Something I wrote in early 2011, but never posted.

The good news.  China has made extraordinary progress.  Between 1980 and 2010 the Chinese economy grew at an average rate of ten percent per year.  The massive expansion of wealth and comparatively well-paid employment has lifted half a billion people out of poverty in a nation of 1.3 billion people.  China has conquered world markets in all sorts of things.  To take an extreme example, sixty percent of the clothes manufactured in the world are manufactured in China.  Ten years ago a million people graduated from university.  This year six million people graduated.

The bad news.  Progress has come at a cost.  First, China’s economic growth has been driven by exports rather than by an expansion of domestic demand.  On the one hand, this makes China’s economy highly sensitive to down-turns in the world market.  The 2008-2011 recession pushed down Chinese exports by ten percent and forced the closing of 100,000 factories (which involved laying off 30 million people).  Sustained economic growth will depend on a global economic revival.  On the other hand, wages and living standards for most Chinese remain extremely low.

Second, China’s environment has been devastated by rapid industrialization.  China has lots of coal, so it burns it for energy.  Half the rivers are severely polluted.  Drinkable water is running short.  China is home to 16 of the world’s 20 cities with the worst air quality.

Third, contemporary China resembles to 19^th Century Europe: there are great and obvious disparities of wealth; poverty-stricken peasants flood into raw new cities which are unready to receive them; and an educated class is being created faster than are jobs for them to fill.

What does the future hold?  That is hard to say.  The government responded to the global recession with a stimulus plan substantially larger than the one approved by the United States (“We are all Keynesians now,” as Richard Nixon said, but apparently some are more Keynesian than others).  The government is allowing wages to rise in order to create more domestic demand and to improve living standards.  The government has announced a commitment to spending over $400 billion to develop green technologies by 2020.  At the same time, there is much discontent.[1]

The average Chinese faces a lot of insecurity.  There’s virtually no old-age pensions; the one-child policy has ended up forcing one child to care for two parents and even for four grandparents, but the kids don’t have the means or the time; private schools are much better than the public schools; public health care is lousy; there’s no unemployment insurance; there is no system of farm price supports, so price or harvest fluctuations can devastate the income of peasants.  For all these reasons, the Chinese save—rather than consume–about a third of their after-tax income.  In most countries, about 70 percent of GDP goes to consumption; in China only 36 percent is consumed.

A further problem arises from the enormous profits of the State Owned Enterprises.  These are re-invested, rather than distributed as dividends, as would be the case in most places.  The result is the creation of excess productive capacity while consumer incomes are held down.  This is a prescription for disaster at some point.  One solution would be to either privatize the SOEs or to heavily tax their profits and shift them to consumers through payment or social security systems that reduced their own need to save.[2]

[1] “The cracks in China’s engine,” The Week, 8 October 2010, p. 15.

[2] Nouriel Roubini, “The Confucian Consumer,” Newsweek, 24 January 2011, p. 31.