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April 2003
IPEG Papers in Global Political Economy No. 6
2
Growth Without Development
IMAGINING CHINA’S POLITICAL ECONOMY
Shaun Breslin
UNIVERSITY OF WARWICK
Introduction
The purpose of this paper is to provide a critical assessment of the relationship between growth,
inequality and development in contemporary China. The main argument is that an image of China
has been constructed in the West that dominates popular perceptions and also the policy preferences
of key western elites. I suggest that this image of the importance of China has been promoted by
both those who want to create an argument for containing China, and those who argue for
engagement. As such, much policy discourse, particularly in the United States, starts from
exaggerated assumptions of the significance of China – particularly, but not only, in economic
terms.
This image of China is supported by an over-strong reliance on growth figures as an indicator of
China’s “wealth”, “power”, “opportunity” and “challenge”. This is reinforced by the fact that the
Chinese leadership itself has placed a heavy emphasis on growth as an indicator of success, and as a
means of gaining legitimacy. But too often, growth is simply equated with development. By
emphasising quantitative measurements of economic success, it is easy to overlook qualitative
issues – in short, even if growth is necessary for development, growth does not necessarily
automatically lead to development. Indeed, as this paper argues, growth can occur without
development. An association of growth with development is a depoliticised epistemology that
ignores the significance of governmental decision and policy as a generator of development.
The tone of the paper is deliberately negative, and it deliberately glosses over the development that
has occurred. In one sense, this paper is intended as an antidote to the over-optimism created by
visions of China that are based on growth figures, hyperbole, limited visits to Beijing and Shanghai,
or all three. But in another sense, it is intended to highlight what I consider to be the negative
impacts of China’s growth strategy to date, and point to potential problems that this strategy might
generate in the future.
Constructing Visions of China
One of the first pieces of advice I give to any prospective PhD student is not to write a thesis on the
future - its hard enough interpreting the past and proving your argument without attempting the
impossible task of proving your predictions. But when it comes to writing a popular book, perhaps
the opposite advice is more apposite – don’t sit on the fence and hedge your bets, but instead make
firm and uncompromising predictions. Elements of grey are a lot less media friendly than bold
black or white predictions of coming wars and conflicts, emerging superpowers, or as in this case,
impending disaster. Of course, such an approach can have a down-side in the long run. Harrison
Salisbury’s “The Coming War between Russia and China”, published at the height of Sino-Soviet
hostility at the end of the 1960s, contained a good analysis of the historical and contemporary
tensions that beset relationships between Moscow and Beijing. But while the analysis may have
been sound, the conclusions, predictions (and indeed the book’s title) thankfully failed to
materialise.
In the United States in particular, a number of such populist books have been published which raise
the spectre of a rising China that will become the major threat to US interests in the coming years.
To be fair, it should be noted that much of this hyperbole is at least supported, if not generated, by
3
the very positive visions of economic success that emanate from China itself. As Gordon Chang
argued in presenting evidence to the House U.S-China Commission in August 2001:
“These days China presents the image of success. Chinese leaders tell us that they're
doing a great job, and they give us statistics that back them up. Foreign (non-Chinese)
experts assure us that the People's Republic has a bright future. We can all look at the
potential of China and become giddy. We extrapolate, multiply, and then let our
imaginations run wild.”
Perhaps the best example of the type of literature Chang was complaining about is Laurence
Brahm’s China's Century: The Awakening of the Next Economic Powerhouse, an edited collection
containing papers by high-ranking Chinese officials, foreign diplomats, and international business
leaders1. Brahm’s is by far the only volume to present a picture of an invigorated China. Gertz’s
(2002) The China Threat: How the People's Republic Targets America, Overholt’s (1994) The Rise
of China: How Economic Reform Is Creating a New Superpower, The Coming Conflict With China
by Bernstein and Munro (1997), and Timperlake and Triplett’s (1999) Red Dragon Rising:
Communist China's Military Threat to America are just four examples from the last decade. At the
risk of oversimplification, these last two books provide a microcosm of how the debates in US
policy circles appear to be coalescing around two main schools. The first presents a rising and
powerful China as a major threat to US. Primarily a challenge to US security interests, but also as a
(perhaps the) major challenge to domestic US economic interests. The second also portrays China
as a rising power – but rather than emphasising the challenges to the global system, it instead posits
China as the international economies’ greatest opportunity. For Gertz, it is this latter group that has
dominated US policy making in both Democratic and Republican administrations, resulting in
information showing the real China threat to US interests being deliberately.
For the China threat school in the US, China is portrayed as already posing a threat in the East Asia
region where its attitude towards Taiwan and claims over South China seas islands marks it as a
potentially destablising force. This regional challenge is also thought to be fuelled by China’s
growing energy requirements, which Calder (1997) argues will be the key to (in)stability in the
region in the future. In the short term, China threatens the military and economic balance of power
in East Asia, and will come to dominate the region (Murray, 1999). Some even suggest that China
is challenging the US in both military and economic terms (Bernstein and Munro, 1998). As Segal
(1998: 442) rather caustically put it, “listen to the proclamations from American think tanks, and
you would believe that China is a 'near peer competitor' of the United States getting reading for 'the
coming war'”.
For proponents of this view, the West (which usually means the US) has no interest in speeding
along the rise of the Chinese superpower by drawing it into international society. Rather, the US
should be building a strategic alliance with Japan in an attempt to contain China. At the very least,
China’s engagement must be accompanied by significant concessions by the Chinese.
For the “China opportunity” school, there is a recognition of the potential challenges that a rising
China might pose, but these challenges are more than balanced by an understanding of the
economic opportunities that Chinese growth can offer. Whether we like it or not, we have to deal
with the China that we have. China is effectively too big and too important to be contained (or to
risk a containment policy). It has the world’s largest population, a large and growing economy, it is
a nuclear power, and a major contributor to global environmental issues. China also has one of the
permanent seats on the ILO board, and of course is a permanent member of the UN security
1
The publication of this book was welcomed by Chinese Premier Zhu Rongji, who also feted
Brahm at the official launch in China.
