedev, Let History Judge, p. 843.)”[78]

During the last thirty years, inequality has increased in China. In the eighties that happened mainly in the country-side due to a burst of “free enterprise” there. But in the nineties, in line with primitive socialist accumulation, the government taxed peasants and the TVEs heavily in order to finance the development of the large SOEs. The pace of rural development slowed in terms of income, health and literacy and the gap to the cities widened. In the beginning of the new millennium literacy and life expectancy actually declined in some parts of the country-side, only to pick up again in recent years.[79]

However, the average level of health continued to improved, because of the influx of people into the cities. For example the infant mortality rate fell from 41 per 1 000 live births in 1978 to 30 in 2002.[80] In 2003 a new medical insurance was set up that covers 80 percent of rural areas.[81]

A similar story is told about education. After the breakup of the collectives the cost of education soared for peasants as schools were closed down or privatized, but despite that the adult illiteracy rate fell from 37 percent in 1978 to less than 5 percent in 2002.[82] And in 2003 the first nine years of school were made free.[83]

More than 135 million Chinese in the most backward rural areas of China still have consumption levels below a dollar per day, often without access to clean water, arable land, or adequate health and education services.[84] However, in the last five-year plan all agricultural taxes were scrapped and subsidies increased. A separate problem is the millions who are still legally classified as rural inhabitants, but live in urban areas. Many of them live in very bad conditions.

For the past fifteen years the increased inequality is mainly a question of the gap between the country-side and the town increasing because the standard of living in the cities is developing much more rapidly than the villages. This is reflected in China’s gini-coefficient, a usual method of measuring inequality, passing India’s (which is supposed to mean that India is more equal than China) although neither Shanghai nor Beijing has the vast festering slums that characterize Mumbai and New Delhi. Actually, even during the mass sackings from the SOEs from 1995 to 2002 equality sharply increased in the urban areas, as measured by the gini-coefficient.[85] The 2008 UN report called the State of the World’s Cities claims that Beijing is the city with the highest level of equality in the world. And although GDP per capita in Shanghai is more than five times national GDP per capita, urban disposable income per capita is considerably less than twice the national level. Interestingly, equality, again measured by the gini-coefficient, also increased in the rural areas during the second half of the nineties, reflecting the greater restrictions on the private sector after Tiananmen Square.[86]

In any case, treating the rural areas well has never been a hallmark of a transitional economy under the dictatorial control of a bureaucracy. Millions died during the Great Leap Forward. In the thirties, when the Soviet Union had its fastest growth rates, the lives of peasants were reduced to absolute misery by collectivisation, and life was terrible for many others too. Trotsky compared the Soviet Union to Nazi Germany. Both had very repressive features. The difference was that the Soviet Union had nationalized the means of production. And that made them fundamentally different.


Not even unemployment need signify capitalism. There are many unemployed in China today. But these people are not a reserve army of labour pressed out of jobs by economic crisis. The working class in China has grown uninterruptedly in the past decades. There are now hundreds of millions of more workers than there were 30 years ago. An estimated 30 million workers have been sacked from the SOEs since 1998, and 8.7 million of these have not found re-employment.[87] Employers often prefer to employ younger more pliable workers from the countryside. However, that does not change the basic equation – the size of the working class is increasing year by year. And unemployment is mainly due to people leaving bad conditions in the countryside at a faster rate than they can be absorbed into the urban working class.

If China were capitalist, the reserve army of labour would have kept down wages. But urban income has risen by an average of 14 percent a year since 1978.[88] That, just like China’s GDP increase in the last three decades, is an increase unparalleled in history. The wage increases have been partially eaten up by increased costs for health, education and housing. Nonetheless the increase in living standards is very big. Wages have risen because the bureaucracy decided to keep down social unrest by sharing some of the benefits of economic growth with workers. Only in an economy dominated by a planned economy can huge wage rises coexist with unemployment. In the anarchic capitalist system every individual capitalist is just out for his own benefit. If he can force wages down by threatening with unemployment he will do so, never mind what the social consequences are.

