For China, the Time Has Come to Grow Up

FOR 35 YEARS, THE CHINESE ECONOMY HAS GROWN WITHOUT PAUSE, NEARLY ATTAINING AN END TO POVERTY. NOW IT'S TIME TO INTRODUCE INDISPENSABLE POLITICAL REFORM TO ALIGN SOCIETY WITH THE LEVEL OF ECONOMIC ADVANCEMENT ACHIEVED

by Carlo Filippini, SDA Bocconi School of Management
Translated by Alex Foti

Was 2014 positive or negative for the Chinese economy? The headlines seem contradictory: you can read either “China’s GDP Overtakes America’s” or “China Grinds to a Halt”. In fact, the news must be put in perspective: Chinese GDP is now larger than US GDP, but China’s population is 1.36 billion, while there are only 315 million Americans, which is to say that each US citizen produces and has access to 4 times more the amount of goods and services than the average Chinese. Last year, China only grew by 7.4%, a quarter less than its average in recent decades, but this should be compared to anemic growth in the eurozone (0.8%) and 2.4% growth in the US: a braking Ferrari is still faster than a compact sedan.

Certainly the 2010s, while the yet-to-be-solved world crisis rages on, have marked a turning point for Asia’s giant: the take-off period is now in effect over, and the transition to maturity is engendering further social transformation, for development always implies change.

China’s average annual growth rate was around 10% in the 1978-2013 period. This meant that GDP doubled every seven years. Chinese growth kicked in with liberalization and deregulation of agricultural production: the immediate results were an actual leap forward in food output (a rice bowl and a bit of pork for everybody) and the creation of an affluent social group, which was able to spend. The steady outflow of people from the countryside to cities kept wages under control, below productivity growth. Technology and the environment were almost free goods: the former was freely given by Western firms which didn’t want to be left out of the Chinese miracle, while the latter was ransacked for the sake of accelerated development.

Government authorities acted pragmatically and introduced piecemeal reform after experimentation with a limited number of economic zones. Bureaucrats were supportive of economic growth, and if you were a businessperson with the right connections, you could do almost anything you wanted, including physically eliminating slacking employees. Rules were few: basically, the supremacy of the Communist Party and the interests of local politicians had to remain unchallenged. Investment and exports drove growth, and low-priced Chinese manufactured goods invaded world markets: today, the near totality of toys around the globe is made in China.

After 35 years (i.e. five seven-year periods in which the size of the Chinese economy has doubled each time) of continuous growth, China has become an upper-middle income economy where poverty has almost been banished. As the economy grows in complexity, the swelling ranks of the middle class are less and less ready to trade off freedom for material wellbeing. What seemed available for free now acts as a constraint on growth: air pollution compromises the health and image of China (when Beijing hosted the Olympics, all the factories and offices had to shut down in a 200-kilometer radius); technology, patents, and brands are now produced domestically, and hence protected from foreign competition. Also the inefficiency of state-owned enterprises and widespread corruption have started being too burdensome; the exceedingly unequal distribution of income is generating social tensions; exports alone no longer suffice, and private consumption now needs to drive growth.

The new challenge for China is called reform. Economic, and especially political institutions and rules must be brought to the level of the advanced country China has become: adolescence is over, adulthood is looming. The task that lies ahead is daunting, but in the recent past China’s leaders have often proved able to find solutions to difficult problems.