4
council. As such, we have an interest for our own security in managing China’s global role through
engagement.
Furthermore, the rapid growth of the Chinese economy means that it is simply too important an
opportunity to miss. The commercial opportunities that China’s rise offer means that it is in the best
interests of the West to take full advantage of Chinese growth through a policy of engagement. This
approach is often combined with strong appeals to liberal international relations theory
epistemologies of promoting “positive” domestic reform in China through locking China in to a
system of international norms. This approach is perhaps most clearly seen in the negotiations that
saw China join the World Trade Organisation at the Doha Ministerial meeting in 2001. While
agreement was not reached until key interests in the US and other advanced industrial democracies
were happy that the deal served their interests, it was an agreement that was in part intended to lock
China in to the global trading system. Such a processing of “locking in” would not only mean that
China adhered to international norms over trade, but would also necessitate reform of the Chinese
domestic system that would bring about “positive” change.
This liberal approach is enshrined in official US statements on the impact of WTO entry on China,
summarised by this official White House (2000) statement:
“China's accession agreement will deepen and help to lock in market reforms -- and
empower those in China's leadership who want their country to move further and
faster toward economic freedom. In opening China's telecommunications market,
including to Internet and satellite services, the agreement will expose the Chinese
people to information, ideas, and debate from around the world. And China's
accession to the WTO will help strengthen the rule of law in China and increase the
likelihood that it will play by global rules”
Nor is it just an American approach, as the EUs trade commissioner, Pascal Lamy’s speech in
Beijing in October 2000 illustrates:
“It can only lock in and deepen market reforms, empowering those in the leadership
who support further and faster moves towards economic freedom”.2
While the WTO entry negotiations mark a specific process of bargaining and negotiation, the liberal
concept of engagement as the best way of generating domestic political change in China has a wider
applicability. It might be a slow process, but it is one that is much more likely to work than
containment. Rather than external actors pushing for direct change, this approach instead sees the
international context as creating a domestic Chinese environment that will generate pressures for
change. As Wang and Deng (1999: 7) put it:
“International enmeshment facilitates China’s social learning in terms of the values,
norms and principles, and rules of the international system and adds China’s stakes in
the existing institutions and order. China’s worldview and definition of national
interests can be transformed toward greater compatibility with the rest of the world
through transnational activities and networks, including tourism, academic and
cultural exchanges, and commercial ties.”
The way in which these approaches construct visions of China can obstruct a realistic understanding
of the extent to which the ongoing transition from socialism has really impacted on the Chinese
people. Both those who want to promote the containment of China (the China threat school) and
2
Pascal Lamy’s speech was reprinted on http://www.ecd.org.cn/WTO/1023.htm
5
those who want to engage (the China opportunity school) have a tendency – indeed, a vested
interest – in talking China up to add force to their arguments for policy prescriptions. Of course, this
approach has not gone uncontested. Gordon Chang’s (2003, 2nd ed) The Coming Collapse of China
provides a damning and darkly pessimistic view of the impact of economic reform in China, and is
in some ways a response to those approaches that he perceives exaggerate China’s importance – in
much the same way (and for the same reasons) that in “Does China Matter?”, Segal (1999) argued
that:
“the country that is home to a fifth of humankind is overrated as a market, a power,
and a source of ideas. At best, China is a second-rank middle power that has mastered
the art of diplomatic theater: it has us willingly suspending our disbelief in its
strength. In fact, China is better understood as a theoretical power -- a country that
has promised to deliver for much of the last 150 years but has consistently
disappointed. After 50 years of Mao's revolution and 20 years of reform, it is time to
leave the theater and see China for what it is. Only when we finally understand how
little China matters will we be able to craft a sensible policy toward it.” (Foreign
Affairs September/October 1999 Issue Volume 78, number 5).
So once more at the risk of oversimplification, Table One provides an example of how six popular
visions of China – all of them constructed visions – are used by specific groups and interests to
push for preferred policy towards China.
The Politics of Growth: Legitimacy and Ideological Hegemony
As noted above, it is not just foreign observers who perhaps exaggerate the significance of Chinese
growth, and reply too heavily on growth figures to form visions, opinions and policy. The Chinese
government too has often invoked growth figures as evidence of its own success in managing the
economy and delivering on its promises. T.H. Rigby once referred to communist party states as
pursuing “goal rational” legitimacy – they set targets, and make sure that everybody knows when
they have been met (or more typically, exceeded ahead of time). Setting targets and then achieving
them – indeed surpassing them ahead of time – has long been a legitimating tool of the CCP, and
was taken to something of an extreme in China during the radical Maoist years. And though little or
nothing of Maoism as an ideology remains in China, the process of economic reform at times
resembles a Maoist campaign of mobilising the people to achieve the goals of market liberalisation.
And one of the easiest means of measuring success has been by attaining self-proclaimed growth
targets.
But economic growth is politicised by more than just legitimation strategies. It is also very much
politicised by groups – both within China and without – that want to justify the ideological basis of
growth strategies. Perhaps the clearest example of this process is the way in which growth figures
were utilised to justify the further acceptance of neoliberal economic strategies through China’s
entry into the WTO at the Doha Ministerial meeting of 2001.