8. Perspectives

Since Trotsky formulated the theory of the permanent revolution, it has been a fundamental part of Marxist perspectives that capitalism cannot close the gap between the third world and the advanced capitalist countries. At the height of the post-war upswing, when the situation for third world countries was at its most advantageous, Ted explained why:

“The bourgeoisie of the colonial areas has come too late on the world arena to be enabled to play the progressive role which the Western bourgeoisie played in the development of capitalist society. They are too weak; their resources are too narrow to hope to compete with the industrial economies of the capitalist West. The disparity between the weak and underdeveloped economies of the colonial world and the metropolitan areas, far from being ameliorated, is gathering speed.”[89]

When the upswing had been broken and world capitalism moved into a period of organic crisis, this was reconfirmed:

“There is no way forward on the basis of capitalism.


There is no possibility of a consistent, uninterrupted and continuous increase in productive forces in the countries of the so-called third world on a capitalist basis.[90]

Now that the economic upswing is at an end and capitalism will move in a cycle of small booms and of small slumps following each other, imperialism will attempt to load the burdens of capitalist crisis on the underdeveloped world. Then the conditions of the colonial masses will become much worse.


In the underdeveloped countries, more than any other area the capitalists are absolutely incapable of developing productive forces except to a very limited extent.”[91]

Finally, in 1998, the collapse of the Asian tigers showed again the truth of this perspective.

“The crushing domination of imperialism in the world arena, which was strengthened after the fall of Stalinism, has meant an increased exploitation of the Third World as a whole. The domination of the metropolitan countries is, if anything, still greater than in the past. The only difference is that the old direct military-bureaucratic control by individual colonial masters has been substituted by the collective domination of the colonial world by a handful of wealthy exploiter states through the mechanism of the world market. Under the banner of ‘globalization’ and ‘opening up of the markets’ imperialism has forced through a policy of lowering the tariff barriers and privatization of the utilities throughout the Third World. These policies are a result of the crisis of capitalism in the West which forces it to constantly look for new markets and fields of investment. But they spell bankruptcy for the local industries of the countries affected which cannot compete unaided against the big multinationals.”[92]

If China has achieved record growth for the last thirty years because capitalism and trade on the world market was gradually introduced, then the above perspectives would have to be changed. China is not some minor country that imperialism can make an exception of for political reasons – to keep “communism” at bay. US imperialism could allow South Korea and Taiwan to develop to protect the US against China, but they do not want China, one of the world’s largest economies, to challenge the might of US imperialism. They are not making any soft trade deals with China, nor are they funnelling massive amounts of aid to China. On the contrary, the US, as could be expected, is making more and more belligerent sounds against China. And not only sounds, they have stopped China buying American companies and slapped tariffs on Chinese imports. Clearly China has been treated worse, not better, than many third world countries.

Yet despite this China thrives, because it is not competing on the world market on the same terms as US imperialism. Against mighty multinationals it pits not puny little domestic companies, but the power of the Chinese state. This, and only this, can explain why China wins its battles on the world market and unlike the countries of the ex-Soviet Union is not reduced to penury by imperialism. The epoch is still the same as Ted described it above. We do not have to revise our basic ideas, but we do need to have a correct analysis of China.

The Chinese economy will continue to develop rapidly for some time. It will overcome the present financial crisis. But that does not mean that China will not undergo huge social convulsions in the coming period.

A planned economy even with a healthy workers state is not a stable economy due to the central contradiction – between the law of value and the planning principle. It is a big step forward from capitalism, but it is not socialism, which can only be established on a world scale and only after many years of development of the means of production. Nor can there be a stable society in a transitional economy. Class struggle is not abolished after the revolution, even when the revolution has won in all the advanced capitalist societies. But the odds are stacked heavily in favour of the working class. If the working class has political power then the economy can relatively peacefully grow over from a transitional economy to socialism.

In China the working class is not in power. Therefore the bureaucracy is riding a tiger. It has unleashed some of the potential of a genuine transitional economy. But without having the massive weight of working class in control, social conflicts are bound to increase. It will have to come to a showdown between the working class and the bourgeoisie. The bureaucracy is balancing between the two classes (just like it is balancing between the law of value and the planning principle). But both the working class and the bourgeoisie are being strengthened.

This is the opposite of the situation of when the bureaucracy came to power either in Russia in the twenties or China in 1949. Then both the bourgeoisie and the working class were weak, not to say practically wiped out. Although the economic growth increases the prestige and wealth of the bureaucracy, it is in fact undermining its whole raison d’être. The bureaucracy is becoming weaker; hence there is also a much bigger openness in China today. This has nothing to do with the development of capitalism as the media in the west claims. The bureaucracy is being squeezed by the rising tide of the class struggle between the bourgeoisie and working class. Contradictions are already mounting within the bureaucracy. The Communist Party, with its millions of members, will be deeply affected by the struggle between opposing class forces.

