"China’s affluence crisis"

"China’s affluence crisis" in the Opinion Column, Reuters, 31 July, 2012, is penned by Mark Leonard, Co-Founder and Director of the European Council on Foreign Relations, the first pan-European think-tank, Young Global Leader of the World Economic Forum, and author of two best-selling books, "Why Europe will run the 21st Century" (2005) and "What does China think?" (2008), both published into many languages. Click here

For comparison, Mark Leonard evokes J.K. Galbraith’s seminal work, "The Affluent Society", which was a critique of the obsessive focus on GDP growth and production in the United States in 1958, producing at the end “private affluence and public squalor”.

Galbraith lays bare the hazards of individual and social complacency about economic inequality. He challenges why work and productivity are worshipped when so many goods are not really needed, and why public works spending has fallen by the wayside while extravagance in the private sector is tolerated, if not condoned.

In America in the 50’s and 60’s, public squalor was portrayed more in the context of inner cities, which remains a problem today even in the most advanced cities like New York. However, the more glaring challenge now is America’s crumbling transport infrastructure, which is only recently beginning to be addressed.

For China, however, whose gleaming super-highways and high-speed train network are now the envy of the world, the main challenge of public squalor is the country’s environment and ecology, which have paid a heavy and lasting price in the pursuit of breakneck economic growth.

But far more threatening for China are, first, the acute economic and social inequalities. The vast surplus pool of migrant labour, though beginning to dwindle as China’s demographics are starting to age, has been trapped by the so-called “hukou” system in social and economic deprivation. Likewise, the hard-earned savings of the population, not just of the migrant labourers, are also trapped in a system of “financial repression” in the form of extremely low deposit interest rates. In the absence of a more vibrant financial services sector, such savings have only limited and often volatile and insecure outlets such as the largely immature stock markets on the Mainland. This huge reservoir of cheap funds has been financing much of the state-owned banks' largesse.

This whole socio-economic system is not unlike some of the “extractive institutions” in the West’s earlier colonial era as described in “Why Nations Fail – The Origins of Power, Prosperity and Poverty” (by Daron Acemoglu and James A. Robinson, Profile Books, London, 2012). As the society has become more affluent and relatively more open, this stark social divide is no longer politically sustainable. Deng Xiaoping’s initial recipe of “Letting a few people get rich first” is now clearly past its sell-by-date.

Another critical challenge facing a rapidly-changing China in transition is the very product of China’s economic growth - a burgeoning middle class – as some 7 million university graduates are being churned out every year. This younger, internet-savvy, and more educated middle-class is becoming restless not so much to fight for more economic benefits, but to satisfy rising aspirations for individual liberty, freedom of expression in whatever form, including dissent, social justice, greater representation, and conservation of the environment.

In any case, while economically China’s rising affluence is for all to see, China as a country remains relatively poor in per capita terms, ranking amongst the world’s poorest compared with some African nations. Indeed, even if Goldman Sach’s much-hyped projection of China’s economic trajectory is eventually realized, by 2050 when China’s economy is forecast to exceed by some 84% that of the United States (on par with the size of India’s expanded economy by that date), China’s per capita GDP would still remain a small fraction of that of the U.S., perhaps equal to that of the per capita GDP of a middle-income country like Turkey (When China Rules the World, Martin Jacques, Allen Lane, 2009, Figure 1 p.3 and Figure 23, p.230).

At the 17th National Congress in October, 2007, President Hu Jintao set the target of achieving an all-round moderate-income society by quadrupling the per capita GDP of the year 2000 by 2020. China’s per capita GDP grew to $5,430 in 2011 (World Bank), already well exceeding the original target by 2020. This still pales in comparison with some of the middle-income countries like Malaysia ($9,656) and Turkey ($10,498). These statistics hides the fact, amongst other things, that much of China’s growth has been driven by labour-and-resource-intensive exports depending on imported proprietary technologies.

In an opening address on 3 September, 2011 in Beijing, Robert B. Zoellick, World Bank Group President, highlighted the challenges for China in avoiding the so-called “Middle Income Trap” – that stage when countries reaching about $3,000 to $8,000 per capita income seem to stall in productivity and income growth. The opening session is for a Conference to critique and refine the initial findings of a joint project on China’s medium-term development challenges up to 2030, undertaken by the Development Research Centre of the State Council, China’s highest decision-making body, and the World Bank. Click here

Zoellick points out that China’s policymakers know what needs to be done, as evident from a changed policy direction in the 11th and 12th Five Year Plans. These focus on quality of growth, expansion of domestic demand through higher consumption, structural reforms to spur innovation and economic efficiency, and social inclusion to overcome the rural-urban divide and income inequality.

Nevertheless, in the midst of an uncertain world entering into a “new danger zone” with stalling Western economies, a looming European sovereign debt crisis, volatile commodity prices and surging food prices, Zoellick raised the following timely questions:

“How can China manage the shift from an intense focus on economic growth to a broader approach that highlights quality of growth, inclusive growth, sustainable growth – and the well-being of all Chinese citizens?”

“How can Chinese policymakers sustain economic growth while protecting the environment and using natural resources efficiently, and how can China transition toward green development? How can pricing policies assist?”

“What will it take to help China adjust to rapid urbanization – from 50 percent of the population living in cities today, to almost 70 percent in 20 years?”

“How can policymakers modernize the country’s fiscal and financial systems -- aligning revenues with expenditure responsibilities at different levels of government and placing all expenditures “on budget”?”

“How should policy makers address the roles of state and market, and private and state-owned enterprises? More fundamentally, perhaps – what should be the role of the state in China – with respect to land, labor, markets, and the rule of law?”

“What about rethinking the organization of public management, and the shift from administrative management to rule-based policies?”
“How can China best encourage open innovation – in products, systems, and technology – in ways that connect that innovation with the global network of ideas?”

“How should China interact with the international economy? China is already a key stakeholder in the world economy. Looking forward, how can China be a responsible international economic stakeholder, serving as a key partner in finding global solutions and sharing mutual responsibilities?”

“And – perhaps the most important question: How can China best draw on the talents, energy, and creativity of its people? In the next five years, more people will be leaving the Chinese workforce than joining it. How can policymakers ensure that the Chinese people can adapt, innovate, and play an active role in the healthy and positive process of change?”

These questions are shorthand for the gripping issues China has to contend with in overcoming the Middle Income Trap.

Additionally, when J.K. Galbraith questioned the essential utility of much of the goods produced by a consumer-centric development model, he probably did not expect that not only does this culture of “consumer sovereignty” tend to push investment in public infrastructure to the sideline in some countries, but that it begs the very question of how sustainable is this culture if it is spread to the rest of an increasingly resource-and-ecologically-challenged globe when a large swath of the world’s humanity is chasing the so-called “American Dream”.

So it is no surprise that China is changing tack quietly but quite dramatically. Apart from the new Five Year Plan (2011-15), the now-released joint 468-page report of the World Bank and the Development Research Centre of the State Council - "China 2030: Building a Modern, Harmonious, and Creative High-Income Society" - may give a glimpse of the shape of things to come. It is an open secret that China’s likely Premier-in-waiting, Li Keqiang, is the report’s main supporter. Amongst its recommendations are proposals to address the “hukou” system, to liberalize the financial sector, to promote a more vibrant civil society, and to reach out for a low-carbon future.

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