For most of the last 30 years China’s leaders have been kept awake at night worrying about their country’s poverty. But as the country approaches its once-in-a decade leadership transition this fall, it is China’s affluence, rather than its poverty, that is causing sleepless nights.
Deng Xiaoping declared in 1979 that the goal of China’s modernization was the creation of a “Xiaokang (moderately well-off) society,” where citizens would be comfortable enough to lift their eyes above the daily struggles of subsistence. For more than a decade, Chinese people have been living a version of this once-utopian concept.
On a recent trip to the prosperous Guangdong province on the Pearl River Delta I was struck by the sophistication and wealth of China’s urban experience – but also by the fragility of the social compact on which it is founded. The country’s economic growth “slowed” to 7.6 percent in the second quarter (the weakest quarter since 2009, when 20 million Chinese lost their jobs as a result of the global financial crisis). Only last week, Premier Wen Jiabao warned of tough economic times ahead.
In Guangdong – where migrant laborers repeatedly riot, and where a new middle class fights hard to protect its advantages in the face of an economic slowdown – the regime is particularly challenged. After the experience of Tiananmen Square in 1989, China’s leaders are painfully aware that social strife and revolution are more likely to come about as a result of the thwarted ambitions of the aspirational than because of the complaints of the very poor.
Now that China is flush with wealth, some of its intellectuals are turning to a surprising source to understand its problems. J.K. Galbraith’s book The Affluent Society was a critique of the obsessive focus on GDP growth and production in the United States in 1958. He made waves by arguing that America’s obsession with the quantity of goods produced would have to give way to the larger question of the quality of life that it provided. In the introduction he famously argued that while poor men have a clear sense of their problems and the solutions, the rich man has “a well-observed tendency to put [wealth] to the wrong purposes or otherwise to make himself foolish”. As with individuals, claimed Galbraith, so with nations.
China has gone from being one of the most equal countries in the world to a nation with a bigger gap between rich and poor than the Unites States. Prominent left-wing thinkers such as Wang Shaoguang and Lu Zhoulai claim that Galbraith would have no difficulty recognizing the symptoms of his affluent society in today’s China. First, China’s leadership has spent a generation obsessively focusing on economic growth at the expense of all else. Second, inequality has run rampant as socialist China destroyed the “iron rice bowl” of social protection. Third, a surge of conspicuous private consumption has come at the expense of investment in public goods like pensions or affordable healthcare or public education. And fourth, spending on overdevelopment and vanity projects has grown, rather than necessary investments in welfare.
China’s supply of cheap exports was made possible by a deep well of migrant labor guaranteed by the “hukou system,” which ties peasants to the land and deprives them of all social rights if they pack up in search of work. The result is that a city like Guangzhou (formerly known as Canton), the largest in Guangdong, has become like Saudi Arabia: It has a GDP per capita on a par with a middle-income country, but academics estimate that only 3 million of the 15 million people who work in Guangzhou every day are officially registered inhabitants. The rest have no rights to housing, education or healthcare and live on subsistence wages. In Saudi Arabia the cheap migrant laborers are attracted by the oil wealth; but in Guangdong the laborers are the sources as well as the by-product of the wealth.
An absence of protection for most workers helps solidify the other leg on which China’s growth stands, cheap capital for investment in domestic infrastructure. Without state-backed pensions, healthcare or education, citizens save almost half their incomes as a hedge against personal misfortune. But the state-owned banks give them an artificially low interest rate. This makes vast amounts of capital available to entrepreneurs at cheap rates for speculative investments, which have swelled the GDP and strewn the Chinese landscape with white elephants like palatial municipal buildings, factories that stand still and empty hotels.
It is not just Guanzhou that is seething with social unrest, although the high levels of development in this region make the inequality more visible. China’s thirst for growth and affluence has created a bubble economy and trapped millions in poverty.
The number of government-recorded “mass incidents” (defined as a violent demonstration involving more than 500 people) has risen from 8,700 in 1993 to 87,000 in 2005, and 180,000 in 2011 according to several state-backed studies.
The debate has been brewing in China over the last few years about how to escape from the trap of its affluence. On the one hand, many on the new left have been calling for ways to stimulate domestic demand to remove the causes of social unrest. At the top of their list is boosting wages, ending the artificial subsidies for exports, providing access to social services, reforming the hukou system and ending the “financial repression” of artificially low interest rates.
Increasing wages and slowly allowing the renminbi to appreciate will be hard enough, but ending the financial repression of artificially low interest rates will strike at the core of China’s most powerful vested interests.
What’s more, these measures will slow growth. That is why many on the right are looking for a way to make China’s affluence more acceptable. They want to privatize state-owned enterprises, encourage business to move up the value chain, and develop policies that can legitimate the inequality they think is essential to drive progress. Many have celebrated what the Chinese academic Xiao Bin has hailed as a “Guangdong model” of flexible authoritarianism that gives greater voice to the concerns of citizens on the Internet and allows civil society and NGOs to voice concerns. Last week – after some particularly violent riots in the town of Shifang in Sichuan province – senior members of President Hu Jintao’s leadership group encouraged cadres to “listen closely to the masses” and try to find ways of mediating and resolving disputes rather than relying on brute force.
But Wang’s worry is that without a massive attempt to deal with the causes of unrest, each of these problems will get worse. “Galbraith’s advice hasn’t led to anything in America”, he wrote in an essay last year, “so Socialist China should be doing better”.
The financial crisis did not therefore just signal the death knell of the Washington consensus. It also started a crisis of China’s own development model. Prosperous areas like Guangdong were immediately plunged into chaos as the West’s demand for imports from China fell off a cliff. This came on top of a growing sense that the traditional foundations of growth were eroding as labor costs, the price of land and exchange rates all went up.