The parasitic layers of the Chinese bureaucracy are guided neither by theory nor the interests of the working class, but by greed, prestige and the desire for power. It is the battle of class forces which decide in which direction they move. It is the pressure from capitalism and imperialism worldwide on the one hand, and the Chinese working class on the other hand that has determined the whole peculiar development of the Chinese economy. In this sense the situation is similar to the twenties in Russia. And then it was the working class – muzzled, betrayed, and with its leaders persecuted – that decided the matter. As explained by Trotsky.

“Without the Opposition’s bold criticism and without the bureaucracy’s fear of the Opposition, the course of Stalin-Bukharin toward the kulak would have ended up in the revival of capitalism. Under the lash of the Opposition the bureaucracy was forced to make important borrowings from our platform. The Leninists could not save the Soviet regime from the process of degeneration and the difficulties of the personal regime. But they saved it from complete dissolution by barring the road to capitalist restoration. The progressive reforms of the bureaucracy were the by-products of the Opposition’s revolutionary struggle.”[93]

Two themes have dominated the policies of the bureaucracy for decades – that the Chinese economy should become ‘modern’ and fear of ‘social unrest’. They have zigzagged between these themes, just as they balance between classes. They have not made a choice based on an ‘intelligent’ analysis of what happened in Russia. The Russian disaster is of secondary significance. If anything, that was a warning to them not to let capitalism become the dominant mode of production.

Theoretically, it cannot be excluded that some sections of the bureaucracy could eventually, in co-operation with capitalists in and outside of China, push China into capitalism. This would be a disaster for China, for the workers and peasants and for many bureaucrats too. The worst excesses of the economic free zones would become the norm, rather than the exception. If China became capitalist its chances of standing up to foreign capital would be even smaller than the Soviet Unions’ were after the fall of the Berlin Wall. In 1990 the Soviet Union’s GDP was estimated by the CIA as being between 44 and 49 percent of the USA’s.[94] In 2006 Chinas GDP was 18 percent of the USA’s.[95] A transition to capitalism would mean, just like in the Soviet Union, the collapse of many SOEs, TVEs and even urban private companies.

If capitalism would become the dominant mode of production in China it would be bad news for most Chinese. After three decades of rising living standards, they would have to accept a decline. To achieve this, the capitalists would have to openly confront the working class. The bureaucracy has tried to avoid this time and time again since the Tiananmen Square. Today they would face a working class that is many times larger and stronger. For the new generation of young workers and students the defeat of 1989 is ancient history. The working class in the Soviet Union was demoralised by decades of stagnation and shoddy goods. Many, after an initial hesitancy, thought that capitalism could offer a bright future. The Chinese working class can already see that it is not the availability of fancy commodities that is the problem, but the money to buy them, and that workers in the completely capitalist sector have worse wages and working conditions than the ones in the public sector. Over the last years there has been a rising curve of struggle. The working class is feeling its strength. It will not hand over its achievements to the capitalists without a serious struggle.

Workers throughout the world are looking towards China and wondering what is going on there. Bourgeois economists and reformist leaders use China as an excuse to privatize. In West Bengal, the CPI (M) government claims it is following the Chinese road to success when it prepares the way for foreign multinationals by slaughtering peasants. The CPI(M) leadership is destroying the party. Let us say to these China ‘fans’ that we also want rapid growth, so we should all agree to start by nationalising and planning the 1000 largest companies in every country.

China proves that the planned economy, even with a serious bureaucratic deformation, is superior to capitalism (and the Stalinist command economy). For three decades it delivered an average growth rate of 10 percent. But a planned economy in a healthy workers’ state with workers democratic control and management over production would without difficulty achieve much more. In China today, enormous resources are wasted due to corruption, competition between bureaucrats in the state sector, and inequalities. A fall in the rate of increase of productivity in recent years is a clear warning that these problems will increase as the economy becomes more complex, if the initiative and creativity of the working class is not harnessed in production. A world socialist federation, using even greater economies of scale and specialisation, and above all abolishing the cost of the military and war, would easily spread a multiple of the Chinese growth rate worldwide.

Jonathan Clyne


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