Nov 9th 2013

Chinese Industrialization and its Discontents

by Barry Eichengreen

Barry Eichengreen is Professor of Economics at the University of California, Berkeley.

TOKYO – As the Third Plenum of the 18th Central Committee of the Chinese Communist Party convenes in Beijing, China stands at a crossroads. Its recent growth record is stupendous; no country in history can match it. But China’s economic imbalances are also stupendous. The country has sustained its output growth by investing fully one-half of GDP, though no country can productively invest more than a third of national income for an extended period. Household consumption accounts for only one-third of GDP, compared to two-thirds in a normal economy.

Associated with this low level of consumption is widening inequality – between the countryside and the cities, and between the political elites and the masses. University graduates with rising aspirations cannot find the office jobs that they seek and will not accept the factory jobs that they are offered. Social unrest, whether expressed in blogs or spontaneous demonstrations, is mounting.

China’s leaders understand all of this. They acknowledge the need to rebalance the economy from investment to consumption, and they recognize that this means developing the service sector, where good white-collar jobs will be found. They also appreciate the need to build a social safety net and strengthen rural property rights.

But Chinese officials worry that the shift from investment to consumption, and from manufacturing to services, will mean slower growth. Less investment will mean less capital deepening. Expanding the service sector, where productivity is low, will hold back aggregate output. And if growth decelerates further – the annual rate has already dropped from 10% to 7.5% – social unrest may increase.

Knowing this, Chinese leaders may hesitate to move ahead with needed reforms, causing imbalances to continue to rise. But this cannot go on indefinitely. At some point, the ticking time bomb will explode, and the growth rate will crash.

So where should Chinese leaders look for help in meeting these challenges?

It may seem improbable, but they can find guidance from the United Kingdom. Just as Chinese industrialization is unprecedented – no developing country has grown by more than 10% per year without interruption for two full decades – Britain’s industrialization 200 years ago was similarly unparalleled.

Britain was, of course, the homeland of the Industrial Revolution. Its economic growth was faster than that of any economy in human history up to that time.

But Britain’s rapid growth created severe problems. There was growing inequality, or so it appears from recent scholarly contributions to the so-called “standard-of-living debate.” There was the alienation of smallholders’ property, in what was known as the “enclosure movement.” And there were complaints about urban pollution and inhumane factory conditions in what William Blake called Britain’s “dark Satanic mills.”

Inevitably, there were eruptions of social unrest. Recall the Luddites, who responded to the early nineteenth-century mechanization of the textile industry by smashing the new technology, and the Swing Riots, in which workers destroyed threshing machines.

British politicians responded by reforming the social safety net. In 1834, the New Poor Law established national standards for social benefits. In the face of considerable controversy, assistance continued to be provided without requiring the poor to enter oppressive workhouses. Outdoor relief, as the alternative was known, was expanded as the most cost-effective way to address the poverty problem.

Second, political reform gave voice to the rising middle classes. The 1832 Reform Act gave the vote to individuals with at least £10 of property – not an inconsequential sum, to be sure, but low enough to enfranchise the middle class. The act also created a system of special courts to adjudicate disputes over voter registration.

Moreover, along with political reform came policy changes aimed at rebalancing the economy. Abolition in 1846 of the Corn Laws, which had propped up the declining agricultural sector, facilitated structural shifts, first toward manufacturing and then toward services, notably financial services.

Finally, British politicians did not seek to maintain at any cost their country’s position as the world’s fastest-growing economy. Admittedly, they faced criticism when the United States, Germany, and other countries overtook Britain in the late nineteenth century. But, by not standing in the way of the economy’s natural evolution from agriculture to industry and then to services, they enabled the United Kingdom to enjoy a full century of sustained economic growth.

China may regard the nineteenth-century experience of a windswept island off the northwest coast of Europe as an odd source of inspiration. But if Chinese leaders meeting at their party plenum accomplish half as much as their nineteenth-century English predecessors, they will have done very well indeed.


Copyright: Project Syndicate, 2013.
www.project-syndicate.org


Related article on Facts & Arts:

China’s Plenum Test

by Minxin PeiAdded 07.11.2013
TOKYO – There is something odd and disturbing about the conventional wisdom surrounding the upcoming Third Plenum of the 18th Central Committee of the Chinese Communist Party (CCP). As the November 9-12 conclave draws near, the international...


