China’s Rise: Dynamics, Trends, and Implications

Swiss Global Economics The China File

May 21, 2012

Annual Growth of the Human Development Index and Per Capita GDPsince 1990, selected Asian Nations

Source: GDP figures are from the World Bank, World Development Indicators 2011, tables 2.1 and 4.1, except for Myanmar, which uses ADB/official data and Ash Center estimates. HDI data are from the UNDP website, or for Myanmar, are Ash Center estimates.

World Bank Governance Indicators Percentiles in 2010

http://info.worldbank.org/governance/wgi/mc_countries.asp

(IMF) 2010 PPP

Myanmar 1 11 2 1 3 0.5 19 $1,250 Bangladesh 38 10 21 22 27 16 134 $1,600 North Korea 0 30 0.5 0 7 3.3 41 $1,800 Cambodia 25 26 22 35 13 8 129 $2,100 Pakistan 28 0.5 26 30 26 12 123 $2,800 Vietnam 9 51 44 31 39 33 207 $3,130 India 60 11 55 39 55 36 256 $3,340 Philippines 47 7 52 44 35 23 208 $3,740 Indonesia 48 19 48 40 31 27 213 $4,400 China 5 24 60 45 45 33 212 $7,520 Thailand 30 13 58 57 50 47 255 $9,200 Brazil 63 48 57 56 56 60 340 $11,240 Malaysia 31 52 82 71 65 61 362 $14,670 Russia 21 18 42 38 26 13 158 $15,840 S. Korea 69 50 84 79 81 69 432 $29,840 Taiwan 74 73 85 84 82 74 472 $35,230

Regulatory Quality

Rule of Law Control of Corruption

Total (Maximum =

600)

(Voice & Accountability)

Political Stability & Absence of

Violence

Government Effectiveness

World Bank Governance Indicators/Income Per Capita (PPP)

• Barriers to China meeting its objectives– Externally—depends on not only general health of the global economy but also how

countries in the region and major trading partners interpret China’s growth– Internally—

• Can the economy continue to grow at the necessary rate and can alternatives be developed to substitute gradually for the pro-active fiscal policy?

• Can the political system deal with the social tensions that have arisen from the transition?

• With the easier parts of reform completed, there will be significant opposition from powerful bureaucracies and the coastal areas to the politics of redistribution

• Need to complete the transition of governing structures from those that oversaw a communist state and planned economy to those that can run a modern market economy and accommodate the pluralistic society.

China and Democratic Transition

Six sets of ideas that may suggest democratic transition in China is possible GNP or GDP per capita rising above a threshold level Rise of a middle class Mass discontent leading to democratic breakthrough Functional needs of an advanced modern economy International integration leads to broad acceptance of international norms Development of civil society provides support to democratization

China and Democratic Transition

GDP per capita– Prezeworski and Limongi: Boix and Stokes Whether economic growth leads to political change has policy consequences for

US foreign policy—Clinton’s foreign policy premised on the idea of constructive engagement

James Mann—”The Starbucks fallacy” China has become the second largest economy BUT per capita GDP paints a more

nuanced picture Projected 2017 GDP per capita PPP for China = $14,640—roughly = South Africa

(13,842) and Brazil (15,510) but well above India (5,801) and Indonesia (6,971)—all democracies

A little below former EE states– Romania (16,902), Bulgaria (18,787) and significantly below Hungary (24,164) and Czech (34,531) and EA democracies South Korea (43,787) and Taiwan (51,473)

PWC (constant 2004 $) in 2050 China = $35,851 around level of Czech in 2017 but still below South Korea and Taiwan. Roughly equal to Brazil (34,448) but well above Indonesia (23,686) and India (21,872)

US in 2050 = 88,443; South Korea =66,489

China and Democratic Transition

Growing middle-class—Barrington Moore CASS = 19% of population in 2003 and will be 35% by 2020 Mckinsey: lower middle class by 2011 = 44% of urban population and by 2025

upper middle class = 50% of urban population with a disposable income of $1.98 trillion

If economic growth persists, they should exert a stabilizing influence Can they be co-opted effectively? Will they push for an expansion of civil and political rights? Quality of life protests on the rise

China and Democratic Transition

Economic development might be a pre-condition for democratization (Lipset) but marketization provides the foundation for democracy by introducing choice, competition and public accountability (Ravich)

Ravich on East Asia concludes: economic development might be a precondition of democratization but

marketization provides the foundation by introducing choice, competition and public accountability

society experiences an increase in prosperity, introduction to concepts of competition and choice (greater individualism), reduction in level of corruption (greater accountability)

rise of a private sphere to balance government These = the foundations for democracy Deeper markets create practical reasons for political liberalization--requires secure

property rights, freedom of association, stable, just and rational rule of law, minimization of government’s role

Democratic “learning” may arise from marketization Builds the foundations for democracy

China and Democratic Transition

Arguments against a democratic breakthrough Potentially divisive issue among the elite with respect to degree of urgency Reform might lead to collapse of CCP power Foreigners might exploit openings to overthrow CCP Legitimacy rests on economic growth, maintenance of stability and territorial

integrity Not much indication of popular pressure for change Fusion of political and economic power at the local level Authoritarian advantage? Civil society is weak Is the political culture conducive to democratization?

