On the (Non-)sustainability of China’s Development Strategies¹

Abstract

This article summarizes the main characteristics of the two major Chinese growth strategies since 1978, namely the Deng strategy (named after Deng Xiaoping) between 1978 and 2011 and the Xi strategy (named after Xi Jinping) since 2012. After a brief description of both strategies, it analyzes in depth whether the respective reforms of the two strategies have caused sustainable or unsustainable growth and economic development. Furthermore, it derives some implications concerning the danger of a Chinese middle-income trap and proposes some policy recommendations (also against the background of the Korean experience).

Keywords:

• China
• sustainability
• economic development
• rebalancing

Notes

1 The paper was presented at the Second World Congress of Comparative Economics in St. Petersburg (June 15–17, 2017). I would like to thank the participants of the session “Catching Up —Prospects for Growth of the Chinese Economy” for discussion and particularly Linda Glawe for valuable research assistance.

2 See also Wei, Xie, and Zhang (2017, p. 53), who emphasize that “public funding for infrastructure was limited, especially in the early days of the reform era.” Therefore, efforts were concentrated on special economic zones and special development zones in the coastal provinces. Moreover, “policy reforms within these zones were politically easier than doing the same things on a national scale.”

3 Translated from the German “Erst kommt das Fressen, dann die Moral.” Brecht and Lucchesi (2005).

4 At the heart of this statement is the so-called “Engel’s Law.” This “Law” states that the richer a household becomes, the less it desires to spend on food. Kongsamut, et al. (2001) extend Engel’s Law by arguing that the (average) household then desires to spend more on services, whereas Brecht argues that it then places more emphasis on morals (social values), which can be understood as a kind of noneconomic service.

5 As Naughton (2017, p. 20) notes: “In China, as in other East Asian societies after World War II, there has almost certainly been a profound social and political consensus in favor of growth.”

6 Theoretically, China also had the alternative option to follow Japan’s example and just learn from the knowledge (blueprint) incorporated into imported high-end products (for the theoretical foundation, see the new growth theory, for example, Coe & Helpman, 1995, Falvey, Foster, & Greenaway, 2002). However, this technologically more ambitious alternative may have been too risky for China, as, in contrast to Japan, China was still at a lower technological level (i.e., it lacked experienced engineers capable of successfully implementing this “blueprint” detection method).

7 “Deng built a system of tacit norms by which senior leaders were limited to two terms in office, members of the Politburo Standing Committee divided leadership roles among themselves, and the senior leader made decisions in consultation with other leaders and retired elders” (Nathan, 2016).

8 Of course, it is not possible to prove this, as the counterfactual cannot be tested, that is, history cannot be turned back (there is no time turner as in the Harry Potter stories).

9 On the “gradual, incremental, and somewhat experimental changes” under the Deng reforms see, for example, Das (2012).

10 In addition, Premier Minister Li Keqiang recently (2016) stated that “(t)he new normal means . . . a farewell to the unbalanced, uncoordinated and unsustainable growth model,” though the IMF argues in its recent country report (2016) that this “transition is proving difficult and bumpy” (IMF, 2016, p. 4).

11 Here “sustainability” is understood as follows: a development policy is sustainable if the adopted growth path (or policy strategy or development strategy) can be maintained for a long time without the overall social system collapsing.

12 However, it has to be taken into account that this change was also, to a certain extent, driven by the after effect of the global financial crisis to reduce the sensitivity of the Chinese economy to exports.

13 In a nutshell, the structural rebalancing process is associated with significantly declining growth rates. If the growth rate drops below a so-called “political legitimation line,” this may cause civil/political unrest. As the Chinese population is used to very high GDP growth rates and thus may have even higher expectations of future growth performance than other countries, Chinese politicians might prefer to delay the rebalancing reforms.

14 For such a characterization of the development stages in China, see, for example, Fischer (2016). On the “One Belt, One Road” initiative see, for example, Lim, Chan, Tseng, and Lim (2016) and Wang (2016). On the “Chinese Dream” vision see, for example,, Sørensen (2015).

