May 2006
The Challenges of China's Growth
China’s economic performance over the past three decades--its rapid growth, economic opening, and strides in poverty alleviation--marks an historic turn that may qualify as one of the great “success stories” of modern economic development. China seems poised for further rapid growth today, but questions and uncertainties cloud the longer-term horizon. Can China make the institutional changes and policy reforms that will be required to reach significantly higher general levels of productivity and income? Will continuing economic growth unleash unpredictable social or political forces within China? And what will an economically rising China--potentially, a China with the world’s largest GDP--mean for the security of China’s neighbors and the international community? On May 11, Dwight H. Perkins, Harold Hitchings Burbank Professor of Political Economy at Harvard University, addressed these and other issues in the fifth Wendt Distinguished Lecture at AEI.
Nicholas Eberstadt
AEI
AEI’s Wendt Lecture Series in Global Political Economy was established through the generosity of Smith Klein Beecham pharmaceutical company and Henry Wendt, CEO of Smith Kline Beecham, now GlaxoSmithKline. The Wendt program is dedicated to the study of globalization and its consequences. It is particularly concerned with the global extension of liberal political institutions and the maintenance arrangements necessary for those institutions to flourish. One component of this program is the Wendt Distinguished Lecture, which is awarded as an honor to someone who has made an impact in the study of globalization.
Dwight H. Perkins
Harvard University
It is important to remember how big the changes in China have been over the last twenty-six or twenty-seven years. Forty-five years ago was the Great Famine in China, during which 30 million people died, leading to the insanity of the Cultural Revolution, a time in which millions more died. This was also a time when people with American passports were not allowed to go to China.
Even when Americans were first allowed into China, there were no ring roads in Beijing--people traveled by bicycle. There were only three hotels in which foreigners were willing to stay. In 1975, the main highways in China were two-lane highways, where there would be traffic jams lasting for hundreds of miles. Now, there are brand new airports and a substantial inter-province highway system; many of these things were built ahead of demand. More broadly, there has been a substantial investment in infrastructure--paved roads, modern buildings, and construction projects. New housing has allowed people to have their own spaces and facilities, rather than sharing with several families. The poverty levels have substantially declined, though poverty does still exist in a significant way.
The change has not been purely economical. It has also been more fundamentally in how people think and relate to each other. In the 1970s, Americans could not travel unescorted and were not allowed to speak with Chinese citizens without supervision. Today, if one is not a reporter, foreigners can speak freely with Chinese citizens. Foreigners can also travel freely throughout the country now. The Internet has given the Chinese people more information than was ever previously available to anyone not at a high level of government. There has been a lot of change, and this has change has been primarily driven by economics.
In 1980-1981 when China began to finally do things correctly in the economic sphere, it was clear that China was economy was bound to grow. Since Chinese growth was around 3.5 percent in the 1960s and 1970s, these substantial changes would likely be enough to help China grow at rates of 6 to 8 percent in the future. It was easy to make forecasts like those, but now it is not as predictable moving forward. Econometric models show that if a poor country begins to do things correctly, they are going to have higher growth than a rich country. These growth rates start high as they converge on higher income countries. The higher the per capita income is, the lower the rate of growth will be. China has refused to join the UN accounting system, so its purchasing power parity figures are somewhat unreliable; however, the main point is that China is still poor, so it is bound to grow more rapidly than wealthier nations with high per capita incomes.
China’s investment right now is extraordinarily high. The official rate last year was 44 percent. Though that figure is suspiciously high, it is undeniable that investment is incredibly high. With high investment, a nation can make a lot of mistakes and still have a high rate of growth. Savings levels are likely to remain high in the next two decades, as driven by the dependency ratio.
The labor force will probably stop growing quite soon. There are 350 million people working in agriculture, doing what 2 to 3 million agricultural workers in the United States do on roughly the same amount of land. The Chinese will be able to shrink the size of their agricultural work force, expand in other areas, and still maintain agricultural output simply by expanding the use of machinery. If China follows the growth paths of Korea and Japan, then it is likely to see a substantial decrease in the percent of the work force in agriculture.
While in India 40 percent of the population is illiterate, in China this figure is only around 16 percent, and it is mostly the older part of the population. The education system in China is likely to expand in coming years, increasing the numbers of secondary and tertiary school graduates. Basically on the input side, it is clear that in the coming years there should be plenty of inputs to continue growth.
However, total factor productivity is critical in determining potential for future growth. The efficiency with which economies use their inputs often distinguishes the faster growing countries from the slower growing ones. The jump in Chinese growth from 3.5 percent to 9 percent has largely been a jump in total factor productivity. China has a market system with most goods and services allocated through the market, despite government discretionary interventions. China has substantial transparency and corruption problems. However, China is far more open to trade and investment than most of its Asian neighbors, and that is not going change. The negative side on economics has to do with the high level of government intervention in industrial policy, leaving lots of room for rent seeking, misallocation of resources, and corruption. The only way to get rid of this corruption problem in China is to substantially reduce the opportunities for it.
To substitute for this government intervention, China really needs to develop an independent legal system that is capable of managing complicated economic transactions and disputes. Most of Asia, except Singapore and Hong Kong, do not have strong legal systems. The challenge for China is to create a system that works, building on the contradictory Confucian tradition. All in all, despite the problems, China is likely to be able to continue to move forward in developing its legal system, so that a crisis does not occur simply due to an economic slowdown.
With economic forces sustaining growth, the Chinese military is likely to continue to grow. Using deflators, it is clear that Chinese military expenditures were constant until the 1990s, and then there was a tremendous jump with real military expenditures doubling over the last ten years. China’s military growth has little to do with a threat and more to do with achieving the goal of becoming an equal competitor with the United States. Because the Chinese are now able to produce weapons that enhance their capacity, it is likely that Chinese military spending will continue to grow as the economy keeps growing.
There are several major sources of social tension that are likely to arise over the coming decade. One is the mass migration of people from the countryside to the cities--possibly the largest migration of people in the history of mankind. Under the current system, people who move their families to cities have no access to housing, health care, or education, so they tend to leave their families back in the countryside. This leaves a significant single male population in a world of prostitutes and HIV. The Chinese government is now saying that it wants to open the cities’ education to migrant children, but whether or not the city governments will cooperate is yet to be seen. If China is unable to provide housing and education to these migrant families, the resulting tensions could be dangerous.
A second social problem is the lopsided male to female ratio. In the age group eighteen to twenty-four, there are currently 97 men to 100 women, but in the zero to four age group, that ratio is 123 to 100. The laws with regard to the issue are not effective, and the implications of this are unclear, but cannot be positive.
It is unclear how big the educated, middle class in China is today, but estimates are roughly 200 million people. The middle class will probably at least double in the next twenty years, but there will be 600 to 700 million uneducated in the cities and roughly 300 million more in the countryside. It is unclear how long this group of people will be satisfied being ruled by a self-appointed group. It is also unclear how a government transition will occur and how the Chinese will build the legal and political institutions necessary to solve the various disputes occurring at all levels.
The fundamental point is that there is very little the United States can positively do to promote a more open political system in China. The change has to be internal. The United States can take negative steps more easily than it take positive ones. International organizations should highlight that China is not living up to world standards are important. China’s membership to the World Trade Organization, a rule-based system, is key. Chinese military power is going to continue to grow, and ideas about containing China are pointless.
The bottom line is a rapidly growing China, while it carries with it a rapidly strengthening China, is a far safer China than a China stumbling from one place to another. Social tensions in China are real, and rapid growth is the only thing that can lead to political and social change in a peaceful way.
This summary was prepared by AEI researcher Anne Siarnacki.
