China Economic Model: Challenges and possible solutions

One the hottest topics nowadays being addressed by academics and policy makers in China is how to rebalance the Chinese economy away from its heavy dependence on exports.  However, too many of the proposed approaches to this issue take rather narrow and simplistic views.   Take, for example, the proposal that domestic consumption should be increased through the introduction of incentives, such discounts or subsidies, to encourage the average Chinese person to spend more.  While this approach may lead to short-term improvement, I believe it is not a viable long-term sustainable solution: it cures the symptoms but not the disease.  Indeed, it appears to treat the issue of consumption as a variable to be adjusted in isolation from the complex reality of the Chinese economy and the prevailing developmental model.  This failure is all the more serious given the still on-going – and likely worsening – global financial crisis. There is a real urgency for China to quickly to revert to a long-term sustainable domestic driven model.
In my view, the key challenges that the Chinese economic development model faces today are: a) too much reliance on a Keynesian-drive approach, export-led growth, supported by high levels of public expenditure, particularly on infrastructure.  While this has, on one hand, achieved a high GDP growth rate, on the other hand, has resulted in a not-so-high growth in personal income; in other words, China has experienced over the last two decades a transfer of value from individuals to the government and corporate sector; b) economic growth too reliant on real estate, even beyond what official figures suggest, since many non-real estate enterprises still rely on real-estate price increase as source of profits. Fundamentally, real estate is a non-productive sector, does not promote innovation or efficiency gains, which is instead what China needs;  c) low wages constitutes a cap as to how much can individuals consume; contrary to general belief, Chinese people do not save a large proportion of their disposable income; they simply spend little, because they have little to spend;  d) lack of a proper social security net (education, healthcare, pension) which further aggravates this situation and tends to direct any income growth to savings instead of consumption;  e) an old-fashioned agricultural system that does not allow farmers to earn decent income from their products and push them to move to the cities, leading to f) a high reliance on urbanization as a source of economic growth. Moving farmers to the cities has worked well for Western countries over the last several decades at a time when resources where abundant and population low, and for China over the last three decades; however, there are no widespread examples around the world of well-functioning cities of 20mn, or more, inhabitants and China cities may face, in the future, unpredictable and destabilizing challenges;  g) other soft forms of value transfer away from citizens, such as forced evictions and/or poor compensation; lack of road safety enforcement that kills innocent people in the name of ‘efficiency’ – the sad statistics show that every year the number of people killed on the road amounts to those who perished in the Sichuan earthquake; the difference is that the latter was, generally speaking, was a natural calamity; the deaths on the road are the results of low level of education, respect for life, no enforcement of rules and rush to make profit: a true example of blood-soaked GDP; building inefficient infrastructure projects with public funds simply for ‘face’, to show that city x has a biggest railway station, as if big was a measure of progress; other types of value transfer include pollution, water sanitation, unsafe food, lack of social services, to mention only a few.  Last but not least, h) the loss of traditional Chinese culture and social values, now only found on TV series and in museums: Confucianism values seem to be forgotten by the young generations and affluent people. Those values have helped society maintain stability and mutual assistance even when the state was absent; now that they may disappear, the Government should take the reins again.
My proposed preliminary recommendation is to adopt an economic development model that puts citizens at the top of the priorities: central government target – and the resulting cascading of economic targets to local governments – should shy away from GDP and, instead use “household disposable income” as the main metric and reverse the process of recent years; that is, it should now promote a transfer of economic value from the public and corporate sector back to private individuals.  By doing that, the interests of the local officials and citizens would be more aligned, leading to fewer conflicts of interests and increased trust in the institutions. As a by-product of increased personal income, inflation fears would largely vanish. As an intermediate and temporary measure, we can still accept a GDP-focus target, provided that contribution from real-estate sector is excluded.  We are almost certain that the development of ‘cathedrals in the desert’, empty offices and shopping malls, and all ambitious ‘appearance-driven’, ego-boosting, low-yielding mega projects would be seriously reconsidered. We are confident that such a philosophical shift can finally achieve a ‘harmonious development” within a socialist society, even with Chinese characteristics.  The “GDP-fast growth” model has done wonders for China since 1978, lifted million of people out of poverty and projected the country into apparent-modernity. Praise goes to those policy makers who had the vision to implement those changes; however, in 2011,” the future is not what it used” to be and new approach is needed, even if this mean slowing the pace.

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2 Comments

  1. Rock Reply

    Benjamin needs a new word to make himself feel that he sdnous like he knows what he’s talking about, since “coprolitic” and the permutations that he frequently drops here have become trite.Ad hominems aside, I’ve been reading this blog for many years and the perma-bull focus is also trite. We could be in a full-blown economic meltdown and Prof. Perry would yet be trumpeting how peachy keen things are looking. There comes a time to acknowledge the forest, even if all that you can see is a tree. Now’s that time. If, like the IMF, you see rainbows and unicorns in our future, you have blinders on and are in denial.Any recovery that we might be (or might not be) seeing is an illusion.

    1. gulam Reply

      RE: Just a little pestvecripe on the credibility of the authors of the study : Study co-author Dr. Roy Spencer, a principal research scientist at the University of Alabama in Huntsville and U.S. Science Team Leader for the Advanced Microwave Scanning Radiometer flying on NASA’s Aqua satellite, reports that real-world data from NASA’s Terra satellite contradict multiple assumptions fed into alarmist computer models. That’s good ol Roy Spencer, creationist and fellow at the ExxonMobil funded Heartland Institute, a libertarian think tank and propaganda machine whose past endeavors include working with Philip Morris to question the science linking second hand smoke and cancer. This guy is the official climatologist of the Rush Limbaugh Show, so that should give you an idea of what kind of objectivity he brings to the table.Everything this guy writes on global warming, just like everything the Heartland Institute puts out, follows the same trajectory. First, it gets published in a marginal journal with low standards so they can say it’s peer reviewed. Second, it hits the right wing blogs, where conservatives accept it uncritically and rejoice because it tells them what they want to hear. Third, actual scientists read it and shred the faulty logic, poor assumptions, and abysmal methodology. Fourth, it hits the the left wing blogs, who take the opportunity to gloat a little and trash the study’s authors and all the uncritical right wing blogs. Fifth, the right wing websites, who would never be caught dead reading a hostile left wing website and who would never read anything written by actual scientists (who they consider to either be part of the liberal elite or part of an ill-defined conspiracy), never hear about what poor science the study they’re celebrating actually is, and go right on believing that their anti-global warming position is so obviously correct that everyone else must either be fools or conspirators.I believe the link pfft posted is step three. I saw a bit of step four out there yesterday. Step five is clearly already under way. Rate this comment: 0 0

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