China's Post-Reform Economy - Achieving Harmony, Sustaining Growth

Richard Sanders, Chen Yang, Richard Sanders, Chen Yang

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134078509
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

China has enjoyed heroic growth rates in the last twenty five years of reform and transition, pulling more people out of poverty more quickly than at any other time in human history. Nonetheless these successes have had costs: today China is faced with increasing environmental difficulties and there is a dangerous level of inequality of income and

1
Introduction
China’s post-reform economy

Richard Sanders

Opening remarks

As Will Hutton¹ argued in an international conference of (mostly) Chinese economists in 2006,² ‘the next twenty-five years will be a great deal harder for China than the last twenty-five years’.

Once the Third Plenary Session of the Eleventh Party Congress had accepted the reforming ideas of the fully rehabilitated Deng Xiaoping in December 1978, the political economy of China that had been created by and in the image of Communist China’s first supreme leader, Mao Zedong, including its unique autarkic, anti-capitalist and antimarket stances and policies, was finally set aside. Indeed, China embarked upon a reform process beginning in the very early 1980s under the slogan ‘Reform and Open to the Outside World’ (gaige kaifang), which set in train such radical shifts in policy that the political economy of China has now become almost unrecognizable from its form twenty-five years ago. Some of the earliest reforms, including the abolition of the commune system in the countryside—where 90 per cent of the population then lived—and its replacement with small-scale, de facto privatized family farming between 1980 and 1983 with the introduction of the ‘Household Responsibility System’, struck deeply at the very fabric of Chinese socio-economic life. As the state began a partial withdrawal from its top-down, autocratic, direct management of the economy, markets were reintroduced into the countryside, price controls were partially lifted and local political leaders were encouraged to engage in economic enterprises of all kinds, as were farmers to undertake a wide variety of sideline activities which had been denounced by Mao as ‘capitalist tails’ (zebenzhuyi weiba) during the first twenty-five years of the life of the People’s Republic.

Other fundamental economic reforms followed. In particular, China abandoned its isolationist stance in relation to the rest of the world. Embracing traditional Western economic principles associated with Ricardian theories of comparative advantage, China embarked upon the development of international trading relations with all comers, including the Western capitalist nations, so vilified in the days of Mao. Hotels sprang up in Beijing, Shanghai and Guangzhou to cater for the foreign tourists that the government, determined to attract hard currency, became so eager to woo. Loans from international aid agencies including the World Bank began to pour in with official encouragement. And to cap it all (given the Chinese Communist Party’s historic detestation of the international concessions which humbled the Chinese in pre-Communist times), Deng Xiaoping’s government created four (then five) Special Economic Zones (and subsequently a tranche of ‘open cities’) to allow foreign companies, albeit with Chinese partners in new joint venture operations, special privileges, to include a relaxed regulatory and bureaucratic environment as well as tax holidays, in order to encourage direct foreign investment in China by overseas multinational companies.

As China’s autarkic economy opened up through the 1980s, so its planned economy began its transformation to one powerfully influenced by market forces. While China’s attitude to the privatization of the often massively loss-making state-owned enterprises (SOEs) remained very cautious, ‘soft budget constraints’ were strengthened and private companies began to jostle with state- and collectively owned enterprises for shares in China’s rapidly growing domestic markets. Two stock exchanges, in Shenzhen and Shanghai, were established in 1989. And thus by the end of the 1980s, at the time when the break-up of the Soviet Union and the collapse of its hold over its European client states created a new class of ‘transitional economies’, China’s transition from plan to market had already achieved spectacular results, with gross domestic product (GDP) per head rising annually at double-digit growth rates. In 1980, Deng Xiaoping had set an optimistic target of quadrupling GDP by the year 2000. Given that this target was achieved by the early 1990s it is hardly surprising that China’s paramount leader, after his well-publicized ‘Southern Tour of Inspection’ in 1992, gave his blessing to the reforms that had occurred up till then, giving the green light to future reforms, reinforcing the reform process in general and ensuring that it could never be reversed.