 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

May 7th 2021
EXTRACT: " Would the United States be prepared to risk a catastrophic war with the People’s Republic of China to protect the Republic of China, better known as Taiwan? "
May 5th 2021
EXTRACT: "Human history, ancient and contemporary, is replete with instances of genocide – that is, the effort to eradicate a people, erase their history, denigrate their culture, and destroy their physical presence. Many of these atrocities have been recognized by the victims and other nations who support them. But, with the notable exception of the German acknowledgment of the Holocaust, rarely have the perpetrators of these crimes accepted responsibility and offer recompense "
May 2nd 2021
EXTRACT: "The best way to defend liberal democracy is to practice it at home and abroad with the “courage and self-confidence” that Kennan touted at the dawn of the Cold War. This is also the best way to ensure the survival of our own conception of human freedom. And survive it will."
May 1st 2021
EXTRACT: "Ann Arbor (Informed Comment) – Sammy Roth at the LA Times/ Boiling Point Newsletter reports that California’s main power grid was powered for several hours last Saturday by 90% renewables. For just four seconds that day, the grid, which covers 4/5s of the state, reached 94.5% generation by green energy. California is the world’s fifth largest economy. The main grid does not cover Los Angeles County. On the other hand, these figures do not include the electricity generated by the Diablo Canyon nuclear plant, which is not counted as renewable but which is also very low-carbon."
Apr 23rd 2021
EXTRACT: "It is no accident that there has been an economic divergence in Central and Eastern Europe. Those countries that have joined the European Union have improved their economic governance, and GDP has begun to converge with Western Europe. Between 2014 and 2019, Hungary, Poland, and Romania grew at an annual average rate of 3.9%, 4.1%, and 4.7%, respectively. Meanwhile, Belarus and Ukraine experienced minimal growth during this period, and Russia’s economy expanded at an average annual rate of just 0.7%. Though Russia had a higher per capita GDP (in terms of purchasing power parity) than Croatia, Poland, Romania, and Turkey as recently as 2009, all of these countries have since overtaken it. Russians today are shocked to learn that they are worse off than Romanians and Turks. Among EU member states, only Bulgaria is still poorer than Russia. With its close proximity to the EU single market, Russia could have had higher growth if it had pursued sound economic policies. Instead,..... "
Apr 22nd 2021
EXTRACT: "As far as anyone can tell, the US military is not on the verge of an internal breakdown, let alone primed to stage a coup d’état. But few predicted anything like the US Capitol riot before protesters equipped with body armor, stun guns, and zip-ties breached the building. Before the US is blindsided again, its leaders must act resolutely to root out extremism in the military."
Apr 17th 2021
EXTRACT: "The new report on 2020 by the International Renewable Energy Agency reveals that the world’s renewable energy generation capacity increased by an astonishing 10.3% in 2020 despite the global economic slowdown during the coronavirus pandemic." .... "In 2020, the global net increase in renewables was 261 gigawatts (GW). That is the nameplate capacity of some 300 nuclear power plants! There are actually only 440 nuclear power plants in the whole world, with a generation capacity of 390 gigwatts. So let’s just underline this point. The world put in 2/3s as much renewable energy in one year as is produced by all the existing nuclear plants!"
Apr 16th 2021
EXTRACT: "When we examined the development of nations worldwide since 1820, we found that among rich Western countries like the United States, the Netherlands and France, improvements in income, education, safety and health tracked or even outpaced rising gross domestic product for over a century. But in the 1950s, even as economic growth accelerated after World War II, well-being in these countries lagged.
Apr 11th 2021
EXTRACT: "Some presidents indulge in the “Mount Rushmore syndrome” making an obvious effort to achieve greatness. Normally soft-spoken and apparently modest Biden is making his own bid for immortality."
Apr 9th 2021
EXTRACT: "New ways of thinking about the role of government are as important as new priorities. Many commentators have framed Biden’s infrastructure plan as a return to big government. But the package is spread over eight years, will raise public spending by only one percentage point of GDP, and is projected to pay for itself eventually. A boost in public investment in infrastructure, the green transition, and job creation is long overdue."
Apr 7th 2021
