Is China’s Growth Sustainable?

| November 17th, 2010

essay_competition_winner

A while back we promoted the Diplomat Essay Competition.  The following is the winning essay written by Calvin Wong who won a trip to Japan covering the APEC summit.

Reposted from the Diplomat:

Is China’s Growth Sustainable?

By Calvin Wong

Fifteen years ago, APEC leaders meeting in Japan called for joint action ‘to ensure the region’s economic prosperity is sustainable.’ But is it realistic to believe that APEC’s largest member, China, can grow rapidly and sustainably?

In 1978, Chinese leader Deng Xiaoping, frustrated by Mao Zedong’s class struggle-inspired politics, embarked on a series of economic reforms that helped China open up to the world. These reforms fuelled China’s dramatic economic rise over the past 32 years, while forming the foundation for China’s deeply-rooted belief in rapid growth. Subsequently reinforced by Zhu Rongji’s internationalization of China’s economic system and stewardship of the country into the World Trade Organization, and underscored by current President Hu Jintao’s declaration of a minimum 8 percent GDP growth rate, the Chinese leadership has always operated under the principle of ‘get rich now — all other priorities can be taken care of later.  Indeed, while China’s ruthless, seemingly single-minded pursuit of growth has produced an unprecedented annual GDP rise of 9.5 percent since Deng’s reforms were initiated, many observers doubt if the concept of sustainability is really commensurate with the country’s goals.

The reality is, fortunately, far removed from such perceptions. Deng’s true genius lay in his recognition that any economic reforms had to be sustainable, in the sense that they had to provide tangible benefits to the people. Part of Deng’s economic development strategy was to ensure that China would achieve the per capita GDP of a medium-developed country by 2050.

The country is arguably on its way to achieving this, with per capita GDP this year estimated at US$3,700, placing it in the middle tier of countries. Furthermore, while rapid economic growth was the only pragmatic way out for China in 1978, the current leadership has acknowledged the negative consequences of current economic development. Hu adjusted China’s economic development policy when he took over in 2003, defining the paramount task for the government and party as ‘the building of a harmonious society’.

Sustainability, the Chinese way

The ‘harmonious society’ concept stresses that the key to sustainable, long-term growth was social justice. It emphasizes the necessity of reforms in socio-economic legislation, environmental conservation and even politics, meaning the government would have to position itself as not merely the driver of the Chinese economy, but as a provider of tangible public services and defender of rights amongst the various social groups.

Hu’s concept of sustainability is made even more relevant by the fact that China is arguably at a critical stage of development. Rapid socio-economic growth has given rise to a strong middle class, which can be further separated into new social groups such as private entrepreneurs, businessmen and professionals. And, with an increasingly large role and stake in China’s growth, they’ve demanded greater participation in this growth. Building on a 2004 constitutional amendment that formalized the right to own private property, the Chinese government adopted a Property Law in 2007 that made significant steps toward providing legal protection for the private economy. (This appears to be part of a larger legal movement that aims to strengthen the rule of law of China).

These newly rising social classes have also been the subjects of the Chinese Communist Party’s (CCP) courtship as the CCP broadens its social base to ensure continued support from the masses.  It’s telling that the CCP – traditionally the party of workers, soldiers and peasants – now has over 17 million registered white collar members, making up more than one-fifth of the party membership. These new social classes are typically liberal, and are a potent force for political and social reform. The moderate groups amongst these classes have pushed for more direct democratic measures as part of political reforms to counter rampant corruption among the ranks of the CCP, which has delegitimized the party significantly in the eyes of the people while eroding public support and confidence.

One such measure is participatory budgeting, which ensures that budget allocation decisions are more people oriented, as the government provides the exact services that the people require. Such budgeting also promotes transparency in expenditure, reducing ‘cronyism funding’ to the extent that officials are less pressured to set aside funds for higher officials or relatives and friends.

Grassroots advocate Li Fan, director of the private think-tank China and the World Institute, has pushed for such budget reform in China since 2005. In March this year, Li scored his first significant success when the small township of Baimiao in Sichuan Province posted its government’s budget online under his guidance.  China’s ‘first naked township government’ was more than just an exercise in monitoring government expenditure.  The township government conducted a budget discussion with 72 representatives of Baimiao’s residents, with enthusiastic participation on the latter’s side in requesting improvements in roads and water supplies, for example, to be included in the budget report sent to the township government. Zhejiang, a rich coastal province, also decided to replicate Li’s model for participatory budgeting throughout the province, a direct consequence of richer taxpayers in the province demanding a greater say in the way their taxes were being spent. The examples of Zhejiang and Baimiao, Li wrote, indicated that direct democracy in the form of participatory budgeting could work not only in the rich provinces, but in China’s poorer regions as well.