After 1992, the second phase of reform began in earnest. Privatization of the SOEs, particularly the smaller ones, was further encouraged, new forms of enterprise restructuring, including stockholder restructuring, were subsequently initiated, price controls were abandoned and wholly foreign-owned enterprises were permitted to enter China. Thus, by the time China became the 144th member of the World Trade Organization (WTO) in December 2001, China was so far down its path of reform that many observers both within China and without began to query whether the Chinese government’s officially termed polity of ‘Socialism with Chinese Characteristics’ was simply capitalism by any other name.

Whatever the answer to that question, no-one who has taken any interest in international political-economic issues in recent years can be unaware that China’s transition has, at the very least in material terms, achieved remarkable results. While per capita GDP growth rates have averaged close on 10 per cent per annum, for twenty-five years, average material standards of living have been transformed, pulling more people out of poverty—perhaps 800 million or more—than at any other time in human history. Not everyone has benefited equally. While an elite of dollar billionaires has been created alongside an urban middle class enjoying the accoutrements of affluence previously enjoyed only in the highly developed economies of North America, Europe and Japan, there still remain 80 million or more mostly rural Chinese in the middle and western regions of China whose lives have been largely untouched by the reform process and who continue to live in abject poverty.³ Nonetheless, it is difficult to gainsay the fact that China’s economic achievements from 1980 to date have been spectacularly successful. China is now recognized as a major player in the global economy, with President Hu Jintao accepted as the leader of the ninth member of the G8 group of countries,⁴ as China plays an increasingly important and decisive role within the World Trade Organization and becomes an ever more active and significant permanent member of the United Nations Security Council. China is now, in purchasing power parity terms, already the fourth largest economy in the world and is confidently predicted by many to overtake the United States of America as the richest absolute economy well before this current century is fifty years old. China, in any conceivable terms, is a formidable global economic power, a status it has achieved in little more than a generation.

Given China’s remarkable success to date, therefore, why do so many commentators agree with Will Hutton that things may well get much more difficult for China in the next twenty-five years than in the past twenty-five years?

China’s post-reform economy

China’s transition to a market-based economy along the lines of North American and European capitalist economies has some way to go as the reform process, though radical and fundamental in so many respects, continues on its gradualist, pragmatic and experimental path.⁵ Even today, there are over 150 super-large state-owned industrial and commercial enterprises and the government still plays a significantly more pivotal and direct role in the social and economic life of the Chinese than is common in Western, market-based economies. Nonetheless, I believe it to be reasonable, at this particular conjuncture, to talk about China’s post-reform economy, if only in the sense that the Chinese leadership, as personified by President Hu Jintao and Premier Wen Jiabao, has itself for the very first time begun to take stock of what has been achieved so far, and, perhaps more poignantly, what has not.

Thus, very recently, and particularly since 2006, new themes and new directions have begun to emerge. As Professor Wing Thye Woo of the Brookings Institution reminds us in Chapter 2, the Chinese leadership—at least in official policy pronouncements and propaganda—has begun to de-emphasize the importance of achieving ever faster economic growth rates⁶ (as measured by GDP) by speaking of other goals—equality, honesty, democracy, caring, justice, above all harmony, harmony not just of society with nature but within society itself. Hu Jintao and Wen Jiabao can thus be interpreted as realizing that China’s ‘GDPism’ of recent decades, while solving many problems associated with the past, has created new problems, limiting the capacities of all Chinese to appropriately enjoy the fruits of economic growth achieved by it so far and thereby providing obstacles for China to create a society at ease with itself.

Those problems, political as well as socio-economic, have arisen partly as a result of the sheer speed and scale of growth. Fast growth is clearly a great deal easier from a lower than from a higher base: maintaining growth rates at double-digit levels is clearly impossible indefinitely, certainly without either appropriate adaptation of prior institutions and/or new institutional innovation to deal successfully with rapidly changing socio-economic circumstances. But even if it were possible, there are questions whether it would be desirable to do so without addressing the problems that have been thrown up by the growth process to date, problems which themselves result from slow or inappropriate institutional adaptation and innovation.

