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National Strategy Lecture - Critical Perspectives on China’s Economic Transition

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  • January 27, 2011
    Speeches and Lectures

    A critical look at the major social and economic transitions that have been taking place since the economic reforms might aid in deriving answers for questions that concern with China’s capital accumulation, political legitimacy, plurality in policy making apparatus and the implications of the country’s rise for the rest of the world.

    The evolution of Chinese model took place in three phases. In the period from 78- 92, the changes, although imperceptible, began to manifest through foreign investments. An interesting point to note here is the similarity of Post – Mao Chinese policies to industrialization and import substitution measures followed in India during the fifties and sixties. But the difference lies in re-orienting the economy towards exports through establishing special economic zones in the south. During the second phase from 1992 to the millennium, the focus was on integration with the world economy through encouraging Foreign Direct Investments, and at the same time becoming the manufacturing hub of the world. Nevertheless nationalism persisted in that national brands were promoted and domestic industries were protected. In the present phase the emphasis is more on harmony, which in Prof. D’ Costa’s view is an admission of social and economic polarization.

    In spite of the infinite labeling of the Chinese model, it is a capitalist economy because of two characteristics viz. formation of wage labour and increase in private property in the form of foreign invested enterprises and small businesses. As a matter of fact, free enterprises and capitalists have been creatures of the Chinese state. With the reform of state owned enterprises, managers who are well connected to the party have become owners of varied industries.

    Relentless industrialization’s demand for labour force has however led to rural displacement. About 150 million people have moved to the urban areas in the last twenty years to be absorbed by the industrial units, especially those located in the coastal belt. Even though this process is not unusual for a country undergoing industrialization, this unprecedented scale has had its impact on urban growth and real estate development. Furthermore, this has led to rise in wages thus contributing to increased momentum in the domestic economy. This is being aided by rising consumption of industrial goods including in rural areas.

    In the present phase of economic development, inward foreign direct investment as a proportion of gross capital formation has been falling. This indicates that FDI no longer plays a critical role in the Chinese economy. In other words, China has come to have an economic dynamism of its own. A shift share analysis of World Bank data throws light on the emergence of Asia and China in particular. Extrapolation of the same leads to the conclusion that the size of their economies will only grow bigger in the future. Despite the dynamic growth, the issue of stagnation in rise of Per Capita income has captured the attention of Chinese policy makers as in India.

    The emphasis on profit driven growth has resulted in a squeeze in private consumption. This might be linked to prevent social upheaval. However, this is unsustainable. Addressing economic growth generated domestic problems related to rising income inequality, employment generation, inflation and real estate bubble and deficiency in technology has become a priority for policy makers. Despite the commitment to research and development with the objective to attain technological competence, sub-optimal quality of education is testing China’s ambitions in the same way as it is affecting India’s attempt at leveraging the opportunity of the demographic dividend.

    Multiple challenges remain for China as its economy expands. The creation of an underclass due to the existing hukou system has created major social problems in the urban side.1 They are unable to even send their children to school because of illegal immigration. Similar to India, China has a large informal sector that adds little value to the economy. In addition, corruption has been a problem in China especially at the provincial and the local level. However, unlike in India, it is due to different incentives at the provincial and the local level. They lie in promotion of growth which in turn aids in raising one’s profile within the CCP. Legal excesses have often raised concerns about human right standards, which necessitate reform. Lastly, aggressive posturing by China has caused disquiet amongst the international community which if unaddressed would not augur well for the country’s image.

    Prof. D’ Costa is unsure of the prospect of Yuan becoming a global currency considering Chinese resistance to deregulation and absence of capital account convertibility. To another question on the attractiveness of the Chinese model of capitalism, he opined that the world is moving towards democracy and not the other way. In addition, he suggested democracy promotion measures by the Government of India which at present is inappreciable. Though he gave credit to the country’s administrators for testing waters before moving ahead, he felt the real test for the Chinese lies in reorienting their growth to ensure internal and external harmony. As for the question of using currency reserves to exercise power and influence, he believes that they would not be able to go beyond a limit due to complex interdependence and prospect of backlash.

    In the next twenty years, China will have to tackle issues related to environmental degradation where there is a potential for co-operation with India. How to ensure inclusiveness as the Chinese growth story progresses is another major challenge Beijing faces in the context of social polarization. Political legitimacy will be in greater doubt if the strains in the society caused by breakneck growth are not addressed. Their final challenge lies in reassuring the international community about their pursuit of growth and political issues such as rule of law and human rights.

    Report prepared by Sundar M.S , Research Assistant, IDSA

    • 1. Hunkou refers to the system of residency permits issued by Government authorities