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The Truth About China

Why must China strive to become a more “normal” economy?

July 6, 2007

Why must China strive to become a more "normal" economy?

A major report commissioned by the Chinese government from a panel of front-rank Chinese and foreign economists concluded that consumption needed to rise from its current 50% of GDP to 60% to sustain economic growth. Determining the necessary rate of consumption is one thing — the issue, of course, is how to accomplish this.

The central problem is that persuading the Chinese to save less, consume more and to make enterprise more productive is not just a technical issue. Rather, it goes to the heart of Leninist corporatism.

The issue in raising consumption is that the habit of saving is very deeply embedded, largely because China’s health, pension, and social security system is so weak.

The chief explanation of high personal saving is the interaction of China’s chronically weak, patchy welfare system with the one-child policy; saving is needed for health, income in old age and education — and there is no wider support available from either family or welfare.

The intention of the next five-year plan — to improve rural incomes, welfare, and health care — is hard to fault, but it starts from so low a base that it is hard to credit.

For example, until the 1970s health care in rural China was provided by the communes and covered 90% of rural areas. When the communes collapsed, so did rural healthcare, which by the late 1980s covered only 5% of rural areas.

The government has made no serious effort to compensate — only 15% of the health budget is allocated to rural China, although this is where 900 million people, or 70% of the population, live.

Worse, the only way health care could be sustained in the countryside was for doctors who used to work for the communes to charge fees — but peasants do not have the money to pay.

Meanwhile, the quality of health care has nose-dived. In 2001, a study of 400 village clinics found that two-thirds did not keep medical records, and that only half of the surgical equipment was sterilized.

The story is similar with regard to education. Much of China’s improvement in literacy and numeracy is a legacy of the Mao years, and progress has largely stopped. China, having made great strides between 1949 and 1976, will not meet UNESCO’s goal for literacy in 2015.

As with health, the central government has not stepped in to supplant the loss of the “iron rice bowl” — the system of care formerly provided by the communes and the state-owned enterprises.

Townships foot four-fifths of the education bill, obtaining the money from a mix of fees, taxes and charges. In the rural areas, the schools have to charge fees — with the inevitable result that the poorer the area, the poorer the education.

Low-income countries spend on average about 3.4% of GDP on education. In comparison, China spends only 2% — forcing large areas of the country to make do as best they can. Peasant families save for their children’s education, not because they can, but because they must.

Another factor exacerbating the situation is China’s aging population. Today, 10% of the country’s population is over 60 — by 2015, the proportion will have risen to 14%. Yet, there is no national pension system.

Moreover, children have been legally required to take responsibility for their aging parents. Because most families have only one child, the potential burden is thus considerable — and in turn, fear of what will happen to them in old age impels urban and rural Chinese alike to save intensely.

Making matters worse, as a result of the one-child policy the ratio of elderly people to the working population will only increase. In the 70 years between 1970 and 2040, China will have gone from a country where every “elder” over 60 was outnumbered by six young people, to one where there are twice as many elders as children. It is a phenomenal switch.

Then there is the lack of property rights, and its complex linkage with saving and spending rates. Consumers in western societies have lower savings in part because they borrow against the collateral in their housing assets. This happens more in Britain, the United States and Scandinavia than in Germany and France, but the trend is apparent everywhere.

Communist China still does not acknowledge private property. Houses and apartments in towns are available on 70-year leases, but typically rural smallholdings are available only on 30-year leases, if at all. China also lacks a national land registry, and this situation aggravates the unclear property structure.

Chinese consumers thus have no backing from their property and face life’s hazards — aging, poor health, unemployment and educating children — largely on their own.

Nor can Chinese workers look to a labor union to advance their interests, protect them from arbitrary layoffs or secure real wage increases. The unions are directed by the All-China Federation of Trade Unions and are creatures of the party — so another piece of China’s soft infrastructure is thus lacking.

Small wonder then that saving is so high. Recent moves to allow collective wage contracts and give unions a role in arbitrating disputes may be welcome, but as David Metcalf and Jianwei Li of the London School of Economics report, hollow collective contracts are not collective bargaining. Chinese workers are not effectively represented and remain at the mercy of their managements.

To move to a lower-saving, higher-spending economy requires solving these conundrums. Solutions will necessarily involve the party in having to concede property rights, allow independent labor unions and impose the taxes needed to finance a more comprehensive welfare system.

But the party does not dare to move on even one front. To permit private property is to empower Chinese civil society as well as to repudiate the ideological base of communism.

Further, to permit independent labor unions is to lose control of the workforce and create a base for ideological competition. And to raise taxation is to invite taxpayers to want to hold the government that spends their money to account.

As Montesquieu famously observed, the compensation for despotism is modest taxes. Welfare systems, freedom of association, representative government and enforceable property rights are not simply pleasant options.

Ultimately, these changes are central to the capacity of a capitalist economy to grow to maturity. Without them, China will be condemned to live with its economic contradictions — but, sooner or later, these will become unsustainable.

Indeed, the economy remains dangerously overheated — refusing to slow down despite interest-rate increases and Beijing’s exhortations, pleading and instructions. This shows how increasingly difficult it is to manage an economy where normal constraints do not apply, and the independent institutional power to enforce normal accountabilities is close to non-existent.

Editor’s Note: Adapted from THE WRITING ON THE WALL by Will Hutton, copyright 2007. Reprinted with permission by Free Press.