Is China’s Economic Future a Rosy One? Becker

Starting with the opening of agriculture to private incentives in the late 1970s, China has experienced faster and more prolonged economic growth than any other country. In a mere three decades China has moved from a very poor nation to a middle-income level country, a development that pulled hundreds of millions of Chinese out of poverty. China’s aggregate GDP is now second in the world only to that of the US. While its per capita income is still much smaller than that of America’s, many are predicting that even China’s per capita GDP will surpass that of the US in a few decades.

Perhaps, but let us not yet get carried away too quickly. Two other predictions in recent decades of countries beating the US are a reminder that projections of continued trends in income growth can be way off the mark. In 1956, Khrushchev proclaimed that the Soviet Union would bury the US, not militarily but economically. One might at the time have dismissed this as the exaggerations of a loud and belligerent leader, but similar predictions were common among mainstream economists. Various editions of Paul Samuelson’s best selling textbook Economics: An Introductory Analysis predicted that by a certain date the Soviet Union’s GDP would exceed that of the US, but each later addition delayed the date of overtaking. In the latest additions, that prediction was dropped from the book since by then it appeared ludicrous. As everyone knows, the Soviet’s centrally planned economy collapsed by the end of the 1980s, and Russian per capita and aggregate income remain far below America’s.

Japan’s economic growth was far more impressive than that of the Soviet Union since it continued at a rapid pace throughout most of the period from the 1950s to the end of the 1980s. In the 1980s, stocks on the Nikkei and housing prices in Japan reached enormous levels. Japan was substituted for Russia as the country that would before long overtake the US, and become the leading economic power (see, for example, Herman Kahn, “The Emerging Japanese Superstate: Challenge and Response). Yet Japan’s rapid growth stopped abruptly during the early 1990s, and that country Japan has largely stagnated economically for the past two decades.

These two examples do not prove that forecasts about China’s future growth will also prove to be much too optimistic, and that China’s growth rate will slow dramatically in the near term future. China’s continuing rapid growth over each of the past three decades despite many obstacles has contradicted the many naysayers during these decades. The energy of Chinese businessmen and workers has been refreshed after China’s long slumber as an economic power, and they are eager to try to recapture China’s past economic glory.

Still, I believe that China’s continued rapid growth is not assured, and that it must overcome several serious remaining obstacles if it is to join the club of rich nations. Tomorrow, the World Bank and the Development Research Center of China are issuing a joint report called “China 2030” that discusses major impediments to continued rapid growth. From media discussions of this report, I gather that the report and I are in general agreement on the importance of the impediments and the difficulty of overcoming them.

Perhaps the most important problem, one not easily corrected because of strong political opposition, is that close to one half of manufacturing output is produced by state owned enterprises (SOEs). These enterprises are less efficient on the whole than private companies, they often have monopolies in their sectors, they are not important innovators, and they get privileged access to capital from state-owned banks.

The China 2030 report argues that the SOEs must operate more like commercial companies, but that is not easy since officials from the Communist Party usually have high positions in these enterprises, and many of the larger SOEs are closely related to the Communist Party and the military. The ideal solution would be to privatize most SOEs, but that does not seem likely in the near future. This is partly because government officials would lose power if SOEs were privatized, and partly because the government fears that privatized companies would greatly cut employment and increase social unrest.Unfortunately for China, it would not be possible to close rapidly the per capita income gap with rich countries as long as a large fraction of manufacturing output in China is produced in over-manned and inefficient state enterprises.

Private companies in China have great difficulty borrowing from state banks since most of their lending goes on favorable terms to the SOEs. The financial crisis in the West has increased the reluctance of Chinese leaders to open their capital markets to competition from foreign banks and funds. Yet greater private banking access to Chinese companies and households seems essential for China’s continued rapid growth.

China is very worried about social unrest, as it observes the Arab Spring and other unrest toppling governments. Many protests in China originate in rural areas where farmers complain about their inability to sell the land they farm, and about local governments that arbitrarily take their land to build factories or infrastructure. The Chinese government also fears the 150 million migrant workers who complain about their low wages, and about the discrimination against them in gaining access to housing, schools for their children, and health services. Unrest also arises from non-migrant factory workers who complain about working conditions, and arbitrary differences in wages between workers with similar productivities. Basically, most of the unrest in China is due to the fact that much of the increase in inequality is not grounded in productivity differences, but rather in discriminatory government rules and behavior.

As China continues to grow, households will demand that a larger fraction of national income goes into consumer goods and services at the expense of investments and the accumulation of foreign reserves. Spending on consumer goods accounts for only 35% of China’s GDP compared to over 70% in the US. Chinese enterprises would be induced to look more to its domestic market if the Renminbi was allowed to float and appreciated a lot relative to the dollar and other currencies. For then Chinese companies would have more trouble exporting their outputs to other countries.

Ultimately, the challenge for China is to move more toward a private enterprise economy with flexible and competitive labor and capital markets, where assets like land can be bought and sold rather freely, and where workers are free to move around the country without discrimination, and to take whatever jobs they want. I confess I do not know if China will make these reforms quickly enough to prevent a sizable slowdown in their drive to becoming a rich country. The experiences of both the Soviet Union and Japan shows both that it is very hard for countries to change their ways when they have had considerable economic success, and that the slowdown in growth rates is abrupt once it happens. Still, I would not bet against the ability of Chinese leaders to radically change their economic ways once again if that becomes necessary to continue to grow rapidly.

 

 

 

 

Comments

[Ted]

Hi, I agree with you that China needs to have certain reform in order for further development. However, I have different opinion on your argument when you say that "Chinese enterprises would be induced to look more to its domestic market if the Renminbi was allowed to float and appreciated a lot relative to the dollar and other currencies." You are assuming that Chinese citizens have the purchase power to the products which are switched back from exportation due to the appreciation of Renminbi. We've seen a lot of small factories being closed because of the weak exportation which indicates that many products being diverted from exportation are not consumed by Chinese domestic market. One of the problem in China now is that many products are sold cheaper abroad than they are in its domestic market. If you have some friends working in China, you would probably know that many Chinese co-workers of theirs may once ask them to bring certain goods back from other countries. Because they are cheaper even those goods are made in China. So the consumption of Chinese citizens would probably not cheered up by simply floating its currency. The additional cost between the factories and the consumers has to be reduced to get the industrial output affordable by Chinese. Otherwise, the reduction of the exportation would only result in the decrease in the output rather than being diverted to its domestic market. One of the other factor is that the inflation of its currency within Chinese market. If you add the fact of rising price in its domestic market to the appreciation of Renminbi to other currencies, the real exchange rates between Renminbi and others are actually going down quickly between one unit of foreign currency buys less Chinese products. If the problem of rising price in China is not curbed, the purchase power of ordinary Chinese citizens will be harmed. Therefore, the output of its industries will hard to find a way to Chinese consumers.

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