‘China’s investment-led growth a time bomb’

As a political economist who tracks China and India closely, Yasheng Huang has long argued that Asia’s two largest emerging economies hold developmental lessons for each other. “But my worry,” says Huang, “is that they’re learning the wrong lessons from each other.” In this first part of a two-part interview to DNA in Hong Kong, the MIT Sloan School of Management professor and the author of, most recently, Capitalism with Chinese Characteristics traces the problems in China’s growth model, the effects of which are showing up acutely during this global economic downturn. Excerpts:

You argue that China’s growth model, which is the envy of India and much of the world, is flawed. Why?
In my view, the true China economic miracle happened in the 1980s, when the country was powered by bottom-up enterprises, especially in the rural areas. In the 1990s, China changed its development strategy by placing greater emphasis on big cities like Shanghai and Beijing. To me, the ‘Shanghai model’ represents the most extreme example of economic and financial distortion, but today that model is being replicated elsewhere in China.

The ‘Shanghai model’ is an extreme version of a model that’s effective in building production but not in building a consumption base. Indicatively, in the 1990s, Shanghai’s GDP per capita grew dramatically in comparison with the national average, but household incomes relative to the rest of the country were virtually unchanged.
That goes to the heart of the problem that China faces today: It’s been successful in generating GDP growth, but far less successful in generating household income growth.

It’s been good at building a huge production base but equally good at suppressing a consumption base. And now, as a result of the financial crisis and the global economic downturn, unemployment is rising and wage growth for China’s rural migrants has slowed, which will only suppress incomes further.

If the model is flawed, how do you account for China’s supernormal GDP growth for 30 years?
It’s not a mystery. Some 50% of China’s GDP comes from investment, which has a huge multiplier effect on GDP. Now, there’s evidence that they are doing that again, with the 4 trillion yuan ($585 billion) stimulus package.

Sure, some of that will go into social spending, which is good. But much of that will trigger another wave of huge investments. You only have to look to Japan to know that such investments cannot get you out of a hole. 

I feel very strongly that if you see a fast GDP recovery in China and if that recovery is powered by investment, it is a time bomb.
In the past, that kind of growth was sustained by high demand from the US and other developed countries. I don’t see any evidence that the US economy will recover magically to the level it was before the financial crisis.

So, the stuff that China puts out has to be absorbed somewhere. The government is trying to increase domestic consumption, but they’re trying that within the existing level of the income rather than thinking of growing the income.

In terms of household income and the small asset base, China is very poor - in some ways, poorer than India. China’s consumption-to-GDP ratio is lower than India’s. Savings rate of households are not high in China: It’s only government corporations’ savings that are high.

Since 2003, China’s leaders have emphasised rebuilding the social safety nets and narrowing the income gap between rural and urban areas. Do these mark a return to the policies of the 1980s, which you believe underlie the China growth miracle?
There’s an attempt to go back to the 1980s, but these developments have been mixed. Sure, there is more emphasis on rural issues and social safety nets. And connected to that is the emphasis on rural education and rural health provisions.
But there’s very little connection with the 1980s in terms of the methods.

We’re now seeing only baby steps, and more administrative measures, more government involvement. In the 1980s, on the other hand, rural financial reforms were put at the front and centre and at a very high level of policy response. In that sense, we’ve not returned to the 1980s model at all, even though leaders are talking about rural entrepreneurship today.

One similarity between now and the 1980s is that then too the country faced a huge unemployment problem. But support for rural entrepreneurship in the 1980s was driven not by ideology but pragmatism. Today, a majority of the policy emphasis is on preserving GDP growth at 8% by supporting exports. Even if there is a rural entrepreneurship initiative, it’s not been highlighted.

There’s been a slideback in China’s efforts at poverty reduction since the 1990s. How did this happen despite high GDP growth and what are the socio-political implications of this?
The whole issue of rural migration has shaped many of the economic and social developments in China. Some of these are positive effects: China created this huge export industry, which was very successful for a time. In fact, I’d argue that India should have more of this broad-based export success.

But the issue in China is whether we need this level of migration to create this level of success. I acknowledge the success, but I also see a huge downside.

When rural migrants go to the cities for employment, they are excluded from the social services, educational services and health services. When I was in Guangdong province (in China’s south, home to many special economic zones) recently, I saw a sign that said: “People born between September 1 1994 and October 1 2008 should report to the government to receive free immunisation shots.”

Basically, one entire generation of rural people who were born in the 1990s simply fell off the map! The same is the case with education. Because the migrants are not urban residents, their children are not entitled to education in the cities. And when NGOs started schools for migrant workers’ children, the government shut them down.

An entire generation of people in the 1990s fell through the cracks.
All this has enormous political implications. The rural situation makes politics less stable rather than more stable. I link everything to rural development. When rural development in China was successful, the country as a whole was successful.

The rural issue has to be front and centre - similar to what (Mahatma) Gandhi said. I disagree with Gandhi’s methods, but the philosophy was right.

(To be continued)