Martin Jacques - When China Rules the World

Economic growth cannot depend upon a constantly rising proportion of GDP being devoted to investment, as is presently the case, because it would absorb an increasingly untenable proportion of the country’s resources, thereby imposing unsustainable pressures on consumption, for example. There needs to be a greater emphasis on the efficiency of capital and improving labour productivity, rather than an overwhelming dependence on investment, too much of which is wasteful: if not, economic growth will inevitably decline as the limits to higher and higher volumes of investment assert themselves. The ability to move up the technological ladder is fundamental to this. There is considerable evidence that this is already happening, with exports of cheap-end products like toys falling in the global recession and those of high-tech products rising. Similarly China will have to reduce its present level of exposure to foreign trade, which has made it highly vulner-able to cyclical movements in the global economy, as the global depression has shown. There is a danger too, especially in the context of a depression, that China ’s export drive will provoke a hostile reaction and moves towards protectionism. [467] [467] Ibid., p. 2. Instead, it is already abundantly clear that China will have to attach greater weight to domestic consumption.

A growing problem is that the priority attached to breakneck economic growth above all else has resulted in China moving in a very short space of time from being a highly egalitarian society to becoming one of the most unequal in the world. [468] [468] Peter Nolan, China at the Crossroads (Cambridge: Polity Press, 2004), p. 15. The causes of that inequality are threefold: the growing gulf between the coastal and interior provinces, with the richest province enjoying a per capita GDP ten times that of the poorest (compared with 8:1 in Brazil, for example); [469] [469] Maddison, Chinese Economic Performance in the Long Run , p. 98. between urban and rural areas; and between those in the formal economy and those dependent on informal economic activities. [470] [470] Wang Zhengyi, ‘Conceptualising Economic Security and Governance’, pp. 531-4; Zheng Yongnian, Will China Become Democratic ? pp. 296–301. This is leading to growing social tension — evident, for example, in the relationship between migrant workers and local residents in the cities — which threatens to undermine the cohesiveness of society and the broad consensus that has hitherto sustained the reform programme. [471] [471] Gittings, The Changing Face of China , pp. 274-5. The government has already begun to pay much greater attention to promoting a more egalitarian approach, though so far with limited effect.

A key question here is the financial ability of the state to act in the ways that are needed. In the early reform period, decentralization was deliberately encouraged, with central revenue falling from 34 per cent of GDP in 1978 to a mere 6 per cent in 1995, according to the Chinese economist Hu Angang. [472] [472] Quoted in Zheng Yongnian, Discovering Chinese Nationalism in China , p. 32. The state found itself increasingly shorn of many of its old sources of revenue and responsibility. [473] [473] Wang Zhengyi, ‘Conceptualising Economic Security and Governance’, pp. 534-5. Expenditure by the central state, in its turn, came to account for a rapidly declining proportion of GDP: 31 per cent in 1978, reaching a trough of around 11 per cent in 1995. By the mid nineties there was deep concern about the loss of central state capacity that this involved, including the latter’s ability to promote balanced development between the regions, and a determined attempt was made to reverse the process. There were even fears that individual provinces were beginning to operate like independent countries, with an increase in their external trade and a decline in trade flows between them. [474] [474] Zheng Yongnian, Will China Become Democratic? , pp. 104- 5. As a result, the government introduced major tax reforms including, for the first time, taxes specifically earmarked for central government; previously, central government was dependent on a share of the taxes raised in the provinces, based on a process of bargaining between the two. The central government also acquired its own tax-collecting capacity, with a large majority of revenue now being collected centrally, some of which is then redistributed to the provinces. [475] [475] Ibid., pp. 136-7. Not surprisingly, the rich provinces strongly resisted paying higher taxes to central government. [476] [476] Zheng Yongnian, Discovering Chinese Nationalism in China , p. 32. By 1999, however, state expenditure had risen to 14 per cent of GDP and by 2006 to around 22 per cent. [477] [477] Nolan, China at the Crossroads , p. 30. Chinese tax revenues increased by 22 per cent in 2006 and by 20 per cent in 2005, which suggests that this process is continuing. Crucially, the state needs to be able to fund its new social security programme in order to provide for the tens of millions of workers made redundant by the state-owned enterprises which had previously been responsible for virtually all of their employees’ social needs, including education, health and housing. [478] [478] David Shambaugh, ‘The Rise of China and Asia’s New Dynamics’, in Shambaugh, ed., Power Shift: China and Asia’s New Dynamics (Berkeley: University of California Press, 2005), p. 18. The problem is particularly severe with education and health, which have suffered from very serious public under-investment during the last decade, a cause of deep popular concern and resentment. [479] [479] ‘Year of the Three Big Headaches’, South China Morning Post , 4 January 2007. The government is deeply aware of these problems and in 2008 alone education expenditure was budgeted to rise by 45 per cent. [480] [480] ‘ China ’s Priorities’, Financial Times , 9 March 2008. During the Maoist period, the state was responsible for almost 100 per cent of health expenditure: the figure is now around 16 per cent compared, for example, with about 44 per cent in the United States and over 70 per cent in Western Europe. As a result, a majority of the population can no longer afford healthcare. In April 2009 the government announced a major reform of the health system, including the short-term goal of providing basic insurance cover for 90 per cent of the population. The lack of a decent safety net and the threadbare character of key public goods fuel a sense of deep insecurity amongst many people, acting as a powerful incentive for them to save, even though the living standards of the vast majority, especially in the cities, have greatly improved. [481] [481] Yu Yongding, ‘ China ’s Structural Adjustment’, p. 5.

Finally, China ’s growth has been extremely resource-intensive, demanding of land, forest, water, oil and more or less everything else. Herein lies one of China ’s deepest problems. [482] [482] Yu Yongding, ‘ China ’s Rise, Twin Surplus and the Change of China’s Development Strategy’, pp. 24-5. The country has to support an extremely large and, for the most part, dense population in a situation where China is, and always has been, poorly endowed with natural resources. It has, for example, only 8 per cent of the world’s cultivated land and yet must sustain 22 per cent of the world’s population; in contrast, with only a fifth of China ’s population, the United States enjoys three times as much arable land and its farmland has been under human cultivation for one-tenth of the time of China ’s. [483] [483] ‘What Will the World Gain from China in 20 Years?’ China Business Review , March/April 2003. China ’s development, moreover, is rapidly exhausting what limited resources it possesses. Over the last forty years almost half of China ’s forests have been destroyed, so that it now enjoys one of the sparsest covers in the world. In 1993 it became a net importer of oil for the first time and now depends on imports for almost half its oil needs.