China’s massive stimulus package helped in the short term but exacerbated the longer-term imbalances. Today, intellectuals declare that Deng’s Xiaokang society has reached its natural limits, as migrant workers take to the streets in unprecedented numbers and officials air differences about policy.
While their predecessors had to cope with the problems of poverty and the legacy of socialism, the new generation of Chinese leaders, who rise to power this fall, will need to escape the trap of a market that produces – in Galbraith’s words – private affluence and public squalor.
JK Galbraith’s “The Affluent Society” is surprisingly timely with its critique of policymaker’s excessive focus on GDP. Over the last few years, a wide literature on the economics of happiness has emerged, criticizing the claim that welfare should be quantified solely in monetary terms. Why, if GDP has been rising in regions such as the US or Western Europe in the second half of the twentieth century, are citizens becoming more and more unhappy? The increased incidence of depressions and mental health problems more generally in Western, affluent countries, is a piece of evidence in this regard. Indeed, national governments have begun to look beyond the GDP balance sheet and into alternative ways of measuring welfare. Nicolas Sarkozy pursued this path in 2008, when he set up the Stiglitz Commission. The latter comprised policymakers and academics, such as Nobel Laureate Amartya Sen, and put forward alternatives to the usual GDP measure of welfare. Some of these suggestions included people’s well-being and the sustainability of a country’s economy and natural resources. The British Prime Minister, David Cameron, followed a similar path in the UK.
Perhaps in this context, one ought to ask if we should not in fact reassess China’s affluence crisis. Policymakers may have to look into the type of growth that they have enjoyed up to now and may find upon a closer analysis that citizens’ welfare is in fact falling. China’s obsession with economic growth over the past decades has clearly been detrimental to other aspects of Chinese society. Your point on rising inequalities proves precisely this.
The inequality debate in China brings to mind a wider concern. As the world economy grew more and more over the last 50 years, the distribution of wealth also became increasingly unequal. China is not an isolated instance of that, and indeed many Western countries have suffered of the same phenomenon.
The sustained increase in real disposable income for OECD households occurred in the background of rising inequalities. The richest 10% experienced much faster income growth than the poorest 10%, leading to a 9 to 1 income ratio between rich and poor. At the heart of rising inequalities lies the rapid onset of globalization. With increased mobility of capital, developed countries outsourced production to the developing world. This in turn led to improvements in employment prospects and living standards for poor individuals other parts of the world, thus harming domestic workers, resulting in layoffs and lower wages.
Furthermore inequality can also be traced back to other factors. One element is the improvement in information and communication technology, a highly skill-biased sector. Additionally, regulation and institutions are also key players in inequality trends. In mainland Europe and Japan, inequality has been less of an issue than in the Anglo-Saxon world due to the corporate governance, tax laws and unionization in place. More specifically, product market deregulation, social transfer changes, wage-setting mechanisms all played a significant part.
Inequality is often perceived to be intrinsically bad. Policymakers and individuals find a moral appeal in the view that individuals are in some sense equal and that large income discrepancies are negative. The inequality debate is however much more intricate than that. One cannot argue that an equal society, in which all individuals are very badly off, but are equally badly off, is a desirable one. There is furthermore the concern that excessive equality may hinder economic progress, lead to the crowding out of investment and disincentivize productive individuals. Additionally, while it is intuitive to say that inequality for which individuals bear no responsibility is unjust and should be addressed, it is harder to make the case for redistribution if inequality is the result of voluntary choices. All these aspects need to be kept in mind when designing redistributive policies.
Inequality also suffers of the same shortcoming as current GDP measures, in virtue of the fact that they are both quantified in monetary terms. This drawback makes it impossible to look into the various dimensions along which inequality can arise. We may have inequality of opportunity and of ability, not only of income. This raises two worries for the policy debate. On the one hand, inequality of opportunity may still be pervasive even if income inequality is not. On the other hand, even if income inequality exits and is addressed, it may coexist with other forms of inequality which are not being dealt with.
This policy challenge is not straightforward, yet future research can lead to insightful results.
Returning to China’s current problems, I think it’s interesting to remark on the outside view of China as an ideal of export-led success and China’s actual internal problems, which are undermining its economic model. Problems abound especially on the social side, as banks take advantage of savers through regulated interest rates, and consumers are charged unfairly for their purchases by state owned enterprises (this is possible due to prevalent barriers to competition). Due to corruption and unjustified government control, officials often cheat farmers and pay them unfair prices for agricultural plots.
Given recent developments, China runs some risks of suffering a severe downfall, similarly to other fast-growing economies before it. The case of the Asian tigers in the run-up to the 1997-98 decline comes to mind. The economies of the tigers were sustained by high investment rates, which gradually created financial fragility. When trade decreased, investment suffered the consequences and capital left these countries. As a recent Economist piece indicates, China has been investing at a faster rate than the tigers. As the same article illustrates however, China does stand out from the tigers in one regard: it is reliant on own resources and not on foreign borrowing, rendering capital flight less of a concern.
The country’s reliance on internal resources may however become more of a problem in the future, as savers become dissatisfied with interest rates on their deposits and look for international destinations for their capital. To make things worse, China’s saving rate is likely to fall over the coming years, as its population ages and employing workers becomes a more costly affair.
Finally, I would also like to remark on China’s relationship with the US, especially in light of the upcoming American elections. Mitt Romney, the Republican candidate for the presidential seat, stated recently that if elected he would declare China a currency manipulator on his first day in office. Moreover, he promised to take measures against China’s predatory pricing and its policies providing unfair subsidies to state-owned firms. These are strong statements, and if Mr Romney were to carry his plan through, worries of a trade war would emerge. This could be an interesting topic to explore in a future column.