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Mind the gap

Despite an agreement to swap half of the 1,200 threatened jobs for a two-year pay freeze and lower pensions, Vauxhall workers in the UK should be warned against welcoming their prospective new Canadian and Russian employers too early.

Massive overcapacity persists in car production as well as the economy in general and no jobs are safe. Last night, for example, the Chinese government set out its detailed plans to deal with overcapacity throughout the huge country’s economy.

China has provided massive support for its major industries in the face of the shutdown of activity in the labour-intensive cities that served the needs of global corporations producing for the now dormant Western consumer markets.

The state has funded infrastructure projects and underwritten production and consumption in the hope that overseas demand for the commodities produced within its borders would recover. But now that hope has evaporated, even though China’s domestic market for cars continues to grow.

Alongside its plans to reduce capacity in traditional industries such as steel, aluminium and cement, China is forced to act on silicon, the key input to the electronics industry, and wind power generation.

In bowing to the logic that follows the credit crunch, China’s State Council said meeting the government's long-standing goal of reducing overcapacity was urgent. Factory closures, job losses and rising bad bank loans would result from inaction.

At the same time the council admitted that the crisis had already spun out of control. Some 58 million tonnes of crude steel capacity under construction is “illegitimate”, and would bring the surplus to 700 million tonnes.

During the globalisation decades that saw it emerge as a major source of profitable cheap labour China grew to become the world’s top producer and consumer of cement. But the global slump has sharply reversed its fortunes. China's cement production capacity will rise to 2.7 billion tonnes per year if all approved projects start operation, and market demand totals only 1.6 billion tonnes. With capitalist-style competition dominating the economy, in 2010 Chinese companies in the wind power industry are expected to produce equipment equivalent to 20 million kilowatts of capacity, double the 10 million kilowatts of actual capacity likely to be installed in the country.

To tackle this oversupply, and in a blow to those in the West who favour a move to localised production, the cabinet said it would refuse approval for the construction of complete wind-power equipment factories. It also banned investors in the sector from using locally-produced equipment, aiming to prevent local governments from building their own equipment plants.

China’s predicament expresses the collapse in demand throughout the major capitalist economies because consumers, all maxed out on credit card and other debt, have stopped spending in the way they did before. And in an economy actually fuelled by debt, this is bad news for capitalism.

Despite aggressive “downsizing” by manufacturing since the recession began, leading to the loss of tens of millions of jobs worldwide, there is still vast overcapacity as shown in the "output gap". This is defined by analysts as the difference between the potential output of a given economy and what is actually being produced (including services).

The Organisation for Economic Cooperation and Development (OECD) is projecting that the situation will actually deteriorate. Next year, the OECD says the output gap in the advanced economies will widen to -5.7% — the biggest number seen since the 1930s.

HSBC's China economist, Qu Hongbin told Time magazine: "There still is hope that we'll go back to the old days but demand in the future will be lower than in the past. That means the factory owners have to face reality."

That “reality” is that the global recession is heading inexorably towards outright slump and talk of a “recovery” in the near future is delusional. A new economic model is needed to replace a capitalist system that is clearly unsustainable and beyond repair.

Gerry Gold
Economics editor
14 October 2009

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