15 Hence, ending the Xi-strategy and returning back to the Deng-strategy would end in a disaster. Therefore, there is no alternative to sticking to the current rebalancing course.

16 On this vision, see Sørensen (2015). Xi also repeated this during his recent visit in Russia when he noted: “I see a lot of touch points in our development strategies. The Chinese side and the Chinese people are stubbornly following the path of realizing their dream of a great revival of the Chinese nation” (Front News, 2017).

17 In the same vein, the Quarterly Forecast and Analysis report of the Center for Macroeconomic Research, Xiamen University (2015), states that the “total amount of social security, medical, and educational expenditure in public fiscal expenditure gradually rose from 29.5% in 2010 to 31.7% in 2014.” However, this is still small compared with the performance of the Western economies: for example, in “2011, EU-27’s spending on health, education, and social protection together accounted for 47.8% of the central (federal) government spending” and in “2013, the U. social security, Medicare, and Medicaid spending accounted for 48% of federal fiscal expenditure” (Center for Macroeconomic Research of Xiamen University, 2015, p. 57).

18 “Such an incentive system can only make sense when a single objective— such as economic development—is seen as an overwhelming priority. This has been true of the Chinese leadership in the last few decades, and may reflect a broader social consensus” (Naughton 2017, p. 10). Correspondingly, Knight (2014) argues that China has been a “developmental state.”

19 For an extensive overview of the various overcapacities in China, see Wagner (2015, 2017a).

20 See, for example, https://global.handelsblatt.com/companies-markets/studies-chinese-steel-overcapacity-hardly-changed-in-2016-703021.

21 Such ideas and preferences can be regarded as already being incorporated into the traded products and information channels (according to a similar interpretation in growth theory of a major triggering factor of economic growth, whereby knowledge is incorporated into the traded products and hence knowledge spillovers occur, leading to faster convergence; see above).

22 Online, available at: http://www.economist.com/news/china/21709321-battle-raging-realm-historiography-china-struggling-keep-control-over-its.

23 The term came into vogue after the crushing of the Tiananmen Square protests in 1989. Party leader Jiang Zemin then declared that historical nihilism threatened to “seriously erode” the party. Jiang’s main concern then was a television broadcast called “River Energy,” which pictured China as a country burdened by a long history of backwardness and inward-looking conservatism. Today, Xi Jinping regards similar critical statements, for example, descriptions of the horrors of the Cultural Revolution, as a challenge to the legitimacy of the party rule. (To counter this challenge, his predecessor, President Hu Jintao, had already reintroduced Confucian elements (“harmony”) into the Chinese policy culture in 2003.) On the role of Confucianism on (political) leadership in China see Han (2013).

24 To implement this new approach of top-down steering, a new organizational mechanism in the form of a hierarchy of “Leadership Small Groups for Comprehensively Deepening Reform” has been adopted, with direct and comprehensive powers of top-down enforcement.

25 This is in line with the naming of Xi Jinping by the Central Committee of the Chinese Communist Party in October 2016 as the “core of the party’s leadership.” This meant the concentration of power in the hands of the party chairman, which has not been the case since Mao Zedong. Under Xi Jinping’s predecessor Hu Jintao, the principle of a collective party leadership was still preferred.

26 See, for example, Chen and Warren, (2011).

27 See press article: http://news.xinhuanet.com/english/2017-02/20/c_136068637.htm.

28 On the need to shift “the focus on the fluctuating external demand to the more solid domestic demand” see Yuan (2017, p. 116).

29 See, however, Mohr and Wagner (2013) for an analysis of the beneficial role of regulatory governance.

30 These suggestions are made in other publications as well (see, e.g., Hasan, Wachtel, & Zhou, 2009; Söderlund & Tingvall, 2016, Zhang, Kang, & Feng, 2016, Zilibotti, 2016).

31 See, for example, the experiences of European Union countries or regions with “old-type” industries; in Germany these are, in particular, in North-Rhine Westfalia and some East German federal states.

