Development Centre

Chinese Economic Performance in the Long Run: The Policy Problems of Rapid Growth are Changing


The Policy Problems of Rapid Growth are Changing


In the projections I made in 1998, I cited three major problems, which might impede China’s prospects of high economic growth. One was the difficulty in reducing the role of inefficient state enterprises. A large proportion were making substantial losses. They were kept in operation by government subsidies and failure to service loans which the state banks were constrained to give them. Their importance has fallen very significantly. In 1993, state employment in manufacturing was more than 35 million; by 2005 it was less than 6 million. In the economy as a whole, state employment fell from 19 to 9 per cent of the occupied population. Hence this problem is no longer likely to be a significant obstacle to rapid economic growth.


A related problem was the weakness of the financial system. In the reform period there was an explosive growth of household savings and rapid monetisation of the economy. Savings were captured by the state banking system and the government had large seigniorage gains from the monetisation process. These new funds offset the disappearance of the operational surplus of state enterprise and the decline in tax revenue.


Although these developments were helpful to the authorities in maintaining financial stability, there were clear dangers in a banking system which operated with a large proportion of non-performing assets due to diversion of private saving to prop up state enterprises which by any normal standard would be regarded as bankrupt. Here again there has been considerable progress. There have been major improvements in the solvability and efficiency of the banking system. Most of the bad debts have been written off and China has attracted foreign participation in state banks by the sale of shares on the Hong Kong and Shanghai stock markets. In the two years since June 2005, more than $60 billion was raised this way and some foreign banks have been allowed to operate in China.


The third related problem was the weak fiscal position of central government. Total government revenue fell from 31 per cent of GDP in 1978 to 10 per cent in 1995. The tax base was seriously eroded by the large range of tax concessions granted by provincial and local governments, as well as by the dramatic fall in revenue from state enterprise. Tax revenue rose to 17 per cent of GDP by 2005, but needs to rise further to extend social protection and strengthen health and education facilities. These social benefits have been eroded by the decline in benefits formerly provided by state enterprises.


Energy supply and the Environment: The problem of energy supply and the environment has emerged as a significant new challenge to China’s future development. Electricity supply rose ten–fold between 1978 and 2005 and its availability at rather low prices transformed living conditions in many urban households. Car ownership has also risen and is likely to become the most dynamic element in private consumption. In 2006 there were about 19 million passenger cars in circulation, (one for every 70 persons). This compared with 140 million and one for every 2 persons in the United States. Judging by the average west European relationship of car ownership to per capita income, it seems likely there will be 300 million passenger cars in China (one for every 5 persons) in 2030.


There has been a surprisingly large improvement in the efficiency with which energy is used. In 1973, 0.64 tons of oil equivalent were used per thousand dollars of GDP, by 2003, this had fallen to 0.22 tons. The International Energy Agency (IEA) projects a further fall to 0.11 tons in 2030 in a scenario which takes account of energy efficiency policies the government can reasonably be expected to adopt. Energy efficiency was better in China than in the United States in 2003 and the IEA expects this to be true in 2030.


However, the environmental impact of energy use in China is particularly adverse because its dependence on coal is unusually large and carbon emissions are proportionately much bigger from coal than those from oil or gas. In 2003, 60 per cent of energy consumption came from coal, compared to 23 per cent in the United States, 17 per cent in Russia and 5 per cent in France. Eighty per cent of its electricity is generated by coal powered plants. This means that the ratio of carbon emissions to energy consumption is higher in China than in most countries. In the IEA “A” scenario, China is expected to emit 0.8 tons of carbon per ton of energy used in 2030, compared with 0.63 in the United States and a world average of 0.60.


Chinese coal is particularly dirty, sulfur dioxide and sooty particles released by coal combustion have polluted the air in its major cities and created acid rain which falls on 30 per cent of its land mass. There are more than 20 000 coal mines and nearly six million miners with low productivity and dangerous working conditions. Several thousand are killed every year in mining accidents. In north China there are some coal seams near the surface which burn continuously in unstoppable fires. These environmental problems are likely to be bigger in China than in the rest of the world, as it is more difficult and more costly to reduce the proportionate role of coal.


The other major problems facing China are social rather than economic.


The Legal System and Private Property Rights: China has made giant strides in moving towards a market economy and its legal system allows private enterprise to flourish. Property rights have recently been strengthened, but are a good deal weaker and more ambiguous than they would be in a capitalist economy. Land is still state or “collective” property. Peasants can get 30–year leases for their farms and urban householders can get 70–year leases on their houses; thereafter, their property reverts to the state. It is difficult to sell such properties or use them as collateral for loans. Paradoxically for a socialist country, property rights are weaker for ordinary citizens than they are for domestic or foreign capitalists. Urban developers find it easier than would be the case in a capitalist country to expropriate land of peasants or poor urban residents and demolish their homes without adequate compensation. Influential party officials are able to enrich themselves by conniving in such transactions. These problems have led to increased public protests and punishment of party officials for corruption. The equity and efficiency of the economy would benefit considerably if property rights were strengthened and the judiciary were less subject to official pressure.


Regional and Urban Rural Inequality: Regional inequality is extreme. There is a ten-to-one spread of average per capita income between persons living in China’s 31 administrative regions and the gap has hardly changed since 1978. Shanghai has always been top and Guizhou bottom. The divergence could be narrowed by major investment in transport and other infrastructure, improved education opportunity in the low income areas, removal of barriers to migration between different areas and elimination of the tax advantages enjoyed by special enterprise zones in eastern China. However, the mitigation of inter-regional income divergence is likely to be a slow process. Rural-urban inequality is bigger than in other Asian countries. The gap is biggest in the western provinces and lowest in the east. An important reason is the household registration system (hukou) established in the Maoist period to control population movement. It is reinforced by legislation to penalise immigrant workers who seek unregistered employment in urban areas. Despite some easing in the system, they are still denied public services such as health and education, they have difficulty in getting housing and employers who hire them may suffer financial penalties. Hence they are in a weak bargaining position and get low wages for long hours. Their wages are often in arrears and sometimes fail to be paid. These unregistered households are about a sixth of the urban population and their average income is 60 per cent lower than that of registered urban households. It is clear that this discriminatory registration system is a major source of social discontent which is in need of remedy. Removal of the system would certainly increase the urban inflow, but this is in any case inevitable in the long term.


Reasons for Taking a Long View
Chinese Performance from the Ninth to the Eighteenth Century
Institutional Differences between Europe and China
The Adverse Impact of Internal Disorder and Imperialist Intrusions
The Maoist Transformation and its Impact
Reformist Policies since 1978 Produced Three Decades of Dynamic Growth
The Outlook for the Next Quarter Century


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