But while political and legal reforms are important goals for the Chinese government, the rest of the world is fixated on the country’s environmental conservation policies. Such obsession stems from the fact that China is now the world’s largest emitter of carbon dioxide emissions. China is, however, also the largest producer of Clean Development Mechanism (CDM) projects — projects funded by rich countries in developing countries so the former can meet their mandated emissions targets. In April 2009, Gansu Electric Power Investment sold a massive 760,000 tonnes worth of carbon credits from its Bingling hydropower plant to an Italian company. The lucrative CDM market is estimated to be worth $14.6 billion, with many Chinese companies jumping on the bandwagon to start green projects.  The Chinese government has also earmarked five provinces and eight cities as pilot carbon cities, and has ordered each area to draft its own plan to reduce carbon emissions and develop a green economy. The net effect has been an increase in support for renewable energy, which will help to encourage sustainable long-term development.

Speed Bumps

While the Chinese government has accorded greater priority than ever before to the pursuit of sustainable development, there remain numerous obstacles challenging the feasibility and strength of reforms. China is only just beginning to experience the backlash of political reforms; the increasing proportion of white collar professionals in the CCP has alienated the party’s traditional base, which feels that recent policy changes have undermined its own interests.

Frustration with the rapidly growing income gap is likely to have contributed to the spate of workers’ protests earlier this year, including the widely-covered strike at Honda’s Nanhai plant in Foshan, Guangdong Province. Sustainable growth is only possible if China’s leadership is able to carve out a feasible route that satisfies and balances all sides. Political reforms have also been slow compared with the breath-taking speed at which economic reforms are usually executed, as the CCP sees political reform as an existential issue. This has, however, resulted in potential social destabilizers – many Chinese, for example, don’t trust their own local governments. 

The spectre of corruption is also one that will not be easily exorcised. Business and bureaucracy in China are deeply rooted in ‘guan xi’, a term that refers to relationship building but which in reality is often a euphemism for bribery and collusion. ‘Guan xi’ is so pervasive within the economy that most Chinese express cynicism on the efforts of the government to curb corruption, cynicism that might not necessarily be unwarranted.

Participatory budgeting outside Baimiao has been plagued by flaws such as partial disclosure, or even outright manipulation of data. Given the necessity of high-level endorsement to secure funding for development projects (a classic example of ‘guan xi’) participatory budgeting could even be a double-edge sword by discouraging high-level officials from visiting and endorsing projects in poorer areas, for fear of public scrutiny over their trip expenses. Other direct democracy measures have shown little success, with the central government wanting to retain tight political control.

‘People’s Premier’ Wen Jiabao, who declared corruption to be the ‘greatest danger’ to the ruling party, has also been accused of not translating his actions into words. One dissident, 36-year-old Yu Jie, went so far as to argue, in his book ‘China’s Best Actor: Wen Jiabao’, that China’s top leaders were pulling the wool over the people’s eyes when it came to issues of corruption: ‘Wen and Hu are like the two sides of the same coin, playing good guy, bad guy.’ Even Chongqing Party Secretary Bo Xilai, who rose to fame this year because of his high-profile crackdown on the city’s mafia and corrupt police force, was accused of holding show trials to increase his own political capital.

Finally, China’s environmental practices leave much to be desired. Chinese CDM companies have been accused of flooding the global carbon credit market with ‘subprime carbon credits’ – credits from questionable projects that contribute little to the fight for environmental protection. There are further concerns that China won’t be able to meet future carbon emission standards as so many of the country’s carbon credits have already been sold. China’s commitment to its environmental targets has also been questioned. The country is due by the end of this year to achieve a 20 percent energy intensity reduction from 2006 levels. It has achieved this mainly through ‘administrative measures’, which include forced closures of factories and companies, rather than real breakthroughs in energy efficiency.  Worst of all, China continues to be plagued by environmental disasters, including 50-year-old coal fires in Inner Mongolia and the recent oil spill in Dalian, damning evidence of the government’s failure to enforce environmental and safety standards.

Is Rapid and Sustainable Growth Possible?

In general, the limited successes that China has enjoyed in encouraging sustainable growth initiatives haven’t been easily replicated across the country. Due to China’s vast size, the central government relies heavily on local governments for the execution of policies. Unfortunately, local institutions often differ massively in quality – richer provinces that enjoy large pools of policy-making and managerial talent have relatively better institutions, while the inner provinces tend to have weaker institutions.