In this introduction, I want to stress perhaps the most critical of issues currently confronting China today and arguably the problem which underlies many of the difficulties for China in, on the one hand, achieving harmony and, on the other, sustaining growth: that of inequality. As I suggested in my opening remarks, the benefits of growth have not been equally enjoyed. This, perhaps, is inevitable in a political economy hellbent on fast rates of economic growth and encouraged within an institutional context of increasing marketization in which ‘to get rich is glorious’.⁷ Markets do not pretend to be equal, and liberal economists are frequently contemptuous of those who criticize the market for leading to inequality. This is hardly surprising: after all, according to such economists, markets ‘work’ to (re)allocate resources optimally as a result of price differences which encourage factors of production (including people) to move out of unprofitable, inefficient sectors into more efficient ones. If prices (including incomes) were equal, liberal economists would argue, the market would lose its essential dynamic and rationale. However, even they accept that there comes a point where the inequalities created in the course of market-based growth pose difficulties for future growth, particularly at the point where inequality leads to social dislocation and threatens social breakdown, a breakdown that is much more likely to occur where appropriate institutional adaptation and/or innovation has not taken place.

The new themes aired and programmes initiated currently suggest that the country’s leaders believe that China has reached just this point on its reform path. It was not difficult to persuade the Chinese in the early 1980s that ‘socialism is not poverty’⁸ and to mobilize them to escape the poverty that was more-or-less equally shared under Mao (at the end of the 1970s, China had, in the estimation of Brugger and Reglar (1994) a Gini coefficient of 0.26,⁹ one of the lowest in the world). But it is hardly surprising that problems would arise once the distribution of income had become markedly skewed, as in contemporary China. Thus, China has in the course of its transition in the last twenty-five years transformed itself from one of the most equal societies on the planet to one, as measured by the Gini coefficient, of the most unequal. With the Gini index standing at 0.45 (World Bank, 2004; Wu, 2007), China exhibits income inequality on a greater scale than either the USA or UK; indeed, China’s measured income inequality is not far short of the inequalities exhibited by many sub-Saharan African nations, plagued as so many of them are with instability, corruption, political chaos and civil war. And this inequality is clearly that much more politically difficult, indeed dangerous, in a country led by a nominally communist government, committed to the development of all the people.

As mentioned earlier, there are, currently, stark gaps in absolute levels of income in China, but it is not absolute income differentials, however grotesque, that threaten socioeconomic and political stability but perceived relative differentials (Sanders, Chen and Cao, 2007), differentials not only between the incomes of some social groups and other groups but also between their actual incomes and their expectations. Such differentials in income, allied with differentials in power and access to resources, throw up serious problems in the current institutional setting of China, a setting in which the ‘iron rice bowl’ of the days of Mao has been smashed apart while new institutions—dealing, for example, with new forms of welfare provision or environmental protection or civil rights—have yet to be created. As a result, the Chinese countryside is characterized by recurring protest and conflict (see, for example, Chapter 2) as well as environmental dilemmas (see Chapter 3), a vacuum of effective governance (see Chapter 4), huge streams of outward migration (see Chapter 5), posing all sorts of socio-economic problems for both the migrants themselves and the host communities in which they settle, and increases in vulnerability (see Chapter 6). Inequality is a bad hand-maiden of harmony.

Yet, although China must deal with inequality through appropriate redistributive policies and institutional innovations, it cannot afford to ignore future growth. Without growth, the government will simply be unable to satisfy the growing expectations of the middle classes let alone those of the common people (laobaixing) or those effectively marginalized within the growth process (see Zhang, Wu and Sanders, 2007). And therein lies the dilemma: the dual need for China not merely to achieve harmony, but to sustain growth at the same time. I believe that, although institutional adaptation and innovation and appropriate policy initiatives are needed to reverse China’s growing inequality in China, they must also take place to ensure that China’s growth trajectory remains strong. And therein lie the difficulties to which Will Hutton and others have alluded.

The next twenty-five years?

This book thus encompasses many of the problems that confront China in the short to medium term in achieving harmony on the one hand and sustaining growth on the other, providing suggestions for future institutional adaptation, institutional innovation and policy initiatives so to do. It is organized into two parts: Part 1 deals with issues pertaining, in the first instance, to the achievement of harmony; Part 2 focuses on questions associated with sustaining economic growth.

Part 1 begins with Wing Thye Woo’s discussions in Chapter 2 on the origins of China’s quest for social harmony and on the background to the Chinese government’s historic decision, made at the Sixth Plenum of the Sixteenth Congress of the Chinese Communist Party in October 2006, to shift its chief policy orientation from ‘economic construction’ to the ‘establishment of a harmonious society’. He argues that such policy reorientation has come about through the realization ...