6
Table One: Constructing Visions of China
View
Held By (examples)
Proposed Policy Response
China is a challenge; militarily, economically
and to global norms and international
security
Elements of US security community
Business and worker interests that
feel threatened by Chinese economic
growth
Contain China wherever possible
China is a major emerging market which
provides immense opportunities
Business interests that want to
invest in China
Engage
China is a nuclear power with a permanent
seat on the UN security council becoming
ever more significant in the global economy
Pragmatists
Cautiously engage/constrain
China is an evil authoritarian state that
oppresses its own people in unacceptable
ways
Human rights organisations, religious
groups
Governmental groups
Contain
China is still a poor state that needs aid
to overcome its problems
UK Department for International
Development
Engage
China is a poor state and the level of growth,
wealth and power has been greatly exaggerated.
Segal, Chang
No need to engage or contain
7
Engage
It would be going too far to suggest that negative reporting was banned. Indeed, prior to entry, the
official media contained numerous articles outlining the “challenges” of WTO entry (though often
balanced by the “opportunities”). Nevertheless, interviews in Beijing and Shanghai make it clear
that academics and journalists were expected to present a positive view of a future under the WTO.
This positive view was most evident in the announcements of China’s chief negotiator, Long
Yongtu, and other senior politicians. The “win-win” scenario of China’s entry was also prevalent in
statements from the WTO itself, the World Bank and other international organisations. In
considering such reports, we must remember that economic analyses and forecasts are themselves
politicised. It is hardly in their interests of the Chinese authorities to suggest that what they have
just signed up to will cause sever damage to the Chinese economy and Chinese society. Those
emanating from organisations like the World Bank, the IMF, and Washington consensus
economists also have a political mission – to prove that there will be huge benefits of free trade to
China, and these benefits will also bring gains to the developed world. They are as much about
selling an idea as anything else.
The following is from a report produced by the World Bank’s Beijing bureau on the impact of
WTO membership on China, and the impact of China’s membership on the world. It highlights
many of the conceptual problems that emerge from economistic interpretations that ignore political
contexts and consequences. For example:
“Over the longer term, increased liberalization in China will accelerate the shift of
agriculture away from areas of comparative disadvantage towards its comparative
advantage. There is likely to be a more pronounced decline in the production of
land-intensive sectors, such as livestock, fruit, flowers and vegetables.
Liberalization of global agricultural barriers should augment this trend as it
provides China with increased access to other countries’ markets in return for its
one-sided concessions. Although the specific effects of WTO entry on the
agricultural sector will vary by province, the net impact of the WTO on agricultural
incomes and exports will be positive, as will be the effect on aggregate income,
employment and exports in the national economy.”3
The economic theory might be sound, but the reality is a million miles away from this. It is difficult
to imagine the peasant trying to scratch a living out of the barren earth in Shaanxi having the
knowledge, the wherewithal and investment, and indeed even the right type of land and climate to
make such a change. Geography, topology, nature, wealth and education can be frustrating
obstacles to the transference of economic theory into practice.
Even if this is all true – an enormously big if - what happens in the short term is politically crucial.
How long is the middle to long term away ? Is it time here to invoke the oft cited Keynes that in the
long run we are all dead? The rosy views of the impact of WTO entry on China all miss the fact that
in the short run, there is the huge question of the impact on social and political stability resulting in
the transference of employment, wealth and power between different geographic and sectoral
groups. Even if the aggregate income and employment is increased, it is of little use to those who
lose out. Where the new jobs come, what type of skills they need, what wages they pay and what
associated benefits they bring are massively significant. The same paper argued that “in urban area,
given the already existing labor market pressures, the scope for re-employment could be limited in
the manufacturing sector until textiles and other emerging sectors begin to be active. Most of the
manufacturing sector labor force to be released will have to be re-employed in the expanding
services sector, which will mitigate the unemployment pressure”.
3
Masahiro Kawai and Deepak Bhattasali “The Implications of China’s Accession to the World Trade
Organisation” paper presented at Japan and China: Economic Relations in Transition Jan 2001 Tokyo, p.5.
8
Laswell’s first question of politics should guide our analysis – who gets what, when and how?
Indeed, later in the report, the authors accept that those who face the biggest risk are “rural farmers
on marginal land…resulting in greater poverty”4. Those who can and will engage will benefit, but
those who can’t won’t. Is it really the case that an ageing unemployed steel worker in China’s
northeast is going to find employment as an insurance broker in Shanghai ? Probably not.
Within the analysis cited above, there is a hint at one of the potentially greatest impacts of all. The
aggregate approach not only misses the significance of sectoral differences, but also of geographic
differences. And in a China where the locus of economic decision making often rests at the
provincial level, this is a crucial determinant of responses to the impact of WTO reforms. In
agriculture, the impact is likely to “vary by province” – too true. Furthermore, “the export intensive
coastal provinces will gain, while the inland provinces – which contain the bulk of grain production
and capital-intensive SOEs – may not gain much or lose”.
Those industries and sectors that stand to lose most, even under rosy assumptions, are those where
the hand of the state – or the hand of the old style of state control – still dominates. Those that stand
to gain most – in particularly clothing and textiles – are sectors where the new quasi-private sector
and foreign ownership dominate. For example, attempts to calculate the impact of WTO entry on
China’s share of world markets suggest that Chinese exports of clothing will rise from 19.5 per cent
of world exports in 1995 to 42.2 per cent in 2005 (and would fall to 18.2 per cent if China did not
join)5. The new opportunities in the service industry will likewise favour those who are not under
old-style state control. To call it a quasi-privatisation of the Chinese economy is perhaps pushing it
too far – not least because current party-state officials (the party-state bourgeoisie) are key actors in
the new non-state economy. But WTO will further facilitate the ownership basis of the Chinese
economy and the class basis of CCP rule that has been ongoing since 1994.
Furthermore, there is a disparity between output figures and employment figures for different
sectors of the economy. Thus, sectors that might not be that significant in terms of their contribution
to overall output may be disproportionally significant in terms of their share of employment. In
addition, the changing structure of output is not reflected by the same changes in employment
structure. While some of this is accounted for by increasing unemployment, much of it reflects the
maintenance of employment as a mechanism of ensuring social stability.