Still, there’s no doubt that growth in China is much more sustainable and equitable than it was 32 years ago. Where the issues are international in nature, such as that of climate change, China is gradually taking a larger, though sometimes disagreeable, role in the global order. Though it would be an exaggeration to compare environmental protection in China to that of Norway, or income and social equality to that of Finland, the concept of sustainable growth is holding its own against the other entrenched interests in Chinese society.

It’s anybody’s guess what exactly this churning mass of conflicting interests will throw up in the end. One thing is clear though: sustainable growth is very much a realistic possibility for the Chinese economy.

Rapid growth still seems a given – the opening up of the last 32 years has left an indelible impact on the country, and the country is obligated to deliver the same economic opportunities to the rest of China that, at present, have only been enjoyed by a minority in the country’s richer provinces. If history is to be our guide, however, China’s black cat-white cat pragmatism will guide such growth along a sustainable path of development, because sustainable growth is necessary for the survival of the country. China will continue to make progress in this area, albeit with little steps, not great leaps forward, and we should look forward to the prospect of a growing and sustainable China in the future.

30 Comments | Leave a comment | Comment feed

  1. Kobe says:

    Key, words into actions, not actions into words.

  2. Kobe says:

    ?BTW, isn’t China the leader in green technology?

    • Lay Low Moe says:

      all i could think all is solar
      but they are only major in manufacturing them
      not sure about innovating the technology itself

    • Carl says:

      wind techonology a big one, and arguably hydro, it’s certainly renewable in the sens that so long there’s water there’s electricity, but wither it’s clean or enviro friendly is debatable.

      In any case while there are strong support in green technology in China, I don’t think it’ll make a significant dent in the big picture of things as conventional green technology it is still fairly expensive and frankly not economical in the eyes of those who can afford it.

  3. diaohua says:

    the inertia of sustainability is protected by a strong legal system

    • pug_ster says:

      Are you talking about the US?

      • diaohua says:

        speaking generally. when sustainability is the goal its course needs protection. when distracted from sustainability by things like oppression or corruption, prosperity is more easily derailed.

  4. zammo mcgure says:

    I vote unsustainable.

    Social unrest and the shortage a potable water will halt China’s growth.

    • Joe says:

      That was the most simplistic analysis I’ve ever seen. If you were a presidential adviser, the whole country would have crashed and burned while he was in office.

  5. GuoBao says:

    No country can keep up an 8 percent yearly growth for long but even with a more regular 2-3 or 4 percent growth rate China should do relatively fine for the next couple of decades. Major problem areas as I see them:

    The quality of higher education and the fact that already now there aren’t enough jobs for graduates. This could be a bXmb under the whole “Educate yourself and achieve a higher living standard (while spending tons of money on it)” idea that China has been promoting so hard since 1985. Social unrest and a growing dissatisfaction with the government could easily occur.

    The lack of trust. Already very few people can honestly say that they trust the police, the courts, the government and the civil service. You need to experience the rule of law and equality in order to feel happy- or even just satisfied- in a society. The general lack of trust has spilled over into the private sector the last decade. “Rich people are corrupt criminals”, “Manufacturers and real estate developers are crooks who risk peoples’ lives to save money” and similar statements you often hear is evidence of that. In the long run lack of trust will be a weight on a country’s future prospects.

    If there is ONE thing we know and are certain of in the world, it is that production will eventually move to the place where it’s cheaper to manufacture things. China will feel the beginning of this over the next decade when inflation soars, wages go up and the competition within the country takes off for real. Countries like Lao, Vietnam, The Philippines and down the road Burma and Cambodia are waiting for this opportunity and there really isn’t much China can do about it. In the West we moved from primary/secondary production into tertiary and later quaternary areas but it was hard work and took MAJOR structural overhauls of society as a whole. It’s doubtful if China can take those steps but there’s no doubt that she’ll try. She needs to.

