China has no choice but to look inside itself for growth
Self-sustaining domestic growth in China is a necessity, not a chioce, writes Jeremy Warner.
By Jeremy Warner, Tianjin
Published: 10:16PM BST 15 Sep 2010
At the World Economic Forum’s “summer Davos” in Tianjin this week, Wen Jaibao, the Chinese premier, held out the promise of bold reform that would restructure the Chinese economy away from the old export-led model of development to a more balanced and healthier form of growth based on domestic demand, and particularly consumption.
We’ve heard this before from China’s leaders. They’ve been promising it for years, but little seems to change. China’s essentially mercantilist approach to growth persists regardless of the rhetoric.
Is China set to disappoint again? The financial crisis gave reason to believe that this time, the Chinese leadership might be serious and perhaps as much out of necessity as design move to address this long-standing sore at the heart of the world economy.
Yet after a brief interlude in which exports plunged and imports surged thanks to economic collapse in the West and China’s fiscal response to it, the old order seems to be reasserting itself.
The IMF has predicted that China’s monstrous current account surplus would soon reincarnate itself in an expanded form. Such an outcome would be unacceptable to the US, and in any case the debt constrained state of demand in advanced economies would seem to make it a logical impossibility.
China cannot hope to rely for much longer on export expansion to sustain present breakneck growth. That phase of the development process is already close to exhaustion. Something has got to change. China’s vast internal market of 1.3bn souls has to be persuaded to become the main driver of growth instead.
I’m in China trying to understand how this transformation might occur, and though past experience gives few reasons for hope – Chinese consumption as a share of GDP has actually been falling during the past decade – I’m more optimistic than I was.
That’s not to say there won’t be setbacks. The past two years of accelerated modernisation and speculative development, has made some kind of a bust, or at least pause in the growth story, much more likely.
You cannot have development on such a scale and at such a speed without misallocation of capital, even in a planned economy. When it happens, it will be a rude awakening for a country which is overarching self-confident believes it can do no wrong.
The country’s authorities may have left it too late to rein in bank lending. But if the pace of development does stall, they will do their utmost to fight it – or cover it up. The Chinese economy remains largely opaque; unreliable statistics combined with inscrutable public policy and impenetrable transmission mechanisms mean it’s never entirely clear what’s going on.
Nevertheless, it is clear that this vast land mass and population is undergoing a profound industrial revolution. There is a momentum which looks pretty much unstoppable on any kind of long-term view.
Over the next several years, China must move to what might be called the Henry Ford phase of development, or the recognition that to command a mass market for its goods, China must pay or subsidise its workers well enough to actually buy them.
Environmental considerations, including the widening use of solar power, may be a key driver of this change.
Already that process has begun. Labour rates are rising strongly, and in his speech this week, Wen Jabaio hinted at further policy action to improve disposable incomes, social security and the availability of affordable housing. What China loses in export competitiveness by adopting such policies it will gain in domestic purchasing power.
Any analysis of this transition must include an examination of the constraints on private demand growth in China, which thanks to the legacy of 30 years of Maoist rule are legion.
According to the Chinese saying, you should plant trees in your youth so that you can sit in the shade in your old age. This way of thinking has long instructed the Chinese approach to development and helps explain why China has invested so heavily in infrastructure.
Unfortunately, there’s not much point in having pleasant tree lined avenues if there’s insufficient enterprise to take advantage of them. A spanking new, first world infrastructure is no guarantee of future prosperity.
The Great Wall of China was by the standards of its time a structural achievement of even greater ambition and apparent utility than today’s gleaming sky-scrapers, super highways and high speed bullet trains, yet it was followed by centuries of stagnation and relative decline. Structurally and culturally, Chinese society was incapable of matching the innovations that were transforming Europe.
Some of these weaknesses in Chinese society persist and have even been enhanced by communist rule. The state owned or sponsored enterprises (SOEs) that dominate the Chinese economy are still rigidly hierarchical organisations typified by imperious chief executives, poor promotional prospects, shockingly deficient R and D, and low rates of innovation. Many of them are monopolies.
There is a fear of failure, or loss of face, which permeates the educational system and acts as a significant barrier to entrepreneurialism and innovation. The Chinese are taught to work for others rather than themselves.
The “can do” attributes of China’s unique brand of authoritarian capitalism have self evidently served the country well during the past three years of crisis in the advanced economies. Set against the paralysis that afflicts the US, it might even be said to have eclipsed the West’s laissez faire, democratically driven approach to economic management, and provide a model for us all.
On this I remain unashamedly sceptical, for with the exception of present traumas, most modern history would not incline you to the view that politically directed development is more successful in generating wealth than market driven growth.
Creativity, ideas and innovation, the great enablers of economic progress, require free societies.
Yet for now, absence of the West’s crippling legacy costs, both from the crisis and social entitlements, will in itself continue to drive strong relative improvement.
The reason self-sustaining domestic growth will soon be taking up the baton of Chinese development is simple; it’s not a matter of choice, but of necessity and economic evolution.