One Hundred Million Jobs for the Chinese Workers!:

Why China’s Current Model of Development Is Unsustainable and How A Progressive Economic Program Can Help the Chinese Workers, the Chinese Economy, and China’s Environment

CHIARA PIOVANI

Ph.D. Candidate (Corresponding Author)

Department of Economic, University of Utah

Mailing Address: 813 East 100 South, Apt #3

Salt Lake City, Utah 84102

Phone: 801-413-4209; E-mail:

MINQI LI

Assistant Professor

Department of Economics, University of Utah

Phone: 801-581-7697; E-mail:

Abstract

This paper argues that China’s current model of development led by exports and investment is not sustainable for economic, social, and environmental reasons. The accumulation of economic, social, and environmental imbalances could potentially lead to a major crisis for China and the global economy. The paper proposes a progressive economic program that could help China move towards a more equitable and ecologically sustainable model of development.

JEL classification: E60, O53, P30

Keywords: Chinese economy; export-led growth; investment; sustainability; progressive economic program

1. Introduction

Since 1978, China has undertaken the transition from a socialist centrally planned economy to a system, which the Chinese leadership refers to as the “socialist market economy”. Over the period of market-oriented economic reform, China has accomplished rapid economic growth. Between 1980 and 2006, the Chinese economy grew at an average annual rate of 9.5 percent. Measured by purchasing power parity, China is now the world’s second largest economy and, if the current trend continues, China could overtake the U.S. to become the world’s largest economy in the next decade or so.

Despite these impressive achievements, the development process in China has been characterized by serious social, environmental, and economic imbalances. These imbalances, if not addressed effectively and timely, could evolve into major crises in the coming years.

Back to the early 1980s, China was one of the most egalitarian countries in Asia. Since then, China has experienced substantial worsening of income and wealth distribution, as well as growing tensions between different social classes and groups (Khan and Riskin 2001; Zhang and Wan 2006). Economic liberalization and the dismantling of state-owned enterprises have led to substantial urban unemployment, increasing gender disparities, and declines of living standards for large sections of the population (Berik, Dong, and Summerfield 2007).

China’s economic growth has been highly energy and resources intensive, and has led to serious environmental degradation. China has now among the world’s worst air and water pollution problems. Land degradation is taking place at alarming rates. China’s massive resources demand contributes to the rapid depletion of the world’s remaining nonrenewable resources, and China has already become a major contributor to the global greenhouse gas emissions (Tisdell 2001; Wen and Li 2006).

At the macroeconomic level, China’s economic growth has been primarily driven by investment and exports, whereas consumption has steadily declined as a share of China’s economic output. As the U.S. economy moves into recession and the US current account deficit starts to correct, China can no longer rely upon rapid growth of exports as a major engine of growth and China’s excessively high level of investment cannot be sustained for long without leading to major macroeconomic difficulties.

Thus, China’s current model of development cannot be sustained for social, ecological, and macroeconomic reasons. This paper argues that China’s current model of development is characterized by serious social, ecological, and macroeconomic imbalances. For China’s development to be sustained, China needs to undertake major transformations that restructure the Chinese economy in accordance with equitable and ecologically sustainable principles. We propose a progressive economic program that would allow China to take the initial steps to move in such a direction.

Section 2 reviews the structural and institutional evolution that led to the emergence of China’s current model of development. Section 3 discusses the social and environmental consequences of China’s market-oriented economic reform and economic growth. Section 4 examines the macroeconomic structure of the Chinese economy, and argues that rapid expansion of exports can no longer serve as a major engine for China’s future economic growth. Section 5 argues that China’s current level of investment is excessively high, and provides an estimate of the likely sustainable level of investment. Section 6 proposes a progressive economic program, which is designed to transform China’s macroeconomic structure so that the future economic growth is to be led by domestic consumption rather than investment and exports. The macroeconomic transformation is to take place in such a manner that it simultaneously advances the goals of social equity and ecological sustainability.

