The Battle for China’s Future

Suppose your favorite basketball team leads by twenty points at half-time, with more rebounds and steals and far fewer turnovers than its opponent. The athletic director rushes into the locker room and announces to the coach and players that unless they radically change the game plan, they will suffer a devastating defeat. Your first thought would likely be that the athletic director has taken leave of his senses. Or that he or she has been bought off by the rival.

Yet this is exactly like the advice that The World Bank and the Development Research Center urged upon The Peoples’ Republic of China on Monday, February 27. In a report entitled “China 2030,” the two entities—one a notorious cheerleader for free markets, privatization and meager social spending and the other an arm of the State Council of the People’s Republic of China—concede that the PRC has enjoyed 30 years of an average of nearly 10% annual growth. Besides this stunning achievement, the PRC negotiated the treacherous shoals of the world-wide economic crisis far better than any other large economy.

One would think that the study would probe the basis for this remarkable achievement and urge its continuance. Perhaps The World Bank would even suggest a similar approach for other countries. But instead, the authors of the report issue dire warnings of rough times ahead and prescribe urgent changes.

They warn that the average growth rate for the next 19 years will only be 6.6%. Assuming that the projection has some theoretical justification (World Bank predictions have fallen on hard times), the PRC economy would, at this rate, double in GDP every 11 years. Indeed, the report notes that it would become the world’s largest economy before 2030. Apparently, the authors of China 2030 are not impressed.

This warning is even more puzzling when we remember that most mainstream developmental economists project a declining growth rate as economies mature. Following W. W. Rostow’s heralded theory, high growth rates are only a feature of economies experiencing a “take-off.” Necessarily, growth slows, they agree, after the initial rapid expansion. Such a theory justifies the relatively low growth rates of the most advanced capitalist nations.

The PRC’s “friends” evade these questions by raising the dangers posed by the “middle-income trap,” a theoretical construct first suggested by economists in 2007. Noting the difficulties that many emerging market economies had in the 60’s and 70’s, they offer a muddled explanation of their failings, ignoring their political turmoil, dependencies, resource deficiencies, etc. Of the rare thirteen proclaimed “successes”—countries that elevated to the high-income category – four are now spiraling into the low-income ghetto. Greece, Portugal, Ireland, and Spain dutifully followed the prior prescriptions of The World Bank and The International Monetary Fund and are now choking on the Kool-Aid. The authors of China 2030 see no irony in this.

The report comes at a particularly opportune time, a week before the PRC’s annual meeting of the National People’s Congress. Media reports signal a heightening of tension between political leaders who wish to press forward with privatization and market de-regulation and those who want to preserve or even expand the socialist elements still extant in the economy and social life. A recent article in The Wall Street Journal (Fate of Two Chiefs Gives Clues on China, 3-3/4-12) embodies this struggle in the views of two rising leaders, Bo Xilai and Wang Yang. Clearly, China 2030 is ammunition for the rightists typified by Wang Yang.

While the Western media anticipated a lambasting of the state-owned sector, a boost for privatization, reduced government intervention and more doors open to Western corporations (see New Push for Reform in China, WSJ, 2-23-12 for a lengthy discussion), the report complied in somewhat veiled, measured econ-speak. Its primary recommendation was to implement structural reforms to:

…strengthen the foundations for a market based economy by redefining the role of government, reforming and restructuring state enterprises and banks, developing the private sector, promoting competition, and deepening reforms in the land, labor, and financial markets. As an economy approaches the technology frontier and exhausts the potential for acquiring and applying technology from abroad, the role of the government and its relationship to markets and the private sector need to change fundamentally. While providing relatively fewer “tangible” public goods and services directly, the government will need to provide more intangible public goods and services like systems, rules, and policies, which increase production efficiency, promote competition, facilitate specialization, enhance the efficiency of resource allocation…

In case the point was not made emphatically enough, the report goes on:

In the enterprise sector, the focus will need to be further reforms of state enterprises (including measures to recalibrate the role of public resources, introduce modern corporate governance practices including separating ownership from management, and implement gradual ownership diversification where necessary), private sector development and fewer barriers to entry and exit, and increased competition in all sectors, including in strategic and pillar industries. In the financial sector, it would require commercializing the banking system, gradually allowing interest rates to be set by market forces, deepening the capital market, and developing the legal and supervisory infrastructure to ensure financial stability and build the credible foundations for the internationalization of China’s financial sector.

Why these “reforms” are necessary and how they will improve prospects is never fully explained, except through blatant appeals to the neo-liberal manifesto. Since the state-owned industries represent 45% of non-agricultural GDP and they almost tripled their contribution to gross industrial output from 1998 to 2009, something beyond dogma is wanted.

The West and its accomplices in the PRC have their eyes on key state monopolies in petroleum, chemicals, electricity, and telecommunications as well as the state-dominated banking system. Under the guise of stimulating competition, the report argues for “breaking up state monopolies or oligarchies in key industries,” the first steps towards privatization. Undoubtedly, foreign capitalist monopoly corporations are lusting after these assets.

As I argued several months ago (The Chinese Puzzle, ZZ’s Blog, 12-14-11), the future of the PRC remains a mystery, with the leadership walking the thin, risky line between emerging capitalism and the remaining socialist institutions. But, clearly, The World Bank and its Chinese allies are determined to influence that direction. And there should be no doubt which direction China 2030 is intended to push those leaders.

Zoltan Zigedy
zoltanzigedy@gmail.com