No More Misunderstanding on “Growth Is of Overriding Importance”

By Wang Jianmao

The Chinese version published onGlobal Times, March 19, 2012

China had experienced the fastest growth in its history from 2002 to 2011. With an average annual growth rate of 10%, China’s GDP per capita (on PPP basis) was 17% of the U.S.’ in 2011, up from just 7% in 2001, quite a historic leap in China’s economic development. China was already in the rank of “upper middle-income economies” in 2010 according to the World Bank’s classification. In 2011, 63% (calculated according to the 3-year average nominal exchange rate) or 62% (calculated on PPP basis) of world population was ranked behind the Chinese people in terms of GDP per capita.

China’s fast-track growth from 2002 to 2011, however, was of low quality and at the cost of sacrificing people’s wellbeing. According to data released by China’s National Bureau of Statistics, as the ratio of households consumption to income dropped from 45.3% in 2001 to 34% in 2011, consumption per capita grew just 6.9% on average annually from 2002 to 2011 in China, much lower than the 8.8% for the 1992-2001 period. The situation for low- and middle-income groupswas even worse due to a widening gap between the rich and the poor. The main cause for China’s sluggish consumption growth is that the trinity of “big governments, big enterprises and big banks”, the institutional basis for China’s extensive economic growth, has hurt the quality and quantity of employment growth.The average annual employment growth rate was merely 0.5% from 2002 to 2011, less than half of the 1.1% for the 1992-2001 period.

As often said, people can judge for themselves. Right before the 2012 NPC & CPPCC sessions, the quality of China’s per capita GDP growth had been a widely-debated issue in the media, fully exemplifying ordinary people’s anger towards low-quality economic growth achieved at the cost of sacrificing people’s wellbeing. This kind of extensive growth has contributed to the accumulation of various risks, such as economic overheating, corruption, housing bubbles, widening income gap, and environment pollution. If we don’t take immediate action, these risks will surely weaken China’s growth momentum, leave China prey to the so-called “middle-income trap”, and even trigger a large-scale crisis.

Previously, China announced to target an average annual GDP growth of 7% from 2011 to 2015, the country's 12th Five-Year Plan period. In addition, China lowered its GDP growth target for 2012 to 7.5% during the 2012 NPC & CPPCC sessions. These moves clearly show China’s determination to launch the unavoidableeconomic restructuring in a bid to eliminate the aforesaid risks, reduce the possibility of a crisis in the short run, and create favorable conditions for launching a new round of comprehensive reform and accelerate the transformation of economic growth pattern in the long run. By doing so, China is also providing necessary foundation for successfully completing its 3rd-phase strategic development–to realizemodernization by and large and establish a prosperous, strong, democratic, culturally advanced and harmonious modern socialist country by 2049 (the year marking the 100thanniversary of the PRC).

China is destined for a soft landing, because only when real growth rate drops below potential growth rate, can China shift from its reliance on investment to domestic consumption. In 2011, asthe GDP growth rate of 9.2% was still way above the potential growth rate, the ratio of households consumption to incomestill hovered around a record low of 34%, while the capital formation rate was up by 0.5% from the record high set in 2010.

Japan’s GDP per capita (on PPP basis, hereinafter the same in this paragraph) was 48% of the U.S.’ in 1968, the year marking the 100th anniversary of the Meiji Reformation. In contrast, China’s GDP per capita was merely 17% of the U.S.’ in 2011, one hundred years after the Revolution of 1911. For China to reach the U.S.’ 2011 GDP level by 2049, the year marking the 100thanniversary of the PRC, it just needs to maintain an annual per capita GDP growth of 4.8% for the next 38 years. That is to say, if China can properly solve the income inequality issue and doesn’t involve itself in war, then a 4.8% per capital GDP growth would be enough to guarantee every Chinese a well-off life. Suppose that the U.S.’ GDP per capita grows 2% annually in the next 38 years, then China,with a 4.8% annual per capital GDP growth, would see its GDP per capita 48% that of the U.S.and its overall output twice as large as that of the U.S. by 2049.

If China can increase its ratio of households consumption to income from 34% in 2011 to the world average level of 61% in 2049, then a 4.8% annual growth of GDP per capita would bring a 6.4% annual growth of consumption per capita. Obviously, as long as China improves the quality of its GDP growth and shifts its reliance on investment to domestic consumption, it won’t see a significant decline in the growth of consumption per capita, even if the average annual growth of GDP per capita fell from 10% in the last decade to 4.8% in the following 38 years. What’s more, if China can secure a moreequalincomedistribution in the next 38 years, then consumption per capita among low- and middle-income groups is likely to grow at a faster pace compared to the past decade.

China’s “Great Leap Forward”from 1958 to 1960, the break-up of the former Soviet in 1991, and South Korea’s crisis in 1997 and 1998, has proven repeatedly that strong but poor-quality economic growth is unlikely to sustain.In the famous quote of “growth is of overriding importance”, Mr. Deng Xiaoping was actually trying to say “growth of high quality is of overriding importance”. But for a long time, many government officials misunderstood Mr. Deng’s words as “fast growth is of overriding importance; the faster, the better.”This is one of the major reasons why the model of extensive growth prevailed in China over the past decade.

Improving people’s wellbeing should be the ultimate goal of economic growth, and the quality of growth should be far more important than the speed of growth. Therefore, China should aggressively update its mentality, launch institutional reform, cultivate talent, make structural adjustment, transform growth pattern, promote employment, and improve people’s livelihood in the four remaining years of its 12th Five-Year Plan period, thus providing necessary foundation for successfully completing its 3rd-phase strategic development.

(The author is professor of economics at China Europe International Business School, Shanghai)