BEIJING - Today's financial crisis and looming global recession are challenging China's export-driven economic model as never before in the 30 years since Deng Xiaoping opened the economy. Indeed, in recent weeks, "the factory of the world" has become plagued by the closure of thousands of manufacturing plants and the threat of widespread labor unrest.
I believe that China's innovative model for development is likely to help it weather both the gathering economic crisis and any resulting social and political unrest. Moreover, should China safely navigate this storm, its status as a rising economic and political power will be strengthened.
The essence of the Chinese economic model is a careful sequencing of reforms, with priority given to economic reform over political reform, which means retaining the existing constitutional system and the ruling status of the Communist Party of China (CPC). This model has involved substantial liberalization in terms of official ideology, the economy, and society, while maintaining public ownership of the major banks and largest state-owned enterprises (SOEs) as "anchors of economic stability."
Similarly, whereas much autonomy has been extended to local governments in economic and social development, the central government has kept its grip on the direction of policy by maintaining the power to appoint local party and government officials. In short, the Chinese model reflects a combination of pragmatism, liberalism, and market competition, but with a strong dose of state intervention.
What is astonishing about this "model" is that it has enabled China to maintain rapid growth within a relatively stable political environment for 30 years. Although China is not the only country to enjoy such long-term growth (post-WWII Japan and South Korea are other cases), it is something of a miracle that a once-poor country with one-fifth of the world's population could achieve such sustained development.
Of course, there are problems. Environmental deterioration is severe, the "Gini index" (the gap between rich and poor) is widening, and official corruption has not been curbed. Nor has domestic consumption been sufficiently expanded, leaving economic growth overly dependent on exports and foreign investment.
Moreover, the global economic crisis has proven to be a far more serious threat than China's leaders initially recognized. The worst difficulties stem from China's dependence on international markets, especially the United States. A rapid decline in exports has caused the closure of thousands of factories in the Pearl River and Yangtze River deltas, and tens of millions of unemployed migrant workers are now returning to their hinterland provinces.
These newly laid-off workers are joining more than six million new college graduates looking for work. If the economy cannot maintain high growth rates, mounting unemployment could combine with an accumulation of unresolved political and social issues to create a risk of major social unrest.
But the "China model" has given the authorities the tools to avoid such an outcome. First, while the US had to wait for its new president to take office, China's government was able to intervene swiftly with a rescue package. Judging from events in the last two months, its $560 billion stabilization plan has served its purpose, despite some public criticism that it was too hastily formulated.
Second, China's fiscal surplus, growing foreign-exchange reserves, and high savings rate have ensured the financial resources needed to maintain adequate investment and sufficiently rapid growth.
Third, the new stimulus package is mainly aimed at infrastructure, equipment renovation, and industrial upgrading, which have suffered serious under-investment in the past, especially in China's central and western regions.
Fourth, increased investment in the country's social safety net includes not only universal health and social insurance, but also expanded housing subsidies. This should help to solve the problem of insufficient demand for real estate, which could have led to the collapse of China's economy.
Fifth, increased investment in rural areas, provided for in the government's rescue plan, will help narrow the gap between urban rich and rural poor. To promote the sale of household electrical appliances in rural areas, the government has begun providing a 13% price subsidy, not only benefiting rural consumption, but also boosting the growth of major industrial enterprises.
Finally, the authorities have subtly used the media to maintain consumer confidence by managing public criticism and thereby helping maintain popular trust in the government and the economy.
Most forecasts suggest that, with a huge effort, China can maintain 8% growth in 2009. But the history of economic crises shows that non-economic factors play an equally important role in any solution. Currently, ordinary Chinese still believe that their country's economic growth remains high, and China's leaders continue to enjoy high approval ratings because of widespread belief in their abilities and dedication. Such psychological factors will need continual nurturing.
The coincidence of economic crisis with the 30th anniversary of China's reforms has provided a timely reminder of the pain of the Cultural Revolution, memories of which make most Chinese opposed to returning in any way to the pre-reform years. Most Chinese now firmly believe that a more open and free China, one increasingly integrated into the world economy, is the only way forward.
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