2. The Structural and Institutional Evolution towards the Current Model of Development

Economic reforms began in China with the Third Plenum of the Eleventh Congress of the Chinese Communist Party in late 1978. Initially, the official goal of economic reform was to build a “socialist commodity economy with planning”. State and collective ownership were to remain dominant, and central planning would continue to play a prominent role in resources allocation and capital formation.

The economic reform began in the rural-agricultural sector with the dismantling of the people’s communes and the adoption of the “household responsibility system”, which represented a de facto privatization of agricultural production in China. The return to family farming was followed by a period of rapid growth of agricultural output. The infrastructure built during Mao's era, rapid increases in the use of chemical fertilizers, and higher state procurement prices for agricultural goods also made important contributions to the agricultural growth in this period.

During the 1970s, rural collective enterprises known as “communes and brigade enterprises” emerged and started to grow rapidly. These became the institutional roots for the later well known “town and village enterprises” at the onset of the reforms. The town and village enterprises remained collectively owned throughout the 1980s and were considered by many as constituting China’s most dynamic economic sector (Riskin 1987; Lin 1988; McMillan, Whalley, and Zhu 1989; Naughton 1995).

Incremental reforms were applied to the urban industrial sector. In contrast to the reform strategy pursued in agriculture, in the 1980s no state owned enterprise was privatized. Until 1990, the state owned enterprises and the collective owned enterprises combined stilled accounted for 90 percent of the industrial output (NBS 1992). The initial restructuring of the industrial sector focused on the managerial system. State enterprise managers were given more autonomy in price and output decisions, and firms were allowed to retain a portion of the profits.

A more radical step in this direction was undertaken in 1987 when the “contract responsibility system” was introduced in all state owned enterprises. Under the contract responsibility system, managers were given the exclusive power to determine workers’ compensation and duration of employment. Until the early 1990s, managers rarely exercised the power to dismiss workers. The new system, however, represented a break with the historical socialist commitment to equality and employment security. The balance of power within the state owned enterprises started to change to the workers’ disfavor.

With respect to international trade and investment, the so-called “open door policy” was introduced in 1978 with the objective of expanding foreign trade and allowing foreign companies to invest in China. With the rationale that modernization could not be achieved while maintaining closure towards the outside world, special economic zones were established in the coastal regions. Preferential policies, such as special tax incentives for foreign investment and greater freedom to conduct foreign trade for international partners, were implemented in the special economic zones.

Despite the rapid expansion of trade following the adoption of the open door policy, the impact of external markets on China’s economy remained modest. Until the end of the 1980s, the contribution of exports as a component of aggregate demand and foreign investment as a source of capital formation remained relatively small in magnitude. In this period, China’s economic growth was largely driven by internal demand (to be further discussed in section 4).

During the 1980s, the Chinese economy grew at an average annual rate of near 10 per cent. The economy was still dominated by state and collective owned enterprises, and the economic gains associated with the growth process tended to be broadly shared across the society. Nonetheless, rapid growth also led to widespread corruption and emerging social and economic imbalances. Income distribution became more unequal. In the state sector, the traditional employment security and other welfare programs, referred to by the Chinese workers as the “iron rice bowl”, started to be undermined. In addition, the dismantling of the people’s communes in the countryside led to a deterioration of the rural public infrastructures.

After the 1989 political turmoil, there was a short-lived attempt by sections of the Party leadership to reorient the Chinese economy towards more central planning and state guidance. However, after Deng Xiaoping’s notorious Southern Tour in early 1992, the internal debate within the Party was settled once and for all[1]. At the Fourteenth Party Congress in October 1992, the Party was officially committed to the objective of transforming the Chinese economy into a “socialist market economy”. The commitment opened the way for full-scale market liberalization and privatization.