Table Two: Percentage of GDP and Employment, 1980-99
Agriculture
1980
30.1
68.7
1990
27.4
53.4
1999
17.7
50.1
Manufacturing
44.2
15.8
37.0
15.2
42.7
12.8
Other
25.7
15.4
36.0
31.4
39.6
37.1
The main conclusion from this is that despite the fact that the rural sectors “only” accounts for a
small proportion of output, it still, in 1999, accounted for half of all employment. Using output
measures, then, underplays the real significance for the Chinese economic structure. What this table
4
5
Masahiro Kawai and Deepak Bhattasali “The Implications of China’s Accession to the World Trade
Organisation” paper presented at Japan and China: Economic Relations in Transition Jan 2001 Tokyo, p.11.
Ianchovichina, Martin, W. and Emiko Fukase 2000 “Comparative Study of Trade Liberalization Regimes: The
Case of China’s Accession to the WTO” Third Annual Conference on Global Economic Analysis, Monash,
Melbourne, June 2000.
9
does not show is the distribution within manufacturing, where the old sectors remain heavily overemployed relative to output (let alone profit).
Lies, Damn Lies, Statistics and Chinese Statistics
Without wishing to divert too far from the focus of this paper, it is difficult to address issues
relating to growth in China without considering the problem of the reliability of Chinese statistics.
The first problem to be overcome is differing methods of calculating the size of the Chinese
economy. If we use Chinese figures, then total GDP in 2001 reached US$1.16 trillion, or a per
capita figure of US$910.8. Using the new GNI calculations of the World Bank, then the total size of
the Chinese economy remains roughly the same, but the per capita figure drops to US$890.
However PPP calculations raise both figures to US$5.56 trillion and US$4,300 respectively.
Even if we accept the highest of these figures using PPP calculations, China is still a relatively poor
country, coming out in the region of the 120th richest nation in the world in per capita terms (nearer
140th using Chinese statistics). While we should point to the fact that economic reform has brought
a massive number of Chinese out of poverty, we should also remember that around 200 million
people – roughly one in seven of the Chinese population - still live in poverty (defined as an income
of less than US$1 per day).
While almost all observers would argue that the Chinese reform experience has been much more
successful than the Russia experience, even after two decades of double digit growth, Russia’s per
capita income is still about double China’s (US$1,750 on the atlas method and US$8,300 using
PPPs). This anomaly is largely explained by the relative wealth of the two nations as they embarked
on their processes of reform. The Chinese economy started developing from a low base, and as
such, it doesn’t take too much to generate large percentage increases - produce one tractor one year,
and two the next, and you have a hundred percent increase, but you still only have three tractors.
And of course, the sheer size of the Chinese population means that a relatively low per capita
income generates a large gross national income.
For some, though, these figures have to be treated with a considerable degree of scepticism. Alwyn
Young (2000), for example, has undertaken a forensic investigation of the way in which Chinese
officials calculate growth. He accepts the Chinese figures as given, and then considers the way in
which the accounting system was changed after 1978. By including such elements as passenger
transport, finance, insurance and public administration, but not recalculating previous figures
accordingly, post 1978 figures were immediately much higher than for the pre-reform era.
Furthermore, Young argues that the State Statistical Bureau did not use its own deflation indicators
appropriately in generating growth figures. So by adding these two omissions together, it is possible
to generate very different conclusions about the levels of growth in the Chinese economy:
“In 1989, a year of economic retrenchment, GDP is now seen to have fallen by 5.2
percent, as opposed to the 4.0 percent positive growth reported in official figures.
This provides some insight into the forces which precipitated the political unrest of
that year.” (Young, 2000: 49)
Young’s calculations are made by accepting Chinese statistics, though he acknowledges that even
these figures might be exaggerated by officials. Citing a report in Liaowang (1995) he notes that
national income figures are derived from reports from localities and:
“Since officials are rewarded for superior performance and punished for failing to
meet targets, it is not surprising that they have a tendency to modify their statistical
reports in accordance with central policy objectives.” (Young, 2000: 4).
10
As just one example, he suggests that the output of Township and Village Enterprises in 1994 was
exaggerated by about one third. (Young 2000: 5). Indeed, Zhu Rongji is quoted as “simply not
believing” the growth figures submitted by local authorities in 19976, suspecting that they had been
inflated by local leaders anxious to claim that they had met official targets irrespective of the real
situation. An official in Beijing also argued in interviews that Chinese growth figures are
extrapolated in order to meet targets.
Most recently, Thomas Rawski (2002) has noted that:
“during the 1997-2001 period, China's energy use, employment and prices all fell.
So how could real output have grown by one-third, as Chinese officials claim?”
Rawski points to the scepticism within Beijing about the reliability of figures provided by local
authorities, and even suggests that the economy might have contracted since 1998, rather than
expanding at 7-8 per cent as official figures show.
“Unless China has embarked upon an unprecedented economic trajectory that
combines high-speed growth with rising unemployment, sluggish demand, massive
excess capacity, glutted commodity markets, mild deflation and low expectations,
Beijing's math is fuzzy.” (Rawski, 2000)
Waldon (2002) similarly notes that:
“Visitors see lots of rural people camped out at urban railroad stations or on
sidewalks: Clearly they have nothing to do where they come from, or where they've
arrived. Block after block of abandoned construction projects in cities suggest
someone's run out of money (as does the recent proposal that money be raised for
the Three Gorges Dam by selling stock). Almost daily protests by workers, many
violent, are also a clue that all is not well.”