Scenarios for Future Development

1) Muddling Through—short to medium-term Essentially technocratic policy-making Maintenance of an authoritarian political structure combined with growing economic liberalization Weak national consensus, continued corruption and lack of social cohesion Flirtation with more strident nationalism to bolster the national consensus Relations with US and Japan manageable but frictions will persist Policy will harbor the tensions of appeasing the new economic elites and trying to support those who

have been left behind by reforms Fits with ideas of Leninist adaptation, authoritarian resilience etc.

2) Xenophobic nationalism combined with a domestic inefficient authoritarianism CCP dominated by new elites who would resist any political opening Rule by new economic elites backed by the military in the name of preserving social stability and

national sovereignty Strident nationalism to provide a minimal level of social glue Inequalities will continue to rise CCP as the preserve of the elites Permanent underclass in rural and urban China Relations with the US and Japan would be fragile and liable to uncertain trends

Scenarios for Future Development

• 3) Liberalization– Leadership responds to increasing diversity in society– Produces similar outcomes to democratic breakthrough elsewhere in East Asia – Requires a significant section of the elite to break with the old system and form a new

compact with progressive forces in society– Beneficial for relations with the US and Japan with considerably reduced tensions over

Taiwan offering a potential route for reunification

From a Command Economy to a Market-Influence Economy

• Transitions 2 and 3 have produced a tremendous growth in the economy with average growth rates of around 10 per cent.

• Has brought China to the shoulder of Japan as the world’s second-largest economy

• Led to a growing private sector, albeit a credit starved non-state sector

• State sector = 25 per cent of industrial output; private sector 40 per cent and collective sector 30 per cent

• Stimulus package has favored the state sector over the non-state

• Move to market caused some 50 million to lose their jobs on the late-1990s

• 22-23 million are now receiving the Minimum Living Support in urban China

From Collective to Individual as Focus

• Progressive undermining of the party’s “heroic” narrative• Re-emergence of popular religion, class and even secret societies,

providing alternative sources of belief and sites for reciprocity and welfare distribution

• In urban China, emergence of a focus on individual desires and wants—enhanced by single-child policy.

• CCP “Women hold up half the sky”• Wang Hui women “have much freedom than women fifty years ago, better

looks than those of thirty years ago, and a greater variety of orgasms than women ten years ago”

• Turning from the collectivist ethos to a focus on the individual• A problem for socialism as this is based on collective individualism• Fundamental challenge for the leadership is to give meaning to a whole

that is greater than the sum of the individuals parts

Global Impacts of China’s Development

• Six main impacts of economic development

• 1) China’s export competitiveness and the volume of exports will severely affect trade prospects of other countries. Strong competitive pressures in consumer goods—future engineering products and services

• 2) Attraction of FDI will force other countries to develop more hospitable environments

• 3) Major impact on import of commodities, intermediate components, machinery and energy

• 4) Setting up of China Investment Corporation can have a major impact on the global investment world

• 5) Emission of carbon dioxide and other greenhouse gases will affect climate change

• 6) Other environmental impacts

Impacts for Global Business

• 1) If shift to domestic consumption is successful—will reduce CCP interest in export trade and FDI—more emphasis on rural/inland development and a shift to higher quality FDI.

• 2) More economic nationalism and pro-China competition policies

• 3) But will still be crucial needs and wants

– Energy and raw materials security

– Advanced technology

– Help develop global brands

• 4) Opportunities to serve new secondary markets, inland cities and new markets created by urbanization and improved infrastructure and logistics

China’s Foreign Engagement

• Two drivers for China’s foreign behavior

– Emotional driver—linked to deep feelings of nationalism and often xenophobia

– Pragmatic driver—trading and essentially status quo power. Economic growth as a primary goal.

• Interact to establish main goals of foreign policy: ensuring that external policy helps sustain economic growth while maintaining domestic stability; trying to expand its sphere of influence without directly confronting US interests; and increasing international support for its attempts to “regain” territories that Beijing feels rightfully belong within the PRC.

• Latecomer to intergovernmental organizations and thus not a rule drafter• Has perception that international governance is structured essentially to

advance the agenda and interests of the West• China is essentially an empire anchored to a Westphalian concept of the nation-

state trying to operate in an increasingly multilateral world