EXTRACT: " One can, and perhaps should, take the optimistic view that moral panics in the US blow over; reason will once again prevail. It could be that the Biden era will take the sting out of Trumpism, and the tolerance for which American intellectual life has often been admired will be reinvigorated. This might even happen while the noxious effects of American influence still rage in other countries. For the sake of America and the world, one can only hope it happens soon.  "
Mar 28th 2021
EXTRACT: "By refusing (despite having some good reasons) to end electoral gerrymandering, Chief Justice John G. Roberts, Jr., has directly enabled the paralyzing hyper-partisanship that reached its nadir during Donald Trump’s presidency. By striking down all limits on corporate spending on political campaigns in the infamous 2010 Citizens United decision, he has helped to entrench dark money in US politics. And by gutting the 1965 Voting Rights Act in Shelby County v. Holder, Roberts has facilitated the racist voter-suppression tactics now being pursued in many Republican-controlled states."
Mar 24th 2021
EXTRACT: "the UK’s tough choices accumulate, and the problems lurking around the corner look menacing. Britain will have to make the best of Brexit. But it will be a long, hard struggle, all the more so with an evasive fabulist in charge."
Mar 15th 2021
EXTRACT: "Over the years, the approach of most American policymakers toward the Israeli-Palestinian conflict has been Israel-centric with near total disregard for the suffering endured by the Palestinian people. The architects of policy in successive US administrations have discussed the conflict as if the fate of only one party (Israel) really mattered. Israelis were treated as full human beings with hopes and fears, while Palestinians were reduced to a problem that needed to be solved so that Israelis could live in peace and security.  ..... It is not just that Israelis and Palestinians haven’t been viewed with an equal measure of concern. It’s worse than that. It appears that Palestinians were judged as less ​human than Israelis, and were, therefore, not entitled to make demands to have their rights recognized and protected."
Mar 8th 2021
EXTRACTS: "XThere’s a global shortage in semiconductors, and it’s becoming increasingly serious." ...... "The automotive sector has been worst affected by the drought, in an era where microchips now form the backbone of most cars. Ford is predicting a 20% slump in production and Tesla shut down its model 3 assembly line for two weeks. In the UK, Honda was forced to temporarily shut its plant as well." ..... " As much as 70% of the world’s semiconductors are manufactured by just two companies, Taiwan Semiconductor (TSMC) and Samsung."
Mar 5th 2021
EXTRACT: "Back in 1992, Lawrence H. Summers, then the chief economist at the World Bank, and I warned that pushing the US Federal Reserve’s annual inflation target down from 4% to 2% risked causing big problems. Not only was the 4% target not producing any discontent, but a 2% target would increase the risk of the Fed’s interest-rate policy hitting the zero lower bound. Our objections went unheeded. Fed Chair Alan Greenspan reduced the inflation target to 2%, and we have been paying for it ever since. I have long thought that many of our economic problems would go away if we could rejigger asset markets in such a way as to make a 5% federal funds rate consistent with full employment in the late stage of a business cycle."
Mar 2nd 2021
EXTRACT: "Under these conditions, the Fed is probably worried that markets will instantly crash if it takes away the punch bowl. And with the increase in public and private debt preventing the eventual monetary normalization, the likelihood of stagflation in the medium term – and a hard landing for asset markets and economies – continues to increase."
Mar 1st 2021
EXTRACT: "Massive fiscal and monetary stimulus programs in the United States and other advanced economies are fueling a raging debate about whether higher inflation could be just around the corner. Ten-year US Treasury yields and mortgage rates are already climbing in anticipation that the US Federal Reserve – the de facto global central bank – will be forced to hike rates, potentially bursting asset-price bubbles around the world. But while markets are probably overstating short-term inflation risks for 2021, they do not yet fully appreciate the longer-term dangers."
Feb 28th 2021
EXTRACT: "To be sure, calls to “build back better” from the pandemic imply some awareness of the need for systemic change. But the transformation we need extends beyond constructing modern infrastructure or unlocking private investment in any one country. We need to re-orient – indeed, re-invent – global politics, so that countries can cooperate far more effectively in creating a better world."
Feb 23rd 2021
EXTRACT: "So, notwithstanding the predictable release of pent-up demand for consumer durables, face-to-face services show clear evidence – in terms of both consumer demand and employment – of permanent scarring. Consequently, with the snapback of pent-up demand for durables nearing its point of exhaustion, the recovery of the post-pandemic US economy is likely to fall well short of vaccine development’s “warp speed.” "