China’s Place in The Global Economy
3 March 2008 Jonathan Reuvid
The rate of China's economic growth is providing a challenge to its underdeveloped regions. In an abridged extract from his book, Business Insights: China, Jonathan Reuvid examines the pressures facing the country's rural population.
The dominance of China on the economic stage offers an interesting debate concerning the country’s future: that its economic miracle carries with it the seeds of its own destruction.
The essence of this argument is that China’s medium- and long-term prosperity is at risk and that the unrestrained dash for growth over the past 28 years, and the continually increasing standard of living for the urban population, is unsustainable. There are three strands to the argument:
- The structural defects of the Chinese economy and the weaknesses of its financial system and controls could cause the economy to implode.
- The ‘law of numbers’ suggests the improbability that by 2012 Chinese investment could triple again or that Chinese exports could grow to three-and-a-half times those of Germany, the world’s current leading exporter – which is what an extrapolation of historic rates of growth implies.
- The exploding trade surpluses with the US (and the EU) and accumulating foreign exchange reserves are causing such imbalances in the global economy that protectionist measures against China are inevitable.
One of the main arguments that could prove intractable unless the government takes decisive action is the imbalance between East and West
STRUCTURAL DEFECTS AND WEAKNESSES OF THE ECONOMY
For those visiting China, whose exposure is limited to the prosperous municipality and city environments in the east or south or the vibrant urban communities of the north, the disparity in living standards between those locations and the undeveloped and rural areas in the west may not be apparent.
Observers may be struck at the unfamiliar dynamism of the local and, it is assumed, national economy where the rate of growth is four or five times of the West. In those parts of China, nothing seems impossible in the ‘can do’ atmosphere of this particular open-market economy.
But venture into the countryside or beyond Chongqing into central China, or further westwards, and quite different impressions emerge. These are territories for which the door of economic development is barely ajar.
Small wonder that migration into towns and cities, driven by need or ambition, continues.
Around 130 million Chinese exist below international poverty lines, while 100 to 250 million surplus rural workers are in limbo between villages and cities, subsisting through part-time and low-paid jobs. And yet, 45% of the population is still employed in agriculture, contributing only 11.9% to GDP.
Allowing for those unemployed from the rationalisation of state-owned enterprises (SOEs) and school and recent college leavers, in addition to the migrant unemployed, a 2005 unpublished paper from Harvard University's Kennedy School of Government estimated that the real unemployment figure could be as high as 170 million, implying a need for China to create some 24 million new jobs a year in order to avoid rising unemployment levels. This need provides an underlying motive for government policies to maintain GDP growth by fuelling exports.
The gap between the depressed rural areas is growing wider. Since 2000, eight of China’s provinces and municipalities, accounting for 40% of the population, have generated almost 75% of national growth.
According to Angang Hu, an expatriate Chinese academic, the purchasing power parity adjusted per capita income in Shanghai exceeded $15,000 in 2006, compared with Guizhou in the rural west at $1,247. The most recent UN World Development Report ranks China in terms of its Gini coefficient of equality behind the US and the UK among developed countries and below India in the developing world.
The concern here is that, if left unchecked, the inequality between the rural and urban populations will generate serious civil unrest. The solution to this problem is twofold:
- A massive programme of public investment including infrastructure project spending on the scale of the mammoth $24bn Three Gorges Dam, largely completed in 2006, which has revolutionised flood control and electrification in the area, albeit at the cost of displacing many millions of the population.
- The deployment of government savings to improve education and social services and to stimulate consumer spending. A proportion of China’s foreign exchange reserves could be deployed in that direction. Creating high employment centres of industry in central and western China would be the most effective tool for a longer-term remission to the West-to-East drift.
The funding for this gigantic development plan can only come from changes in the pattern of gross domestic investment, which is already the highest in the world at an estimated 40% of GDP (or a further shift away from investment in SOEs), the application of a part of China’s current account surpluses and, if necessary, a redeployment of a part of the foreign currency reserves into the domestic economy.
As the economies of the poorer regions burgeon and living standards rise, increasing domestic consumption will act as an accelerator.
The undeveloped regions and associated unemployment issues are probably the greatest challenge to China’s continued prosperity.
Extract from Business Insights: China, published by Kogan Page, www.koganpage.com, hardback, 318 pages, £45.