The reality is that the domestic Chinese economy is in deflation. For example, the latest figures I
have found show that in April 2002, the consumer and retail price indexes in China were 98.7 and
97.9 percent of the previous year respectively. And although Solinger has convincingly explained
“Why we cannot count the unemployed”, we do know that unemployment is growing irrespective
of what the actual figure is. But it is possible to explain how domestic deflation and growth can
coexist by examining the causes of growth in the recent era.
Engineering Growth
Rapid growth, particularly since the late 1990s, has been maintained by a combination of export
growth, government spending and the extension of bank loans. In the following section, I will
explore how each of these three areas brings into focus the relationship between growth and
development.
Safety Net Socialism
One of the explanations for growth without apparent growth is found in the massive pump priming
of the economy, which Zhu Rongji has admitted saved the economy from collapse in 1998. This
process has continued – not least because of concerns over the potential impact of WTO entry. For
example, in April 2002, investment in fixed assets and capital construction were up by 127 per cent
and 21 per cent respectively. Between 1996 and 2001, expenditure on capital construction rose from
RMB 907.44 to 2517.9 (hundred millions) while expenditure to support agricultural production rose
6
James Kynge “Zhu assails padded growth figures” in The Financial Times, 17 December 1998
11
from RMB 510.07 to 905.3 (hundred millions). As a result, the budget deficit is expected to reach
62.5 billion yuan (US$7.6 billion US dollars) in 2002.
In addition new bank loans remained a major source of maintaining production, with a year on year
rise of over 11 per cent in April 2002. And it is the role of the financial system that warrants special
attention here. Despite the theoretical independence of Chinese banks, lending decisions remain
highly politicised – to the extent that Wang Luolin, Liu Shucheng and Liu Rongcai, (1999: 6) refer
to bank loans as “para-fiscal investment” which should be considered to be quasi-government debt.
In particular, the power of local authorities7 to collect and impose fees (which exceed taxes as a
source of all government income) and exert local influence (of not control) of local banks
contributes to the characterisation of many local governments as running “dukedom economies”
(zhuhou jingji) (Shen Liren and Tai Yuanchen, 1990). The notion of dukedom economy is not just
that the local government is in control of finances etc, but also controls the judicial system as well;
“Since courts and judiciary departments are subject to local Governments, justice cannot be brought
along in many fields” (Xie Ping, 1999).
Fiscal reform since 1994 has gone some way to restoring the central authorities’ ability to control
the national economy that it all but lost in the first decade of reform. But it is not enough. In
addition to the levying of fees, and control of local branches of central financial institutions, there is
financial “chaos and mismanagement” resulting from the expansion of local financial institutions
(Gao Zhanjun and Liu Fei, 1999: 53). For example despite a policy of encouraging mergers in light
of the failure of the Guangdong International Trust and Investment Corporation (ITICs), and the
decision to cut the number of central ITICs to 3 in September 2000, there were still around 240
locally controlled ITICs operating in China in 2002.
In addition to the ITICs, there are over 50,000 small scale locally controlled rural and urban credit
cooperatives in China today. By the end of 2001, outstanding deposits from all rural credit
cooperatives stood at about RMB 1.73 trillion, accounting for 12 percent of total deposits in
financial institutions, while outstanding loans by rural credit cooperatives were about 11 percent of
the national total (Renmin Ribao, 2000). As a result of local control and horizontal dictatorship,
many of these essentially exist beyond the reach of the central macro-economic control and central
financial regulatory institutions. Indeed, this quote from Xie Ping (1999: 13) provides a succinct
assessment of the impact of localism on the financial system:
“a considerable number of financial institutions to be restructured are jointly
invested by local Governments and controlled by them. It is local government’s
intervention of senior management and business that cause the loss and difficulties
of these financial institutions. Consequently, upon merger, restructuring and closure
or even bankruptcy of these financial institutions, on the one hand local
governments are only responsible for liabilities up to the amount of their
investment, but on the other hand for the local interest their intervention in the
described processes are severe. Even judicial justice can not be guaranteed since
local judicial departments have to obey the orders of local governments.”
It is this concern with local control over local financial institutions that led the PBC to undertake a
major structural reform in August 1998. The central bank abolished its 49 provincial branches and
replaced them with nine multi-provincial regional offices.
7
We should exercise care in assuming that there is a single local interest at work in each local authority.
Duckett’s (1998) investigation of Tianjin Municipality, for example, found that different departments within
the local government were following their own independent policies which entailed independent strategies for
raising capital.
12
“The purpose of these reforms were to put an end to local government (mainly
provincial government) disturbance in monetary policies and financial supervision
of the Central Bank; and to set free state-owned commercial banks from the
intervention of local government.” (Xie Ping, 1999: 4)
In addition to the general issue of local financial autonomy, the PBC reforms were aimed at
facilitating fundamental reform of the banking structure in an attempt to deal with the technical
insolvency of China’s major banks – a problem that results from the leadership’s strategy of
providing a soft-landing on the transition from socialism.
If the decentralisation of economic power is one defining characteristic of the Chinese reform
process, a second is what we might call “safety net socialism”. The leadership’s desire for rapid
economic growth has been tempered by a recognition that rapid growth can be as politically
destabilising as no growth at all. The issue of decentralised control is also relevant here, in that the
central authorities have faced constant pressure from representatives of those areas that have not
developed as fast as the coastal areas. But the main emphasis in this section is on the perceived
relationship between unemployment (particularly urban unemployment) and social stability.
In the initial period of reform, one of the major political tasks associated with reform was assuring
key sectors that the new era would not harm their interests. Thus, for example, rather than liberalise
grain production and supply, the government retained central pricing an allocation to ensure
relatively equable supplies of basic foodstuffs. With the price of other produce increasingly set by
the market, the government essentially controlled incentives for grain production by increasing the
procurement price. In most cases, an increase in the grain procurement price subsequently led to an
increase in urban subsidies to offset the impact on urban purchasing power.
