What is So Difficult About Transforming the Chinese Economy?

By Liang Jing
Dec 5, 2009 – 5:17:35 PM

Everyone understands that to transform China’s economy, household consumption must increase, but few have real confidence in this strategy. What is so difficult about making over the Chinese economy? Overseas, people say that China’s consumption is inadequate because Chinese people save too much. This is actually a big misunderstanding. Some people save to buy property, to educate their children or in case of illness, but the bigger problem is that China has too many poor people, who, rather than despite having money fail to consume, in fact lack the money to spend. Most Chinese economists now recognise the fact that China’s basic pattern is: government is rich while the people, especially the peasantry, are poor.

In a recent article the economist Zhang Shuguang pointed out that from 1997 to 2004, government revenue increased some 204.7 percent, while the disposable income of urban residents increased by only 82.6%. The per capita net income of rural residents, who make up the majority of the total population, increased by only 40.5%.

There has in recent years been relatively significant growth in the wages of migrant workers, but an important fact that many overlook is, that, with the urban land prices soaring, the rent many migrant workers pay increases faster than their wages, exacerbating rather than diminishing the problem of the relative poverty of peasants. [1]

Since the Government has money, and the people don’t, isn’t raising consumption quite straightforward? Wouldn’t the problem quickly be resolved by the government distributing money to the people, and in particular to the peasantry?

Commenting on the economic imbalance between the US and China, some economists say that the American economy should turn from extravagance to thrift, while China’s should turn from thrift to extravagance. According to common sense, changing from thrift to extravagance is easy, while once accustomed to luxury, it is hard to be frugal. This common sense doesn’t apply in China. The basic reason is that the Chinese government is one that can only amass wealth by unfair means but absolutely cannot distribute the government’s wealth. Tax cuts alone are insufficient to substantially enhance Chinese people’s share of GDP consumption and transform the economy. Substantial increase in expenditure on the poor is required, which is precisely what the Chinese government is most reluctant and most unable to do. In decision-making circles, massively increased expenditure on the poor and on the peasantry in particular has been powerfully blocked by officials and scholars. One of their major “theoretical” reasons is that growth must be ensured first of all; if the government doesn’t use its money to maintain high growth, the growth rate will fall, causing instability in society as a whole. Is this a kind of intimidation tactic used to maintain the vested interests of the bureaucratic class, or a real danger?

I think there are two factors. Many years of rapid growth have indeed led to the formation of powerful vested interests, and many people seek to make money and earn a living out of rent-seeking in the allocation of investment and large-scale projects; were significant reductions to occur in government investment, their interests would suffer. More importantly, the service sector developing out of these rent-seeking activities, such as catering and sexual services, is also highly dependent on the Government’s large-scale investments, and is bound to be is strongly correlated with the scale of government investment. A clear tilt of fiscal policy to the welfare of the poor and the peasantry would mean a decline in the demand for and employment in these services. As with a drug addict, its physiology has been changed, such that going cold turkey will bring about a reaction of intense discomfort, not to mention a serious health risk.

At the level of governance, the problem is even worse. China’s vast poor population is distributed in the central and western rural areas; not only are the people poor there, the government is too, and many local governments are hard put even to pay the salaries of their officials. Extending central government transfer payments to these places brings in its wake a whole set of problems. First, it will stimulate more corruption. A recent story from Guiyang [provincial capital of Guizhou] relates how in large numbers of people who were not qualified to receive the minimum welfare guarantee [dibao] managed to receive it on the basis of human sentiment [renqing]. If this is the case in the city, how much worse it is in rural areas can only be imagined. [2]

An article entitled “Lanzhou: the game between poor government and poor people,” in the latest issue of Nanfengchuang magazine, says that governments in backward regions have developed a powerful “fee-charging narrative.” Letting local governments steeped in this narrative issue welfare for the masses of poor people is like getting gangsters to play generous do-gooders—it’s bound to go against the grain. In essence, maintaining large numbers of poor people is an intrinsic requirement of dictatorship. For when a majority of the population has assets in excess of basic needs, their awareness of power will increase, as will their capacity to engage the government in its games. And China’s elite class grasps this point instinctively.

From this perspective we may readily see why the government is much more enthusiastic about reducing carbon emissions than reducing poverty. Not only do the elite classes themselves want to have a cleaner, greener environment, but as well, they now have a good excuse to make the government spend more money without returning more of it to the people to go spend.

* Liang Jing, “Zhongguo jingji zhuanxing nanzaihechu?” [What is so difficult about transforming China’s economy?], Xin shiji, 2 December 2009 [梁京： “中国经济转型难在何处？”， 新世纪，2009年12月 2日 (<http://www.ncn.org/view.php?id=76893>here).].

[1] Zhang Shaoguang, “Jingji shiheng: zhengfu fu, baixing qiong” [Economic imbalance: rich government and poor people], , 2 December 2009 [张曙光：“经济失衡：政府富，百姓穷”， ，2009年12月 2日 (<http://www.chinavalue.net/Article/Archive/2009/11/3/188761.html>here).].

[2] Xinei renshapolang, “Guiyang 6000 yu ren bei quxiao dibao zige, ‘renqing bao’ zhou chongchuang” [Over 6,000 people’s dibao qualification canceled in Guiyang, “sentiment guarantee” suffers heavy losses], Huanqiu shibao, 11 November 2009 [Xineirenshapolang (pen name): “More than 6,000 people’s dibao qualifications have been canceled, Guiyang guaranteeing qualification” human security “by the heavy losses,” Global Times, November 11, 2009 (<http://www.feloo.com/news/show.php?id=14316>here).].