  6. Lay Low Moe says:

    along with… China pisses the world for years by manipulating fixed exchange rate
    for those who don’t know about this
    Since China is major in manufacturing, if their currency rate is high
    no company would want to export by them
    by doing this, they could monopolized the manufacturing sector but does strong damage to rest of the world
    i think was one big topic at the recent G20

    • golf trolley says:

      No, I can’t agree with you. That is unfair to the grassroots of Chinese. They work hard to make a living, but the salary is not raise. So, China do not need to be the major manufacturers, what she needs to do now is to improve her people’s living standard, as the above had discussed, China need to relieve the disadvantaged

      • lay low moe says:

        increasing labours wage is joke in China
        every Chinese companys want to look good on their margin & ratio to keeps their foreign investors happy instead of contributing to their society
        China should realized that their most profit ended up to the rich instead to the average Joe
        and where does the rich spend most of their money, not in China
        That’s why there are news on lots of Mainland Chinese are buying up millions of dollar(USD) mansion along the West Coast(US)

  7. Mark says:

    Some predictions are that based on China’s demographic destiny of declining youth China will be the next Japan burdened with older population and huge social service demands sapping economic growth.

    According to Feng Wang, Director, Brookings-Tsinghua Center

    “China’s astonishing economic expansion over the past two decades took place within a highly, almost uniquely favorable demographic context. But the country is at the end of reaping economic gains from a favorable population age structure.

    Economic growth relies on a number of basic factors. Aside from institutional arrangements, these include capital, technology, markets, and labor. In China’s case, foreign direct investment, especially from overseas Chinese, brought not only capital but also technology and management know-how. Foreign consumer demand, especially in the United States (fueled first by the dot-com boom and then by the housing and stock market boom), supplied a ready market for China’s export industries. But capital, technology, and overseas markets alone would not have made China a global factory in the last two decades of the twentieth century. The country’s economic boom relied on another crucial factor: a young and productive labor force.

    Such a labor force, a non-repeatable historical phenomenon resulting from a rapid demographic transition, was fortuitously present as the Chinese economy was about to take off. The large birth cohorts of the 1960s and 1970s were at their peak productive ages when the boom began. This good fortune, measured as a demographic dividend, is estimated to have accounted for 15 to 25 percent of China’s economic growth between 1980 and 2000.

    The term “demographic dividend” refers to gains (or losses) in per capita income brought about by changes in a population’s age structure. It is expressed as the ratio of the growth rate of effective producers to the growth rate of effective consumers. It resembles but is not the same as the commonly used “dependency ratio,” which is the ratio of the dependent-age population (such as 0–14 years old and 60 and above) to the productive-age population (such as 15–59 or 20–59). The demographic dividend, unlike the dependency ratio, takes into account people in the productive age cohort who are not contributing to income generation (for example, because they are unemployed) as well as those within the dependent age range who generate income (such as from after-retirement earnings).

    For the most part, China has exhausted its demographic fortune as measured by the demographic dividend—that is, by the changing support ratio between effective producers and effective consumers. Between 1982 and 2000, China enjoyed an average annual rate of growth in the support ratio of 1.28 percent. Using the World Bank’s figure of per capita annual income growth during this same period, 8.4 percent, we find that the demographic dividend accounted for 15 percent of China’s economic growth. Today, the net gain due to favorable demographic conditions has been reduced to only one-fifth of the average level maintained from 1982 to 2000.

    By 2013 China’s demographic dividend growth rate will turn negative: That is, the growth rate of net consumers will exceed the growth rate of net producers. Starting in 2013, such a negative growth rate will reduce the country’s economic growth rate by at least half a percentage point per year. Between 2013 and 2050, China will not fare demographically much better than Japan or Taiwan, and will fare much worse than the United States and France.”

  8. lay low moe says:

    the answer is so easy to find
    if you are young & bright but just an average joe, would you wanna work in China?
    and if you have kids, would you want your kid to get educated in China or Western world?
    in the China the average wage is low
    everywhere is like a rat race
    you have worry about scam on daily basics
    if shit really happen, do you trust the government’s support?
    and i am sure there many more reasons that is currently preventing China from growing

    for me i would unsustainable as well

  9. lay low moe says:

    Taiwanese taekwondo athlete disqualified at Asian Games over socks
    http://edition.cnn.com/2010/SPORT/11/17/asian.games.china.taiwan/index.html?hpt=Sbin

  10. S.K. Cheung says:

    Excellent essay. More please.

  11. hoklodude says:

    Great article piece, all China has to do is boost domestic consumption, keep a stable Yuan currency and keep chugging along its path of industrialization and gobbling up natural resources.

    • lay low moe says:

      so true
      but most of the Chinese products are junk
      only the poor are willing to buy them
      there are reason why Chinese loves import products

  12. Betti says:

    UOBYBR Walking in the prensece of giants here. Cool thinking all around!

  13. voiceofhomer says:

    “China alone will probably have the largest economy, surpassing that of the United States a few years before 2030,”

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