By the end of the 1980s, official Chinese figures showed that subsidies constituted almost a quarter
of total central government expenditure. The political logic of reform was creating a subsidy cycle
that was proving difficult to overcome. And while subsidies to maintain purchasing power were an
important component of this subsidy cycle in the 1980s, debt to maintain employment became a
characteristic of the 1990s.
It is difficult to overestimate the importance that the Chinese leadership ascribes to maintaining
employment. Particularly in urban centres, maintaining employment is seen as the pre-requisite for
the maintenance of social stability, and perhaps even the CCPs continued grip on power. A quick
survey of China’s employment statistics give some indication of why employment comes so high
on the list of the leadership’s concerns. We should also bear in mind that China does not have a
national system of social security. China developed a system of workplace socialism after 1949,
through which the danwei in urban centres and the collective in the countryside provided health,
education and welfare.
“although China has been building socialism for nearly half a century, yet, the
unemployment insurance system, one of the basic systems of a socialist society, has
remained in name only. It cannot play the role of a social safety net. Once a worker
gets unemployed, he would lose everything.” (Hu, 1999: 20)
With no national social welfare safety net8, the costs of maintaining employment can in some
respects be considered to be disguised social welfare payments.
8
Experiments in different forms of welfare systems are ongoing in a number of places across the country.
13
The PRC had a labour force in 2001 of roughly 718 million people – around a quarter of the world’s
total labour forces and around one and a half times the combined workforce of all developed states.
In the countryside, mechanisation and the replacement of collective socialist motivations with
private and profit motivations resulted in the loss of an average of six million workers a year in the
1990s, and it is widely accepted that around 120 million rural workers are without work for most of
the year.
One of the more notable consequences of this increased rural unemployment is the growth in
migration – both state sanctioned and supported, and illegal. Not surprisingly, China’s poorest
provinces are the major sources of migrant workers9. Neither is it surprising that many have made
their way to the cities in search of jobs – to the extent that people with rural household registrations
accounted for 29.85 per cent of the new urban workforce in 1996 (Hu, 1999). Rural unemployment
is now very definitely an urban issue.
The extent of the unemployment problem in rural China is clearly significant. But for the purposes
of this paper, we need to turn our emphasis to the issue of urban unemployment. As Solinger (2001:
671) has argued, it is all but impossible to get a truly accurate number for unemployment in China,
and “No one, and certainly not the central government, knows how many once-state workers have
been removed from their posts”. Different accounting methods are used by different analysts, and
official unemployment (shiye), figures do not include laid off (xia gang) workers – and workers can
be laid off for up to three years before they count as officially unemployed. While urban
unemployment increased by about 8 per cent per annum in the 1990s, the number of laid off
workers increased by around 40 per cent a year. Thus, while in 1993, laid-off workers accounted for
around 3 per cent of the total urban payroll, the figure had risen to 8 per cent by 1996.
Two thirds of these laid off workers are from State Owned Enterprises (SOEs), and, as with all
things in contemporary China, there are large geographic variations. In essence, the old industrial
bases have both the highest levels of unemployment and the highest levels of laid off workers –
14.2 per cent of the pay-roll in Liaoning, 13.8 per cent in Heilongjiang, 11.2 per cent in Hunan and
so on.
So while the official unemployment rate remains at around four per cent, the percentage of workers
without jobs is at least double that, and maybe even as high as 14 per cent. And this is the situation
before any potential impact on employment from WTO entry has kicked in.
Throughout the reform period, the government has devoted a considerable amount of government
spending on subsidies to keep loss making enterprises in operation. Latterly, it has also relied on
loans from the banks to serve the same function. If we accept Wang Luolin, Liu Shucheng and Liu
Rongcai’s assertion that bank loans constitute quasi-government debt, then the government debt
balance as a percentage of GDP rises significantly. For example, a figure of only 8 per cent in 1997
rises to 33.12 per cent if you include non-performing loans as part of the calculation (Yu, 1999: 12).
And even these figures don’t give the full extent of the problem, as those unperforming loans that
will not be paid off, but which aren’t yet due, are not counted as bad loans (Wang, 1999: 35).
The Chinese State Statistical Bureau announced that unpaid loans to various levels of government
accounted for 10 per cent of Chinese GNP in 1995 (China News Digest, 15 December 1996), while
a World Bank (1997) calculation suggested that non-performing loans accounted for 20 per cent of
the assets of Chinese banks. Looked at from the enterprise side, debts equalled 71 per cent of the
assets of non-financial SOEs capital structure in 1995. As non-productive loans in support of
political stability increased in the 1980s, then the returns on assets of China’s specialised banks
9
For example, in Gansu, over 21 per cent of registered peasants working elsewhere; 20.6 per cent in Ningxia;
18.4 per cent in Sichuan; 18 per cent in Anhui and so on.
14
dropped from around 1.4 per cent in 1986 to virtually nil by 1997 (Lardy, 1998: 100). And while
the capital of state banks increased by 1.88 times between 1987 and 1996, the balance of loans
provided by state banks increased by 5.25 times (Wang, 1999).
It is difficult to come to an accurate assessment of the extent of bad loans in the four major state
banks. The figures emanating from the People’s Bank of China are widely regarded as being
politically constructed to present a positive confidence building image, rather than being based on
firm accounting. Furthermore, the official figure of 25 –30 percent does not include the RMB1.4
trillion of non-performing loans that had been transferred from the banks to Asset Management
Companies (AMCs) by May 2002. These AMCs take over portions of bank debts, and then try to
sell them as equity on the open market. So until and unless the equity is sold, it is effectively “debt”
by another name. So the real extent of non-performing loans in the big four banks in 2002 ranges
somewhere from the official figure of 25 per cent, to the most pessimistic calculations of 50 per
cent (Chang, 2002). Perhaps its best not to concentrate on finding the exact figure, and just accept
Harding’s (1997: 3) assertion that “In short, China's banking system is insolvent: its bad debts
exceed its capital”.
