China May Yet Make Good on Its Promise of Increased Prosperity

“The latest East Asian economic miracle, the greatest miracle of all!”

That was the characterization of China that I heard last month from a World Bank representative at a small conference in Beijing. It was a view shared by all seven “foreign experts” who had been invited to the meetings, arranged by the State Planning Commission of the People’s Republic of China. And, not surprisingly, it was a view that our Chinese hosts--in considerable part Western-trained economists--did not seek to dispel.

We were told that economic growth, as measured by real gross domestic product, was coming in over its 1995 target of 10% (though somewhat lower than the overheated pace of the previous year). Recent growth has rivaled or exceeded that of the other miracles of South Korea, Taiwan, Hong Kong and Singapore. But in this case, we are talking of a nation of 1.2 billion people, a quarter of mankind. Huge, relatively untapped labor reserves, waiting to be equipped with capital and brought into an increasingly market-oriented industrial system, offer the possibilities of continued rapid growth in the future.

The Chinese are given to using number sequences as slogans. One, coined at the conference, is “10, 10 to 2020,” signifying 10% annual real growth with no more than 10% inflation, to bring Chinese GDP up to that of the United States by 2020. With Chinese GDP now at $700 billion, I was told, that rate of growth would indeed bring it to $7.6 trillion, which is more than the current U.S. GDP of about $7 trillion. It would be much less, though, than the $12 trillion the U.S. GDP would attain by 2020, even with the modest 2.5% growth to which our Federal Reserve Board appears to think we should be restricted. Continuation of such disparities in growth rates would make China the largest economy in the world within another 10 years--that is, by 2030.

There are, of course, all kinds of ifs to this scenario of sustained rapid growth. There are the uncertainties of a regime that clearly still does not think it can let its people witness any political dissent. I deplore the one-child-per-family policy that, aside from being a terrible deprivation of human rights, threatens major economic burdens if it is continued. China could eventually become a “1, 2, 4” nation, with one child trying to support two parents and four grandparents.

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On the positive side, there are prospective major gains from the economic union next year between Hong Kong and China--if the Communist authorities don’t move to kill, or at least cripple, their golden goose. And there are huge further gains that can come from new investment of financial, physical and human capital from Taiwan and Singapore. About 50 million overseas Chinese have much to offer to the growth of their motherland if the regime welcomes them.

Inflation has been worrisome, particularly because it causes discontent among those who suffer from it--or think they do. It ran at about 15% in 1995 but is expected to come down as the rise in food prices, the main culprit, subsides. Much of the inflation is not the classic general increase in prices as much as the adjustment of relative prices.

As in all socialist, government-directed economies, rent, food and other prices had been kept arbitrarily low. When they are allowed to adjust upward to reflect costs and market demand, these prices rise, but because other prices do not decline, the average of prices or total cost of living rises. Once these adjustments are completed, as long as monetary and fiscal policies are reasonably prudent, inflationary pressures may be expected to subside. I see no reason to anticipate 10% inflation indefinitely.

The Chinese economy has been characterized by fairly irresponsible credit practices, particularly at what we would call the state and local levels. We hear of the “debt triangle” in which A borrows from B and B from C and C from A and nobody ever pays back. There have frequently been only “soft budget” constraints for local governments and state enterprises. However, it seems that the state enterprises are not all dinosaurs and have been adjusting to market forces and producing by far the major portion of Chinese output.

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The increased prosperity in Beijing is visible and palpable. Well-dressed couples with their one child fill the streets on Sunday and mob ultramodern department stores, buying apparently high-quality Chinese products (I purchased lined Shanghai-made gloves of “genuine leather” for $5) along with huge Sony television sets and other luxury items. I understand the scene is similar in other major Eastern cities and newly developed areas.

But all this prosperity is uneven. Vast areas of this huge country have a long way to go to catch up. The income distribution is outrageously unequal. Those in abject poverty, I was told, number 70 million. About 30% of the adult population is still illiterate, less than the 50% figure I have heard for India but representing a huge number of people that can hardly function effectively in a technologically advanced economy.

And there is widespread corruption, along with a lack of more than the rudiments of an appropriate administrative and legal system to service business. There are huge gaps in infrastructure yet to be filled. I also have some concern as to how much of the great growth in production may be going into investment for short-term, possibly corrupt, gains rather than contributions to long-term growth. And the Chinese military buildup, a possible threat to China’s neighbors, is hardly a contributor to sustained growth.

On the positive side again, I did come away with the conviction that the Chinese economists and policy-makers in and out of the State Planning Commission are a highly professional lot. They are committed to a market economy and see its enormous advantages. But they are also well aware--better aware than some here at home--of the need for a public role in ensuring that the market does not exclude or destroy millions of those who might or do participate. Although they have been conservative--perhaps too conservative--in building foreign reserves to an astonishingly large $70 billion, they do not seem disposed to accept misguided advice of some foreigners to curtail growth by macroeconomic measures to combat inflation.

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If rapid growth continues, China will continue to increase its exports and prove a tremendous market for imports and foreign investment. The consequent opportunities to relatively rich developed countries, including the United States, will be correspondingly enormous.

China may throw it all away in military adventurism or on the isolation and eventual turmoil coming out of continued political repression. But the people I met in China as 1995 rang out give me hope that the promise will win over the threat.