32 These mainly economic incentive mechanisms for bureaucrats had already been initiated in the 1980s with formal “target responsibility systems” establishing targets (success indicators) for bureaucrats on all levels. These targets were mostly economic (the most important was GDP growth and an increase in fiscal revenues; see Chan & Gao, 2008 and Whiting, 2001). Today, however, “declines in local air pollution and reductions in local industry energy intensity are also statistically significant correlates of promotion chances, especially in relatively richer cities on the east coast” (Zheng, Kahn, Sun, & Luo, 2014).

33 Therefore, as a substitute, it often favors the initiation of new macroeconomic stimulus programs.

34 This does not, however, imply that the Chinese government has so far not tried hard to implement the intended rebalancing process and to eliminate imbalances. Nonetheless, the institutional hurdles have been (too) high (and underestimated) and the incentive mechanisms often ineffective or wrong to implement the reform process successfully in this giant country with significant regional diversity.

35 Derbali (2017) shows that higher debt contributes positively to systemic risk in the Chinese financial system.

36 For a relatively actual, short assessment of “Xi Jinping’s Track Record” see, for example, Bradsher (2017), online available at: https://www.nytimes.com/2017/03/04/business/china-xi-jinping-economic-reform-scorecard.html.

37 Investments by private investors halved in the first half-year of 2016, whereas investments by state-owned enterprises doubled within the same period of time. In addition, there have been warnings of a banking or financial crisis in China, for example, by the Bank of International Settlements in a recent Quarterly Paper (BIS, 2016) as well as by the IMF in its recent country report (IMF, 2016).

38 As argued above, there has been a shift toward the stability goal under Xi Jinping (based on recentralization to gain control over the system).

39 Or, respectively, against the specific reform options that put high costs on them; instead, they may favor reform alternatives that put relatively higher transition costs on others (Alesina and Drazen, 1991).

40 If the political–sociocultural system is not allowed to develop as fast as the economic system, a demand for political and cultural changes or experiments and hence social protests and unrest may not arise as extensively and rapidly as otherwise; however, such unbalanced development will lead to ecological, regional, and other inequalities or imbalances, as the example of modern China shows. On the other hand, if the sociocultural system is also allowed to develop or change as fast as the economic system, then the danger of political destabilization (a call for democracy, codetermination, transparency, and decentralization) may occur. This, however, can lead to global instability in a country as immense as China. The Xi strategy can be seen as an answer to this threat.

41 The welfare convergence attained by China is even lower if welfare is measured not only by GDP per capita but also by other measures, such as consumption, leisure, mortality, and inequality, as Jones and Klenow (2016) show.

42 In particular, many different definitions of the MIR exist; furthermore, the GDP (per capita) data differ significantly across databases (as well as across different versions of databases); see Glawe and Wagner (2016, 2017). This can have significant impacts on the MIT results.

43 See the Appendices in Wagner (2017b).

44 This means that, if the economic imbalances are not reduced in good time, if pollution is not reduced before it becomes explosive, if social imbalances are neglected for too long (such as before the Trump election in the United States) or if structural–normative values are changed too rapidly, then a development/growth strategy will generate problems or, respectively, become unsustainable.

45 See Murach and Wagner (2017) and Kim, Park, Murach and Wagner (2018).

46 See the calculations by Lin et al. (2016). Lin et al. (2016) guess that Korea in 1977 had the same technology gap (vis-à-vis the United States)— seen there as a measure of the development gap— as China had in 2015.

47 Lin et al. (2016) are more optimistic, assuming that the above-mentioned worse frame conditions will only be transitory. This, however, seems to be questionable or even improbable.

48 As explained above, an ending of this new strategy, or respectively a return to the old growth strategy, would end in a disaster.

49 See Shambaugh (2016, pp. 2–3).

50 As expected, until the 19^th Party Congress of the Communist Party of China in 2017, China remained on its course of “hard authoritarianism”. But for the future, there is a chance of a transition back to the “soft authoritarianism” of the Deng strategy.