Export Growth and Enclave Economies
In addition to government spending and bank loans, the other explanation for continued high
growth rates has been a recovery in export growth after the first impacts of the Asian crises in 1998.
It is difficult to argue that export growth has been detrimental to the Chinese economy.
Nevertheless, in this section I will try and demonstrate that the growth figures associated with
export growth are not necessarily as beneficial for development as appears at first sight.
The first issue relates to the uneven geographical distribution of the benefits of export growth.
Chinese export industries are concentrated in nine coastal provinces, with Guangdong Province
providing some 41 per cent of all exports since the start of reform. While there has been a
geographic shift in the location of export industries, this has occurred largely within the nine coastal
provinces, rather than from coast to interior. We will return to issues of equity in the final section of
this paper.
Second, we have to consider whether the type of export growth China has seen lays down the long
term basis for development. The growth in Chinese exports has relied very heavily on FDI. Indeed,
foreign enterprises operating in China have taken an increasingly important role in promoting the
growth of Chinese exports in the post-1994 era. While the Chinese authorities may have initially
hoped that FDI would help reinvigorate the domestic Chinese economy by using domestically
produced components, the majority of these investors choose to import key components from
existing plants overseas, with the Chinese sites typically only concentrating on labour intensive
component assembly.
This does not suggest that China has not benefited from the export of assembled goods. It has
created jobs - although typically low wage and low skilled jobs - and generated income. But it does
suggest that China has not gained as much as simply looking at bilateral figures for export growth
initially suggests. Rather, we need to take a more holistic view of trade figures, and consider the
value added, rather than the nominal value, of exports. Indeed, perhaps we need to ignore
nationally based statistics altogether, and consider inter and intra-company trade instead of national
trade. Neither should we forget that major western corporations are also benefiting greatly - and
perhaps most - from the expansion of the Chinese processing trade.
In considering economic regionalisation in east Asia, Bernard and Ravenhill argued that “foreign
subsidiaries in Malaysia's EPZs were more integrated with Singapore's free-trade industrial sector
15
than with the ‘local’ industry”10. Similar trends are identified by Heron and Payne11 in “Caribbean
America” – defined as a new transterritorial structural context linking the political economies of
the US with the various countries that make up the Caribbean. They note that “production sharing
enclaves” have served to increase the involvement of the Caribbean apparel sectors in the US
production system. However, this has not generated horizontal linkages and integration within the
apparel sectors in the Caribbean itself. Indeed Heron and Payne argue that microregional integration
in the textiles industry has run counter to initial intentions. The Caribbean Basin Economic
Recovery Act of February 1982 was officially espoused as a means of generating development in
Caribbean states. But in practice, they argue, it has done more to benefit the interests of US textile
manufacturers, and “is not so much a form of economic aid towards the Caribbean, but rather a
mechanism for enhancing the international competitiveness of the US textile and apparel
industries.” 12
Similar trends are evident in China. Lardy, for example, has noted that:
“rapid export growth from foreign invested firms, a large share of which is export
processing, has limited backward linkages and the domestic content of exports is
very low. To some extent export industries appear to be enclaves”13
In its extreme form, this can lead to what is termed “technologyless growth”, in that the technology
base of the national economy is not advanced as economic growth occurs through the assembly of
external productive forces, rather than domestic productive forces. Of course, wholly
technologyless growth is a pure type which is not reflected in reality. Participation in the global
economy has seen a technological upgrading. But what is significant here is that linkages between
export oriented areas and sectors and the rest of the domestic national economy remain relatively
weak. The technological and developmental spill-overs of export oriented growth remain, in many
areas, to be attained.
There is also the question of what Brecher and Costello term a “race to the bottom”.14 The
proliferation of free trade and export zones across the world has seen significant competition both
among state and even between subnational areas in individual states for investment for export. As a
result, there is now a competitive international environment with competitive devaluations,
competitive tax holidays and so on. What this means is that growth is often occurring without the
benefits of this growth being located within the local economy – for example, up to 40 per cent of
Caribbean exports to the US provide virtually no fiscal income to the host governments. As such,
growth figures may often underestimate the real impact for the host locality and country from
participating in export led projects.
Disaggregating Growth: Who Gets What ?
While the above point to potential pitfalls in the future, this paper concludes by considering the
existing situation in China, and considering the ways in which growth has already created problems
of equity. In short, it asks who gets what?
10
11
12
13
14
Mitchell Bernard & John Ravenhill, `Beyond Product Cycles and Flying Geese: Regionalization, Hierarchy,
and the Industrialization of East Asia', World Politics, No. 47 (1995) : 197.
Heron and Payne
Heron and Payne
Nicholas Lardy, ‘The Role of Foreign Trade and Investment in China's Economic Transformation’ China
Quarterly, Dec (1995) : 1080.
Jeremy Brecher and Tim Costello, Global Village or Global Pillage? Second Edition (Cambridge: MA: South
End Press, 2001).
16
What the statistics tell us
One of the key impacts of economic reform on China as a whole has been a growth in inequality. In
its 1987 report on “China 2020”, the World Bank noted a startling rise in the gini coefficient from
0.288 in 1981 to 0.388 in 1995 – probably the highest rise in inequality of any country over that
period. Since then, the figure has continued to rise, reaching an official rate of around 0.46 today,
though Hsu argues that if you add in illegal and unofficial income that don’t show up in the official
date, the figure is already more than 0.56. If we accept official figures, then China ranks at 5th in the
least of most unequal economies, whereas Hsu’s calculations puts China behind only South Africa
and Brazil.