By the end of the 1990s, most of the state owned enterprises and virtually all of the collective owned enterprises had been privatized (Hart-Landsberg and Burkett 2005). The remainders were restructured into corporations with shares held by both domestic and foreign capitalists. This widespread privatization was accompanied by massive lay-offs that reduced the state sector employment by more than 40 percent (Naughton 2007: 105)

China has also taken major steps towards trade and financial liberalization. In 1996, the Chinese currency (renminbi) was made fully convertible on the current account. In 2001, China was admitted into World Trade Organization with a full range of commitments of further trade liberalization. In the financial sector, state owned banks were required to become fully commercial, and a large number of new banking institutions were established. The stock market also developed rapidly during the 1990s, which resulted in an increase in total market capitalization as a share of GDP from 10 percent in 1993 to 48 percent in 2000 (Naughton 2007: 468). China has also been taking steps to open its capital account to allow for freer cross-border capital flows.

The post-1992 reforms inspired by greater market orientation continued to generate rapid economic growth. However, in comparison with the earlier phase, the market reforms led to serious social and environmental problems. In the urban sector, many workers experienced declines in living standards due to the withdrawal of the employment security and other welfare programs. The rural residents faced major deterioration in access to basic health care and education, which used to be provided by people’s communes (Cook 2002; Li and Zhu 2004)[2]. As the workers’ and peasants’ incomes fall behind the overall economic growth, household consumption declines as a share of China’s GDP and China’s economic growth has been increasingly driven by investment and exports (see section 4 below). China’s economic growth has also led to serious environmental degradation, and has been heavily dependent on the use of fossil fuels and other non-renewable resources.

Since 2003, the new Chinese leadership has demonstrated the intention to tackle China’s social, ecological, and macroeconomic imbalances by broadening its political agenda to focus greater attention on social equity and the sustainable use of natural resources. The new leadership promised to pursue a “scientific perspective of development” in order to achieve "common prosperity" and a “harmonious society”. However, there has been no change in the general commitment to privatization and liberalization. The effects of the new government policies have been modest thus far, and have not yet been able to contain the general tendency towards rising inequality, environmental degradation, and macroeconomic imbalances.

3. The Social and Environmental Consequences of China’s Current Model of Development

The economic reform in China has been applauded by many as a great success. During the reform period, the Chinese economy has been growing at an annual average rate of nearly 10 percent. In 2005, there were 600 million fewer people living below the poverty line than 1978, measured by an income of purchasing power parity $1.25 per day (Chen and Ravallion 2008). From 1978 to 1996, the per-capita consumption of rural residents nearly quadrupled, and the per-capita consumption of urban residents tripled (Chow 2007).

However, as China is becoming the world’s second largest economy, imbalances in social, ecological, and economic areas have also emerged. The current processes of privatization, liberalization, and retreat of the State from social security have generated in the Chinese economy a sharp increase in inequality along different dimensions. Growing income and wealth inequality has been reflected by greater disparities between coastal and inner provinces, between urban and rural areas, between sexes, and between different social classes and groups (Khan and Riskin 2001; UNDP 2005; Lin 2007; Naughton 2007). In the urban sector, the income gap between the richest 10 percent of households and the poorest 10 percent increased from 3.3 times in 1992 to 7.9 times in 2002. As a reflection of these disparities, the Gini coefficient shows that China’s inequality in household income distribution increased from 0.38 in 1988 to 0.47 in 2004 (World Bank 2007). By this measure, China is now more unequal than the United States and the majority of Asian developing countries. The radical acceleration of liberalization and privatization has thus imposed a radical departure from the traditional socialist commitment to equality.

Inequality in China is also rapidly increasing with respect to non-monetary indices. In recent years, health care, education, and housing costs have escalated, which have had a dramatic impact on the budget of ordinary working families. According to a survey conducted by the Chinese government, about 50 percent of the urban residents and almost 90 percent of the rural residents cannot afford any health insurance. In some poor provinces, it is estimated that from 60 to 80 percent of the people who died because of diseases could have survived if they had been able to pay for the medical treatments (Zhu 2005; Quinlan 2007). Inequities in the distribution of entitlements and capabilities have also had a gender dimension. Compared to men, women have less access to health care, face poorer working conditions, and have fewer market opportunities due to their greater responsibilities in household activities (Hart-Landsberg and Burkett 2005; Berik, Dong, and Summerfield 2007).