The rise in the gini coefficient is partly explained by a growth in regional inequality, with China’s
coastal regions witnessing faster growth than the interior. In urban China, urban citizens of
Shanghai earn around 1.7 times the income of the urban population of Shanxi Province. In rural
China, the per capita income of the richest farmers from Shanghai Municipality are roughly four
times those of the lowest earners in Guizhou.
But the biggest source of inequality comes from the urban rural divide, with the gap between rural
and urban incomes continuing to rise. In 2000, the average urban income was Yuan 6316 compared
to Yuan 2253 for rural dwellers. While urban incomes rose by around 7 per cent per annum from
1996-2000, the growth in rural incomes dropped from 9 per cent in 1996 to only 1.9 per cent in
200015.
And What the statistics don’t always tell us
These figures can be interpreted in different ways. For example, they can and have been used to
support the idea that openness and internationalisation leads to growth. But there are other elements
relating to equity that are not always reflected in these statistics. For example, gini coefficient
figures do not tell us anything about access to health education and welfare (HEW). With the end of
the collective as the basic unit of administration in rural China, access to HEW, particularly for
women, has declined dramatically. Indeed, if we do not simply use income figures, and factor in
issues such as access to HEW, it is possible to argue that there are more people living in “poverty”
now than pre-reform. Nor is this just a rural issue. There is, for example, great inequality of access
to HEW in urban centers between those with urban “hukou” registration, and migrant workers.
Nor do the figures disaggregate between different levels of income or groups of people. Quite
simply, class is important. A recent report from the department of sociology at CASS (Lu Xuyi
2002) has outlined how the Chinese social structure can now be divided into ten broad groups, each
of which can be subdivided into smaller sub groups16. Notably, the report uses the definition of
jieceng or social level, rather than class (jieji), but the basic understanding that economic reform has
led to a reformulation of the bases of Chinese society would not be out of place in a class based
analysis.
15
16
It is only fair to note that the government is well aware of these problems, and has launched a “look west”
policy in an attempt to redress the imbalances.
The ten broad headings are (1)state and social management (guojia yu shehui huanli); (2) economic
management (jingli); (3) private enterprise owners (siying quanyezhu); (4) specialised technological personnel
(zhuanye jishu renyuan) (5) administrative personnel (banshi renyuan); (6) individual industrial and business
households (geti gongshanghu); (7) business service personnel (shangye fuwu renyuan); (8) (business) workers
(shangye gingren) (9) agricultural workers (nongye laodongzhe) (10) urban unemployed (literally urban
without work to include laid off workers), unemployed and ‘semi’ unemployed personnel (chengshi wuye,
shiye he ban shiye renyuan).
17
There has been a relatively large body of work considering the rise of new business elites in
China17. There is also a body of work that considers the changing socio economic construction of
the countryside18, the position of urban workers19, the exploitation of workers in export processing
industries (often by party-state managerial classes in collaboration with external capitalists) (Chan
1996)20, and the creation of an unemployed and/or semi-employed ‘underclass’ through what
Solinger (2001) terms the ‘informalisation’ of the Chinese urban economy21.
Conclusions
This paper is in many ways a paper of frustration. A frustration that emerges out of the use of
growth figures to paint a picture of economic success in China. Not only does this approach ignore
the pitfalls of development, as He Qinglian has called it, but is even used to shout down those who
might have the temerity to suggest that economic liberalisation is not beneficial to all. And to
reinforce these views, they point to visits to Beijing and Shanghai that “prove” that China is now
rich.
Indeed, sometimes it can appear as if there are two Chinese economies. One of these is an economic
superpower, a competitor state of the Western powers and the biggest challenge to the global
system. Simultaneously, it is the international economies’ greatest prize – over 1.b billion potential
consumers just waiting to buy imported goods. The other Chinese economy is one where domestic
demand and consumption stubbornly refuses to increase, where the financial structure is all but
insolvent, where large sectors of the population fear unemployment and the social fabric of both the
towns and the countryside are crumbling leading to strikes, demonstrations and riots.
Statistics are not politically neutral. They are not only used to justify political preferences, but the
choice of which figures to use, and how to calculate them, is also highly politicised. I suggest that
what we see in relation to China is a growth fetishim, to support the interests of globalising state
elites within China, and those who wish to promote reform in China from without. I suggest that the
need to prove that China’s entry into the WTO will mean that good growth figures become even
more politically important in the near future.
China’s pre-reform socialist system was far from perfect. But it did provide certainty of welfare for
a large population in what was, and remains, a poor country. The move towards the market has left
many without access to HEW, forced many to become migrants in search of work, many into sweatshops, and many into unemployment. And many of the main beneficiaries of reform are those that
use their position within the party-state hierarchy to transfer political power into economic power.
And this paper has not mentioned the environmental problems that could well prove to be the
biggest long term impact of reform in China.
If there is a purpose to this paper, it is simply to act as a reality check. Yes things have got better for
many under reform, but this does not mean that there are no problems. If we consider how growth
has been attained, particularly in the last five years, we can point to growth at the expense of
working conditions in many factories, growth at the expense of budget deficit, and growth at the
expense of a sustainable banking system. It might not be a case of growth at the expense of
development, but a case where development has lagged way behind the impression that growth
fetishim provides.
17
18
19
20
21
Examples of this pre-WTO literature include Pearson (1999), Goodman (1995), Goodman (1996), Goodman
(1999) and Young (1995).
For example, Zweig (1997), Bernstein and Lu (2000), and Bernstein and Lu (forthcoming),
For example, Sargeson (1999), Chan (2001), and Cai (2002).
Veteran conservative leaders Deng Liqun has also warned of the dangers of the emergence of a ‘new capitalist
class’ which exploits workers and farmers, and called for the party to be ‘prepared for a new class struggle’.
See China News Digest 7 May 2000.
See also Solinger (2002).
18
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